The Federal Reserve pulled out all the stops to support the money markets Monday, as its Money Market Mutual Fund Liquidity Facility, announced March 18, reached full force and was expanded to include almost all major asset classes owned by MMFs (CDs and VRDNs were the keys adds over the weekend. The move appears to be ratcheting down the level of danger in the money markets substantially, though we're not out of the woods yet. Prime outflows have decreased for 5 days in a row and weekly liquid assets increased noticeably Monday. The recently posted "Money Market Mutual Fund Liquidity Facility FAQs" explains, "How will this program support money market mutual funds (MMMFs)? In the days prior to the initiation of the program, some MMMFs experienced significant demands for redemptions by investors. Under ordinary circumstances, they would have been able to meet those demands by selling assets. Recently, however, many money markets have become extremely illiquid due to uncertainty related to the coronavirus outbreak. Pursuant to Section 13(3) of the Federal Reserve Act, and with prior approval of the Secretary of the Treasury, the Board of Governors of the Federal Reserve System (Board) authorized the Federal Reserve Bank of Boston (FRBB) to establish the MMLF. In addition, the Secretary of the Treasury, using the Exchange Stabilization Fund, will provide $10 billion of credit protection to FRBB. The MMLF will assist MMMFs in meeting demands for redemptions by households and other investors, enhancing overall market functioning and the provision of credit to households, businesses and municipalities."
The FAQ asks, "How does the program work?" It answers, "Under the MMLF, the FRBB will provide a non-recourse advance to an eligible borrower to purchase certain types of assets from an eligible MMMF. The MMMF must be a fund that identifies itself as a Prime, Single State, or Other Tax Exempt money market fund under item A.10 of Securities and Exchange Commission Form N-MFP. The assets are pledged to the FRBB as collateral (eligible collateral).... The program will open on March 23, 2020, and will accept as collateral certain types of assets purchased by the borrower from MMMFs (i) concurrently with the borrowing or (ii) on or after March 18, 2020, but before the opening of the Facility."
The Fed explains, "This program was established to respond to uncertainty related to the coronavirus and is authorized through September 30, 2020. No new credit extensions will be made after September 30, 2020, unless the MMLF is extended by the Board of Governors of the Federal Reserve. Terms of the program may be adjusted before that time as market conditions warrant.... It will be administered by the FRBB, which is authorized to make loans under this facility to eligible borrowers in any of the twelve Federal Reserve districts."
The FAQ also asks, "Who is eligible to participate in the program?" It answers, "Eligible borrowers include all U.S. depository institutions, U.S. bank holding companies (parent companies incorporated in the United States or their U.S. broker-dealer subsidiaries), or U.S. branches and agencies of foreign banks. Eligible borrowers must provide the FRBB with necessary certifications, which include a certification that both the borrower and the MMMF from which the collateral is purchased are solvent."
One question is, "Can the eligible borrower pledge commercial paper bought from proprietary funds under this facility?" They respond, "Yes. For example, if eligible borrower 'XYZ' manages a qualified MMMF, 'Blue Ribbon Fund,' XYZ may fund the purchase of CP from Blue Ribbon Fund under this Facility, so long as the transaction does not otherwise violate banking laws, securities laws or any other laws.... A qualified borrower may pledge ABCP from one of its own programs.... Assets must be concurrently purchased and pledged as collateral in order to secure an Advance under MMLF; provided that an eligible borrower may purchase assets between March 18, 2020, and the date that the program begins so long as the assets purchased in such time period are expeditiously pledged to the FRBB following the date that the program begins."
Finally, they explain, "All advances under the MMLF must be secured by a pledge of eligible collateral. Specifically, eligible collateral for pledge under the MMLF includes: U.S. Treasuries & Fully Guaranteed Agencies; Securities issued by U.S. Government Sponsored Entities; Asset-backed commercial paper that is issued by a U.S. issuer, is U.S. dollar denominated, and ... is rated not lower than A1, F1, or P1 ...; Unsecured commercial paper ...; or U.S. municipal short-term debt.... In addition, the facility may accept receivables from certain repurchase agreements."
In other news, a release entitled, "OCC Revises Short-Term Investment Fund Rule" tells us, "The Office of the Comptroller of the Currency (OCC) today announced an interim final rule to revise its short-term investment fund (STIF) rule for national banks acting in a fiduciary capacity. The rule allows the OCC to authorize banks to temporarily extend maturity limits of these funds. The financial markets are in a period of significant stress negatively affecting the ability of banks to operate in compliance with maturity limits identified in the rule. The rule is effective immediately. The agency will accept comments for 45 days following publication in the Federal Register."
It continues, "Simultaneously to announcing the interim final rule, the OCC also announced an order extending the maturity limits for STIFs affected by the market effects of COVID-19. The order provides that a bank will be deemed in compliance with the rule if: The STIF maintains a dollar-weighted average portfolio maturity of 120 days or less, as determined in the same manner as is required by the Securities and Exchange Commission SEC) pursuant to Rule 2a-7 for money market mutual funds (17 CFR 270.2a-7); The STIF maintains a dollar-weighted average portfolio life maturity of 180 days or less ...; The bank is acting in the best interests of the STIF under applicable law in connection with using these temporary limits; and The bank makes any necessary amendments to the written plan for the STIF to reflect these temporary changes."
The OCC's release adds, "The OCC also determined that the relief provided by this administrative order terminates on July 20, 2020, unless the OCC revises this order to provide otherwise before that date. The OCC has established a single web page with all of its COVID-19 related information at https://occ.gov/covid-19."
Finally, yields on money market funds and rates on brokerage sweep accounts both plummeted in the latest week. Our flagship Crane 100 Money Fund Index fell below the 1.0% level, dropping 36 basis points to 0.72%, according to Money Fund Intelligence Daily (data as of Friday, 3/20). The Crane 100 is down from 1.46% at the start of the year and down 1.51% from the beginning of 2019 (2.23%). The Crane Brokerage Sweep Index fell to 0.02% (for balances of $100K), down from 0.07% a week ago and down 26 bps from the end of 2018 (0.28%). Our latest Brokerage Sweep Intelligence, with data as of March 20, shows eight out of 11 major brokerages cut rates in the past week. Yields should continue falling towards zero as markets continue to digest the Fed's panic rate cut in coming days.
The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 674), shows a 7-day yield of 0.67%, down 31 basis points in the week through Friday, March 20. Prime Inst MFs were down 22 bps to 1.01% in the latest week, while Government Inst MFs fell by 41 bps to 0.67% and Treasury Inst MFs dropped by 35 bps to 0.59%. Treasury Retail MFs currently yield 0.30%, (down 36 bps), Government Retail MFs yield 0.49% (down 31 bps), and Prime Retail MFs yield 0.91% (down 14 bps), Tax-exempt MF 7-day yields increased 1.75% to 2.58%.
Yesterday's Brokerage Sweep Intelligence shows that Ameriprise, Raymond James and Fidelity all lowered rates across the board in the past week, while Merrill Lynch, Morgan Stanley, Schwab, UBS and Wells Fargo dropped their higher tier rates. Fidelity cut all rates by 50 basis points, their 100K balance dropped to 0.07%. The cut cost them their long reining title of highest brokerage sweep rate.
Ameriprise also trimmed rates across the board; their $100K balance tier now pays 0.01%. Raymond James cut its rates; its $100K balance declined from 0.02% to 0.01%. Merrill Lynch, Morgan Stanley, Schwab, UBS and Wells Fargo all dropped their upper tiers, all of their $100K balances remained at 0.01%. No brokerage sweep rates or money fund yields have dropped to zero or gone negative to date, but this could become a distinct possibility in coming weeks or months.
Crane's Brokerage Sweep Index fell five basis points to 0.02% in the week ended March 20 (for balances of $100K.) Ameriprise, E*Trade, TD Ameritrade, Merrill Lynch, Morgan Stanley, Raymond James, Schwab, UBS and Wells Fargo all currently have the lowest rate (0.01%) for balances at the $100K level. Meanwhile, RW Baird now has the highest sweep rate (0.10%) and Fidelity is paying 0.07%.
