Late last week, SIFMA, the Securities Industry and Financial Markets Association (formerly the more easily recognizable Bond Market Association), posted a letter to the SEC on money fund reforms authored by its Asset Management Group and the Investment Company Institute. Entitled, "Securities Industry and Financial Markets Association Comments on Money Market Fund Reforms," the letter states, "The Asset Management Group of the Securities Industry and Financial Markets Association ('SIFMA AMG') and the Investment Company Institute ('ICI') welcome the opportunity to provide additional information to the U.S. Securities and Exchange Commission with respect to the Commission's proposed amendments to Rule 2a-7 that govern money market funds under the Investment Company Act of 1940, and related proposed amendments to Form N-MFP, Form N-CR and Form N-1A." (See the "Comments on Money Market Fund Reforms" posted to the SEC's website here, and see our Sept. 6 News, "Funds Doing Last-Minute Lobbying to SEC Says Ignites; Germain on RDM.")
It explains, "As a follow-up to our conversation on August 10 and previous submissions to the Commission, we are writing to provide an example of language that a money market fund could use to describe how a reverse distribution mechanism ('RDM') works and would impact an individual investor in a negative interest rate environment. The language takes the form of a supplement that a fund would use to inform shareholders that the fund board has elected to implement an RDM mechanism. In practice, each fund would develop its own specific disclosure language, so the template is an illustration rather than proposed mandatory language. We re-iterate that the proposed provision to prohibit RDMs should not be included in final amendments."
The example Prospectus Supplement filing language says, "Upon the recommendation of [ABC Fund Advisers] and to address circumstances where interest rates fall below zero and cause the income accrued on the Fund's portfolio securities before deduction of expenses to be negative, the Board of [Trustees/Directors] of the Trust authorized the implementation of a 'reverse distribution mechanism' ('RDM'). As discussed in more detail below, the RDM will be implemented to seek to maintain the Fund's stable $1.00 share price by reducing the number of shares held by shareholders, thereby reducing the value of each shareholder's investment in the Fund in an amount corresponding to the Fund's daily negative income.... Shareholders are encouraged to consider whether their investment in the Fund remains appropriate and consistent with their investment objectives."
It continues, "The fund will reduce the number of shares that you hold in order to maintain a stable $1.00 share price once it implements RDM. The value of your investment will decline if the fund reduces the number of shares that you hold. In the event of a negative interest rate environment that impacts a money market fund's ability to maintain a stable $1.00 share price, subject to approval by the board of trustees, a money market fund may: 1) Implement an RDM: A money market fund that implements an RDM would continue to maintain a stable $1.00 share price by use of the amortized cost method of valuation and/or penny rounding method; Such fund would reduce the number of shares held by an investor to offset the daily negative income accrued by a fund on the fund's investments; and, The value of an investor's investment in a money market fund that implements RDM would decline if the fund reduces the number of shares held by the investor."
The fund may also, "2) 'Float' its NAV: A money market fund that floats its NAV would no longer maintain a stable $1.00 share price and instead have a share price that fluctuates; Such fund would establish its NAV per share by using available market quotations (or an appropriate substitute that reflects current market conditions). The NAV per share would be reduced to reflect the daily negative income accrued by a fund on the fund's investments; and, An investor in a money market fund that floats its NAV would lose money if the investor sells their shares when they are worth less than what the investor originally paid for them."
The SIFMA letter adds, "Regardless of which option a fund selects, the decline in the value of a shareholder's investment due to the negative interest income earned by the fund would be the same. The board of trustees has determined that it is in the best interests of the fund and its shareholders to maintain a stable NAV per share and has authorized the fund to implement an RDM. To maintain a stable $1.00 share price in the current interest rate environment, on each business day on which income accrued on the Fund's portfolio securities before deduction of expenses is negative, the RDM will reduce the number of full and fractional Fund shares outstanding in an amount necessary to offset the daily negative income accrued by the Fund on its investments."
In other news, Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics Tuesday, which track a shifting subset of our monthly Portfolio Holdings collection. The most recent cut (with data as of Sept. 16) includes Holdings information from 62 money funds (up 8 from two weeks ago), which represent $2.114 trillion (up from $1.732 trillion) of the $5.007 trillion (42.2%) in total money fund assets tracked by Crane Data. (Our Weekly MFPH are e-mail only and aren't available on the website.)
Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Repurchase Agreements (Repo) totaling $1.105 trillion (up from $922.1 billion two weeks ago), or 52.3%; Treasuries totaling $722.8 billion (up from $543.9 billion two weeks ago), or 34.2%, and Government Agency securities totaling $114.8 billion (up from $107.8 billion), or 5.4%. Commercial Paper (CP) totaled $49.6 billion (up from two weeks ago at $45.9 billion), or 2.3%. Certificates of Deposit (CDs) totaled $38.7 billion (up from $37.4 billion two weeks ago), or 1.8%. The Other category accounted for $50.2 billion or 2.4%, while VRDNs accounted for $32.3 billion, or 1.5%.
The Ten Largest Issuers in our Weekly Holdings product include: the Federal Reserve Bank of New York with $872.6 billion (41.3%), the US Treasury with $722.8 billion (34.2% of total holdings), Federal Home Loan Bank with $72.0B (3.4%), Federal Farm Credit Bank with $37.9B (1.8%), RBC with $30.8B (1.5%), BNP Paribas with $26.3B (1.2%), JP Morgan with $17.7B (0.8%), Mitsubishi UFJ Financial Group Inc with $14.3B (0.7%), Barclays PLC with $13.7B (0.6%), and Credit Agricole with $13.0B (0.6%).
The Ten Largest Funds tracked in our latest Weekly include: JPMorgan US Govt MM ($221.5B), Goldman Sachs FS Govt ($209.0B), Morgan Stanley Inst Liq Govt ($144.3B), Fidelity Inv MM: Govt Port ($123.4B), State Street Inst US Govt ($111.2B), Dreyfus Govt Cash Mgmt ($109.6B), Goldman Sachs FS Treas Instruments ($108.2B), Allspring Govt MM ($107.2B), JPMorgan 100% US Treas MMkt ($90.0B) and First American Govt Oblg ($78.4B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary, or our Bond Fund Portfolio Holdings data series.)
