The SEC recently released its quarterly "Private Funds Statistics" report, which summarizes Form PF reporting and includes some data on "Liquidity Funds," or pools which are similar to but not money market funds. The publication shows overall Liquidity fund assets were slightly lower in the latest reported quarter (Q4'20) to $624 billion (down from $627 billion in Q3'20 but up from $568 billion in Q4'19). The SEC's "Introduction" tells us, "This report provides a summary of recent private fund industry statistics and trends, reflecting data collected through Form PF and Form ADV filings. Form PF information provided in this report is aggregated, rounded, and/or masked to avoid potential disclosure of proprietary information of individual Form PF filers. This report reflects data from First Calendar Quarter 2019 through Fourth Calendar Quarter 2020 as reported by Form PF filers." (Note: Crane Data believes the largest portion of these liquidity fund assets are securities lending reinvestment pools.)

The tables in the SEC's "Private Funds Statistics: Fourth Calendar Quarter 2020," with the most recent data available, show 123 Liquidity Funds (including "Section 3 Liquidity Funds," which are Liquidity Funds from advisers with over $1 billion total in cash), up 9 from last quarter and up 17 from a year ago. (There are 71 Liquidity Funds and 52 Section 3 Liquidity Funds.) The SEC receives Form PF reports from 36 Liquidity Fund advisers and 23 Section 3 Liquidity Fund advisers, or 59 advisers in total, the same number as last quarter (up 3 from a year ago).

The SEC's table on "Aggregate Private Fund Net Asset Value" shows total Liquidity Fund assets at $624 billion, down $3 billion from Q3'20 but up $56 billion from a year ago (Q4'19). Of this total, $313 billion is in normal Liquidity Funds while $311 billion is in Section 3 (large manager) Liquidity Funds. The SEC's table on "Aggregate Private Fund Gross Asset Value" shows total Liquidity Fund assets at $633 billion, down $8 billion from Q3'20 but up $60 billion from a year ago (Q4'19). Of this total, $318 billion is in normal Liquidity Funds while $315 billion is in Section 3 (large manager) Liquidity Funds.

A table on "Beneficial Ownership for Section 3 Liquidity Funds" shows $59 billion is held by Private Funds (18.8%), $79 billion is held by Unknown Non-U.S. Investors (25.5%), $87 billion is held by Other (28.0%), $20 billion is held by SEC-Registered Investment Companies (6.5%), $9 billion in held by Pension Plans (2.7%), $8 billion is held by Insurance Companies (2.6%), $2 billion is held by Non-Profits (0.7%) and $1 billion is held by State/Muni Govt. Pension Plans (0.3%).

The tables also show that 72.1% of Section 3 Liquidity Funds have a liquidation period of one day, $294 billion of these funds may suspend redemptions, and $270 billion of these funds may have gates. WAMs average a short 31 days (43 days when weighted by assets), WALs are 48 days (55 days when asset-weighted), and 7-Day Gross Yields average 0.12% (0.25% asset-weighted). Daily Liquid Assets average about 46% (44% asset-weighted) while Weekly Liquid Assets average about 60% (60% asset-weighted). Overall, these portfolios appear shorter with a heavier Treasury exposure than money market funds in general; almost half of them (44.2%) are fully compliant with Rule 2a-7. When calculating NAVs, 73.1% are "Stable" and 26.9% are "Floating."

In other news, Federal Reserve Bank of New York Executive Vice President Lorie Logan spoke recently on "Liquidity Shocks: Lessons Learned from the Global Financial Crisis and the Pandemic." She comments, "Thank you to the Yale Program on Financial Stability and to the Bank for International Settlements for the invitation to speak at today's forum. Financial crises can have deep and lasting effects on the economy. They disrupt the vital flow of credit, damage business and household balance sheets, and result in lost jobs and income for the American public. Given these costs, it is critical that we learn the lessons of past crises and continue to build knowledge about the tools and interventions that will help us respond effectively in the future. Discussions like the one we’ll have today are valuable opportunities to evolve our thinking on policy implementation and crisis management."

Logan tells us, "Today, I'll share some lessons I’ve taken from two crises that occurred during my time implementing monetary policy: the Global Financial Crisis (GFC) and the coronavirus pandemic shock. I'll discuss liquidity shocks and how central bank actions address them. In particular, I'll focus on a recent decision by the Federal Open Market Committee (FOMC) to establish two standing repo facilities to support the effective implementation of monetary policy and smooth market functioning: the Standing Repo Facility and the FIMA Repo Facility."

She continues, "The GFC and the pandemic crisis resulted from very different events. The GFC was precipitated by a housing market shock that was amplified by weak underwriting standards and highly leveraged financial intermediaries—in particular, in subprime mortgage finance. The crisis unfolded over an extended timeline, punctuated by events that revealed significant vulnerabilities among financial institutions, including in the banking sector. In contrast, the pandemic crisis was caused by an extraordinary exogenous shock to the economic outlook as measures taken to control the coronavirus pandemic threatened to disrupt activity worldwide and raised concern about the ability of financial markets to operate smoothly. The sudden and unprecedented uncertainty resulted in a 'dash for cash' that began in the markets for the most liquid and safe investments and unfolded with astonishing speed. Although banks were a source of strength during the pandemic, the event still revealed vulnerabilities in market structure and among some financial firms."

Logan explains, "Even with these very divergent origins, the GFC and pandemic crisis impacted financial markets in some similar ways. First, both resulted in an extraordinary increase in the demand for dollar liquidity. The demand arose out of both immediate funding needs and the desire to raise precautionary liquidity. The supply of liquidity was also curtailed as firms that normally lend instead stockpiled liquidity to meet potential future payment needs. During both crises, this surge in demand for U.S. dollars was global in nature and had significant spillovers to domestic funding conditions. Second, each crisis revealed vulnerabilities in short-term funding markets -- notably among prime money market funds -- in which maturity transformation created an unstable source of liquidity during periods of stress, propagating funding strains."

She adds, "As I've discussed in previous remarks, the Federal Reserve responded to dislocations from the pandemic crisis with swift and decisive actions -- many in coordination with the U.S. Treasury -- to support smooth market functioning and the flow of credit to the U.S. economy. Bearing in mind lessons from the GFC, policymakers announced actions to address conditions quickly in order to restore confidence. Fortunately, many tools used during the GFC -- including expanded U.S. dollar liquidity swap lines, enhanced terms of Discount Window lending, and 13(3) facilities -- were able to be revived, with good results. Indeed, the Commercial Paper Funding Facility (CPFF), Money Market Mutual Fund Liquidity Facility (MMLF), Primary Dealer Credit Facility (PDCF), and Term Asset-Backed Securities Loan Facility (TALF) were all substantively similar to facilities employed during the GFC. And, during the pandemic, the CPFF and MMLF in particular were highly effective at stabilizing money funds and short-term funding markets."

Finally, Logan states, "At its July meeting, the FOMC established two standing repo facilities as tools in the Fed's policy implementation framework: a domestic standing repo facility (SRF) and a repo facility for foreign and international monetary authorities (FIMA Repo Facility). These facilities will serve as backstops in money markets to support the effective implementation of monetary policy and smooth market functioning.... While I hope we can avoid future shocks to the financial system and the disruptions to the economy that they cause, history teaches us that unpredictable events will challenge financial markets from time to time. Central banks will need to respond to new environments and new shocks. Nonetheless, there are some recurring elements of liquidity shocks from which we can learn. The SRF and FIMA Repo Facility will provide backstops in overnight money markets that help address immediate demand for dollar liquidity, both domestically and internationally, when shocks occur. I hope that the continued study of crisis events will yield further lessons for central bankers looking to shield economies from the effects of shocks to the financial system."

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