As we mentioned in yesterday's "Link of the Day," the ICI published a white paper entitled, "Reverse Distribution Mechanism and Negative Yields: Considerations and Recommended Practices," which reviews theoretical options for money market funds to operate in a negative yield environment. The paper says, "CNAV money market funds are exploring several actions to mitigate the pressure of negative yields [including] fee waivers and/or soft closures ... contributing a fund sponsor's own capital ... converting from a CNAV money market fund to a floating NAV ... [and a] Reverse Distribution Mechanism (RDM).... The working group identified RDM as the most operationally feasible alternative should a CNAV money market fund have to apply negative yield quickly. This paper provides details on RDM and highlights recommended practices for successful implementation of RDM, should it become necessary."
ICI explains, "RDM distributes a CNAV money market fund's negative yield by cancelling shares in shareholder accounts. It offsets the daily negative yield accrued (i.e., a decline in the fund's net assets) by reducing the number of fund shares outstanding. This process allows the fund to maintain a constant NAV per share, typically $1.00. The fund allocates the reduction in shares outstanding pro rata across all eligible shareholder accounts by posting a share redemption/cancellation transaction to each shareholder's account based on the daily negative yield factor per share. To ensure they apply reductions to all eligible shareholders, funds and intermediaries must post share cancellations to their respective systems daily. Shares included in the RDM calculation are determined using the same criteria used to distribute positive income."
They continue, "It is anticipated that funds would make the daily negative yield factor per share available around the same time of day as other positive income factors per share (also known as daily accrual factors). Members of the RDM Feasibility Working Group indicated that, should they need to implement RDM, they plan to apply their share cancellation transactions each day prior to the initiation of their nightly processing cycles."
The paper tells us, "Whatever share cancellation alternative that funds choose to manage negative yield situations for a CNAV money market fund, they should consider proactively communicating their intention to their intermediary partners. In addition to assisting counterparties in their preparations, transparency will help ensure consistent accounting for negative yield when it is necessary. For instance, fund accounting for share cancellation (e.g., RDM) differs from fund accounting for reductions in accrued dividends (e.g., negative yield accrual). To maintain accurate fund accounting and reporting, all parties must pursue the alternative determined by the fund."
It adds, "In addition to the various back-office considerations described in this playbook, discussions are ongoing regarding approaches to clarify shareholder and fund tax reporting, as well as the effects of RDM on fund financial statements delivered to shareholders and filed with the SEC. ICI will provide its members with information about decisions made in these two important areas through its regular memo distribution process."
For more on negative yields and the reverse distribution mechanism, see these Crane Data News articles: "More from Mini Fund Symposium: Dechert's Cohen on ESG, RDM, Reforms" (9/2/20), "N-MFP Holdings: Treasuries Half; JPM, Ignites on RDM, Negative Rates" (6/9/20), "European MMF Reforms Going Live, or Not? Economist Swipes at RDM Kill" (1/22/19) and "WSJ: Yu'e Bao Shrinking; Europe Still Unclear on RDM Ban; Weekly Holds" (11/1/18). (Let us know if you'd like to see our Money Fund Intelligence International too, which tracks Euro MMFs with negative yields.)
In other news, Crane Data's latest monthly Money Fund Portfolio Holdings statistics will be sent out Wednesday, and we'll be writing our normal monthly update on the November 30 data for Thursday's News. But we also published a separate and broader Portfolio Holdings data set based on the SEC's Form N-MFP filings on Tuesday. (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 Nov. 30, 2020, includes holdings information from 1,073 money funds (up four from last month), representing assets of $4.878 trillion (up $80 billion). Prime MMFs now total $963.0 billion, or 19.7% of the total, up from $960.1 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 $2.459 trillion (up from $2.443 trillion), or a massive 50.4% of all holdings. Repurchase Agreement (Repo) holdings in money market funds totaled $1.080 trillion (up from $997.6 billion), or 22.1% of all assets, and Government Agency securities totaled $706.4 billion (down from $730.0 billion), or 14.5%. Holdings of Treasuries, Government agencies and Repo (almost all of which is backed by Treasuries and agencies) combined total $4.245 trillion, or a stunning 87.0% of all holdings.
Commercial paper (CP) totals $239.9 billion (up from $230.8 billion), or 4.9% of all holdings, and Certificates of Deposit (CDs) total $136.9 billion (down from $148.5 billion), 2.8%. The Other category (primarily Time Deposits) totals $168.5 billion (up from $157.1 billion), or 3.5%, and VRDNs account for $88.5 billion (down from $91.3 billion last month), or 1.8% of money fund securities.
Broken out into the SEC's more detailed categories, the CP totals were comprised of: $150.0 billion, or 3.1%, in Financial Company Commercial Paper; $48.6 billion or 0.9%, in Asset Backed Commercial Paper; and, $44.0 billion, or 0.9%, in Non-Financial Company Commercial Paper. The Repo totals were made up of: U.S. Treasury Repo ($625.3B, or 12.8%), U.S. Govt Agency Repo ($403.0B, or 8.3%) and Other Repo ($51.3B, or 1.1%).
The N-MFP Holdings summary for the 208 Prime Money Market Funds shows: Treasury holdings of $259.4 billion (down from $271.8 billion), or 26.9%; CP holdings of $234.6 billion (up from $225.7 billion), or 24.4%; Repo holdings of $147.8 billion (up from $138.4 billion), or 15.3%; CD holdings of $136.9 billion (down from $148.5 billion), or 14.2%; Other (primarily Time Deposits) holdings of $118.3 billion (up from $105.2 billion), or 12.3%; Government Agency holdings of $55.1 billion (down from $59.0 billion), or 5.7% and VRDN holdings of $10.9 billion (down from $11.6 billion), or 1.1%.
The SEC's more detailed categories show CP in Prime MMFs made up of: $150.0 billion (down from $141.2 billion), or 15.6%, in Financial Company Commercial Paper; $45.9 billion (down from $47.9 billion), or 4.8%, in Asset Backed Commercial Paper; and $38.8 billion (down from $36.6 billion), or 4.0%, in Non-Financial Company Commercial Paper. The Repo totals include: U.S. Treasury Repo ($40.4 billion, or 4.2%), U.S. Govt Agency Repo ($56.1 billion, or 5.8%), and Other Repo ($51.3 billion, or 5.3%).
