As we mentioned last week, mutual fund trade group the Investment Company Institute published a press release entitled, "Prime Money Market Funds Didn't Trigger Financial Turmoil in March," and a report examining the performance of money market funds during the coronavirus market turmoil earlier this year. Subtitled, "New Paper Shows How Stress in Fixed-Income Markets and Some SEC Reforms Fed into Redemption Pressure," it tells us, "There were serious and widespread dislocations in short-term credit and other fixed-income markets before institutional prime money market funds experienced redemption pressure, and some Securities and Exchange Commission (SEC) reforms exacerbated -- rather than mitigated -- that pressure, according to 'Experiences of US Money Market Funds During the COVID-19 Crisis,' a new paper from the Investment Company Institute (ICI)." We didn't have a chance to fully cover this news late last week as our monthly products shipped, but we excerpt from the release today.
ICI President and CEO Paul Schott Stevens comments, "Money market funds did not trigger the turmoil that struck fixed-income markets in March.... Though the SEC's 2010 and 2014 reforms resulted in a much more resilient money market fund sector, one of the principal 2014 reforms, which gave fund boards the option to impose liquidity fees and gates if a fund dipped below the 30 percent weekly liquid assets threshold, may have intensified flows from institutional prime money market funds instead of moderating them." (See also our Oct 29 News, "ICI's Stevens Keynotes Crane Event, Says Money Funds Didn't Drive Crisis," and our recent Money Fund Symposium Online replay.)
The release explains, "Assertions that institutional prime money market funds caused the financial turmoil in March are inconsistent with the data, explains ICI. For example, as this paper and previous papers demonstrate, many different markets experienced dislocations, including markets for Treasury bonds, longer-term agency securities, municipal securities, corporate bonds, and foreign exchange -- markets in which prime money market funds are not significant players. The report also analyzes the sequence of events that occurred during the COVID-19-related volatility to help assess causality. Importantly, stresses appeared in many of those markets several days before institutional prime money market funds began to see meaningful outflows."
It says, "Though money market funds' experiences during the COVID-19 and global financial crises share some similarities, ICI's paper shows that their differences were significant. Importantly, during March 2020, prime money markets funds were much more liquid than they were in 2007–2009 as a result of the SEC's 2010 and 2014 reforms. From 2007 to 2009, 33 percent of institutional prime money market fund assets, on average, were in weekly liquid assets; that rose to an average of 43 percent from 2010 to June 2020. For retail prime funds, the increase in the proportion of their assets in weekly liquid assets was even more substantial, rising from an average of 27 percent from 2007 to 2009 to 41 percent from 2010 to June 2020."
The release continues, "ICI's paper also details other differences, including that prime money market funds: saw smaller outflows in terms of dollars (page 24); rolled off more repurchase agreements to meet redemptions (pages 26–27); and made less use of Federal Reserve liquidity facilities during the COVID-19 crisis (pages 25–26). In part, these differences reflected the successful elements of the SEC's 2010 and 2014 reforms that made money market funds more resilient, such as requirements for enhanced credit quality, shorter portfolio maturities, and minimum liquidity levels."
ICI states, "The SEC's 2014 money market reforms imposed significant changes on money market funds, including giving prime and tax-exempt fund boards the option to impose liquidity fees and gates if a fund's weekly liquid assets dip below the 30 percent regulatory requirement. This was meant to allow boards to have greater flexibility to determine the best line of defense against heavy redemptions. ICI's paper, however, shows that the potential for liquidity fees and gates may have accelerated redemptions.... [F]rom March 17 to March 24, outflows were much stronger from institutional prime money market funds with weekly liquid assets at or below 35 percent, even though these funds held liquid assets above the required minimum. Given uncertainty about how a fund's board might act if the fund reached the regulatory minimum, some institutional investors treated the 30 percent limit as one to be avoided instead of a significant liquidity cushion."
The press release adds, "The Federal Reserve established several liquidity facilities to support households, businesses, and the US economy overall, including the Money Market Mutual Fund Liquidity Facility (MMLF). ICI's paper explains that these various facilities were both necessary and appropriate to helping restore liquidity and the flow of credit to the economy. As the paper discusses, the MMLF helped institutional prime money market funds meet their investors' demands for liquidity and helped stabilize the supply of liquidity to financial firms that borrow through short-term credit markets.... That said, prime money market funds' use of the facility was much more limited than their use of a similar facility in 2008—$53 billion in 2020 compared to $152 billion in 2008." (Watch for more excerpts and coverage of the full report in coming days.)
In other news, Crane Data's latest monthly Money Fund Portfolio Holdings statistics will be sent out Tuesday, and we'll be writing our normal monthly update on the October 31 data for Wednesday's News. But we also published a separate and broader Portfolio Holdings data set based on the SEC's Form N-MFP filings on Monday. (We continue to merge the two series, and the N-MFP version is now available via Holding file listings to Money Fund Wisdom subscribers.) Our new N-MFP summary, with data as of Oct. 31, 2020, includes holdings information from 1,069 money funds (up three from last month), representing assets of $4.798 trillion (down $143 billion). Prime MMFs now total $960.1 billion, or 20.0% of the total, down from $999.0 billion a month ago. We review the new N-MFP data below.
Our latest Form N-MFP Summary for All Funds (taxable and tax-exempt) shows Treasury holdings totaled $2.443 trillion (down from $2.494 trillion), or a massive 50.9% of all holdings. Repurchase Agreement (Repo) holdings in money market funds totaled $997.6 billion (down from $1.050 trillion), or 20.8% of all assets, and Government Agency securities totaled $730.0 billion (down from $768.3 billion), or 15.2%. Holdings of Treasuries, Government agencies and Repo (almost all of which is backed by Treasuries and agencies) combined total $4.171 trillion, or a stunning 86.9% of all holdings.
Commercial paper (CP) totals $230.8 billion (down from $240.5 billion), or 4.8% of all holdings, and Certificates of Deposit (CDs) total $148.5 billion (down from $156.9 billion), 3.1%. The Other category (primarily Time Deposits) totals $157.1 billion (up from $138.1 billion), or 3.3%, and VRDNs account for $91.3 billion (down from $93.0 billion last month), or 1.9% of money fund securities.
Broken out into the SEC's more detailed categories, the CP totals were comprised of: $141.2 billion, or 2.9%, in Financial Company Commercial Paper; $47.9 billion or 1.0%, in Asset Backed Commercial Paper; and, $41.7 billion, or 0.9%, in Non-Financial Company Commercial Paper. The Repo totals were made up of: U.S. Treasury Repo ($562.7B, or 11.7%), U.S. Govt Agency Repo ($384.9B, or 8.0%) and Other Repo ($50.0B, or 1.0%).
The N-MFP Holdings summary for the 208 Prime Money Market Funds shows: Treasury holdings of $271.8 billion (down from $276.5 billion), or 28.3%; CP holdings of $225.7 billion (down from $235.0 billion), or 23.5%; CD holdings of $148.5 billion (down from $156.8 billion), or 15.5%; Repo holdings of $138.4 billion (down from $161.3 billion), or 14.4%; Other (primarily Time Deposits) holdings of $105.2 billion (up from $92.9 billion), or 11.0%; Government Agency holdings of $59.0 billion (down from $65.4 billion), or 6.1% and VRDN holdings of $11.6 billion (up from $11.2 billion), or 1.2%.
The SEC's more detailed categories show CP in Prime MMFs made up of: $141.2 billion (down from $143.4 billion), or 14.7%, in Financial Company Commercial Paper; $47.9 billion (down from $52.5 billion), or 5.0%, in Asset Backed Commercial Paper; and $36.6 billion (down from $39.1 billion), or 3.8%, in Non-Financial Company Commercial Paper. The Repo totals include: U.S. Treasury Repo ($39.9 billion, or 4.2%), U.S. Govt Agency Repo ($48.5 billion, or 5.0%), and Other Repo ($50.0 billion, or 5.2%).
