Money market fund assets dipped again in the latest week, but the small movement masked a massive shift from Prime to Government assets as Vanguard's huge Prime fund was reclassified. It was money funds' eighth decline in a row and 16th decline over the past 19 weeks. Assets are at their lowest level since April 1. ICI's latest weekly "Money Market Fund Assets" report says, "Total money market fund assets decreased by $10.34 billion to $4.40 trillion for the week ended Wednesday, September 30, the Investment Company Institute reported.... Among taxable money market funds, government funds increased by $115.30 billion and prime funds decreased by $124.26 billion. Tax-exempt money market funds decreased by $1.38 billion." ICI's stats show Institutional MMFs falling $11.5 billion and Retail MMFs increasing $1.2 billion. Total Government MMF assets, including Treasury funds, were $3.690 trillion (83.8% of all money funds), while Total Prime MMFs were $600.9 billion (13.6%). Tax Exempt MMFs totaled $113.4 billion (2.6%).
ICI shows money fund assets up a still massive $772 billion, or 21.3%, year-to-date in 2020, with Inst MMFs up $617 billion (27.3%) and Retail MMFs up $155 billion (11.3%). Over the past 52 weeks, ICI's money fund asset series has increased by $941 billion, or 27.8%, with Retail MMFs rising by $207 billion (16.1%) and Inst MMFs rising by $734 billion (35.1%). (Crane Data's separate and broader Money Fund Intelligence Daily data series shows total MF assets are down $132.0 billion in September (as of 9/30) to $4.778 trillion.)
They explain, "Assets of retail money market funds increased by $1.16 billion to $1.52 trillion. Among retail funds, government money market fund assets increased by $124.39 billion to $1.12 trillion, prime money market fund assets decreased by $122.32 billion to $305.49 billion, and tax-exempt fund assets decreased by $915 million to $103.02 billion." Retail assets account for just over a third of total assets, or 34.6%, and Government Retail assets make up 73.2% of all Retail MMFs.
ICI adds, "Assets of institutional money market funds decreased by $11.50 billion to $2.88 trillion. Among institutional funds, government money market fund assets decreased by $9.10 billion to $2.57 trillion, prime money market fund assets decreased by $1.94 billion to $295.37 billion, and tax-exempt fund assets decreased by $467 million to $10.41 billion." Institutional assets, which broke below the $3.0 trillion level for the first time since April 22 last month, accounted for 65.3% of all MMF assets, with Government Institutional assets making up 89.4% of all Institutional MMF totals.
We assume the $124 billion drop in Prime MMF assets this week is attributable to the conversion of the massive Vanguard Prime Money Market Fund. It was renamed Vanguard Cash Reserves Federal Money Market and switched to a Government money fund earlier this week. (Crane Data's MFI Daily switched the fund's category from Prime Retail to Government Retail on Tuesday Sept. 29. See our August 28 News, "Vanguard Prime Money Market Fund Going Government; ICI's July Trends.")
In other news, the first issue of the new blog "Confluence Connect" features a section entitled, "ESMA Money Market Fund Regulation: The Strategic Opportunities that Lie Beneath." It tells us, "The deadlines are fast approaching for the European Securities and Markets Authority's (ESMA) obligatory stress testing by Money Market Funds (MMFs) across a number of criteria. ESMA's stress testing requirements represent a step change in reporting protocols and will present both challenges and opportunities for managers of MMFs. In this article, we will take a closer look at the current state of play and outline some frameworks and structures for ensuring that compliance with the stress testing requirements is not unduly stressful for those responsible for their implementation."
Fund data reporting firm Confluence continues, "The Article 37 MMF reporting template can be broken down into 6 main fields, each requiring disclosures related to a particular topic. Some of the key information required is as follows: MMF type and characteristics: Information such as the name, domicile, inception date, base currency, and share classes of the MMF. Portfolio indicators: Details about the fund's portfolio liquidity profile, cumulative returns and performance of the most representative share class. Stress tests: Five types of stress tests are required quarterly. Results of stress tests and the proposed action plan (where applicable) must be provided."
The article explains, "The shocks related to Credit Spreads aim to stress the market value of money market instruments in the portfolio under deteriorating credit environment. The granularity of the stress tests considers the nature of the issuer, which includes the sector, geographical locations and credit quality. For Government Bonds, the changes to the government spreads take into account the term structure of the credit exposure. As with interest rates, this is defined up to 2. In addition, the shocks are broken down by country. For Corporate Bonds, the shocks to corporate issuers have been defined on the basis of issuer sector and rating. The shocks are parallel across the term structure."
They add, "The exposure of money market funds is expected to be stressed to reflect the full cross currency exposure. Two scenarios have been defined to address both the appreciation and depreciation of the EUR against the USD. In each case, 30+ currencies participate in the stress testing, covering the most relevant markets for European MMFs. All other currencies are assumed to be held flat against the USD."
Confluence also discusses liquidity stress testing, writing, "With respect to Article 28(1)(a) of the MMF Regulation, a stress test has been introduced to estimate the impact on the MMF in the event of reduced liquidity. For each relevant security, the discount factors should be applied to the bid prices used for the valuation of the fund at the time of the reporting to derive an adjusted bid price. Taking the nature of the investments into account, the methodology is based on the definition of a haircut to the instrument valuation. Such haircuts are defined by ESMA as part of the stress testing definitions and provide a consistent and comparable framework for the assessment."
They also tell us, "The weekly liquidity stress test aims to assess the amount of assets in the Fund that can be liquidated within the week, taking into account predefined haircuts. In addition, reporting for atypical money market instrument holdings (i.e. derivatives, repos, asset-backed securitization) will introduce a further layer of complexity than typical money market instruments will involve and as such will warrant particularly careful attention."
Confluence also covered the topic in a previous piece, "Key questions to consider ahead of ESMA Article 37 MMF Reporting," which says, "Article 37 MMF Reporting includes new requirements on transparency, valuations and investment policy, and obliges each MMF to have in place sound risk management, identifying stress testing, liquidation stresses and reverse liquidity analysis as core components of such oversight.... By requiring holdings-level disclosure with security classification, liquidity, and maturity information, ESMA is maximizing the information to be made available to national competent authorities to detect, monitor, and respond to risks in the MMF market. Different MMF types are only supposed to invest in certain asset types, and this reporting helps ensure compliance with ESMA's mandates."
