Citi writes in a recent Viewpoint, "Fed balance sheet: The primes they are a-changin'." Authors Isfar Munir and Jason Williams explain, "Money market fund usage of the Fed's reverse repo facility (RRP) reached a new high at the end of September, although this was mainly driven by a sizeable quarter-end effect. More interestingly though, prime money market fund usage has now breached the $300bln level. About 60% of US prime money market funds assets are in the RRP facility, a significant departure from the 'typical' makeup of prime fund holdings. Prime money market funds are receiving inflows in contrast to government funds and this may drive RRP usage higher.... Usage of the Fed's reverse repo facility (RRP) dropped by $136bln as the quarter-end effect subsided."
Citi's piece tells us, "The large drop in RRP usage reflects a normalization in usage post-quarter- end. The large build up in RRP balances in the second half of September appears to be mainly driven by quarter-end -- the build-up just started earlier than it often does. RRP usage has since returned to around $2,250 billion, where it was prior to the September FOMC meeting. With rate hike risks still skewed to the upside, risks to RRP usage remain skewed to the upside -- but our base case remains for RRP usage to stay sticky around current levels through to year-end."
It continues, "The Fed's interest expenses on IORB and RRP (along with costs of operating the Fed) have now exceeded the interest income the Fed generates from the SOMA. The Fed does not follow GAAP accounting and cannot take a loss on capital either. The Fed accounts for the negative interest income by creating a negative liability on its balance sheet for its remittances to Treasury. The Fed 'prints' reserves needed to make IORB/RRP payments that are owed."
Citi says, "Prime money market funds have become non-negligible users of the RRP facility in recent months -- usage in September broke the $300bln mark. The driver of this behavior is likely the same aversion to duration that is keeping government money market funds heavily invested in the RRP. While prime funds have a much broader set of investment options available to them compared to government funds, and most of these options (commercial paper, bank CDs, etc.) have higher yields than the RRP facility (i.e. Fed expectations on a duration matched basis), they will all have longer than overnight duration. As such, for prime funds looking for the shortest duration asset they can invest in, RRP is the only option that is available in scale. US-based prime money market funds held $510bln AUM at the end of September -- implying that 60% of their assets are in the RRP facility." (Note: Crane Data's statistics show Prime MMFs at $961 billion on 9/30/22, with 35.0% investing in the Fed RRP.)
The article also states, "Money market fund holding data shows that government funds are continuing to shift out of T-bills and allocating an increasing share to the RRP facility. It's important to note that the holdings data is reflective of month-end holdings and thus the September holdings will be heavily skewed by the quarter-end effect. With that in mind, decreased T-bill holdings has been a trend for the last year or so -- and this trend is unlikely to change while funds generally minimize duration. While money fund lending in repo markets was depressed by the month-end effect, tri-party repo continues to print below the RRP offer rate. While money market funds are likely to still lend in tri-party repo to maintain longer-run relationships with counterparties, the amount of cash deployed in this manner is likely to remain downward biased. These are all factors that can cause RRP usage to increase, assuming that government MMF AUM remains relatively stable around current levels."
Finally, it adds, "The largest money market fund users of RRP remained below the $160bln counterparty cap even with the increased usage due to quarter-end. The highest using fund allocated around $130bln to RRP. The September FOMC minutes did not mention any discussion of increasing the RRP counterparty caps, in contrast to the June and July FOMC minutes. There remains little need for the Fed to increase the counterparty caps at current usage levels, especially now that GSE usage of RRP has declined." (For more, see our Oct. 13 News, "Oct. MF Portfolio Holdings: Repo, Agencies Higher; T-Bills Fall Again.")
In other news, BlackRock briefly discussed money market funds on its recent Q3 2022 Earnings Call. CFO Gary Shedlin comments, "Over the last 12 months, BlackRock's broad-based platform has generated approximately $400 billion of total net inflows, representing positive organic base fee growth of 2%. During a tumultuous market environment, BlackRock generated third quarter long-term net inflows of $65 billion, representing approximately 3% annualized organic asset growth. Quarterly long-term net inflows were partially offset by net outflows from cash and advisory AUM. However, total quarterly annualized organic base fee decay of 4% reflected outflows from higher fee precision ETFs, the continued impact of elevated redemptions in active equity and fixed income mutual funds, and outflows in institutional money market funds."
He explains, "Third quarter base fees and securities lending revenue of $3.5 billion was down 10% year over year, broadly in line with the decline in our average AUM. The negative revenue impact of approximately $1.9 trillion of market beta and foreign exchange movements on AUM over the last 12 months was partially offset by positive organic base fee growth over the same period and the elimination of discretionary yield support, money market fund fee waivers versus a year ago.... As a result of continued global equity and bond market declines toward the end of the quarter, including the impact of FX-related dollar appreciation, we entered the fourth quarter with an estimated base fee run rate approximately 7% lower than our total base fees for the third quarter."
Shedlin says, "Our cash management platform experienced net outflows of $40 billion, primarily driven by redemptions from U.S. government money market funds, as reduced debt issuance in a higher rate environment, coupled with ongoing capital management and a general reduction in corporate cash levels, contributed to industrywide institutional outflows. As rates stabilize, BlackRock is well positioned to grow market share by leveraging our scale, product breadth, technology and risk management on behalf of liquidity clients."
He adds, "Finally, third quarter advisory net outflows of $9 billion were primarily linked to the successful transition of the last remaining assets managed in connection with our assignment with the New York Federal Reserve Bank. Throughout our history, BlackRock is led by listening to clients. This connectivity has been foundational to our growth over the last 34 years, and our relationships with clients have never been deeper. We have always capitalized on market disruption to emerge stronger by continuing to innovate, to work collaboratively, and to deliver the full power of our platform."
Asked about events in the U.K., CEO Larry Fink responds, "I don't know the Gilt markets since we've been on this call, but as of this morning, Gilt markets were stable. So it appears much of the reconstruction of these products may have been done, and the market maybe should be a little more normalized.... What I do believe we should do, like BlackRock was a leader in terms of money market reform, we want to work with the regulators, be a part of this to try to say, if volatility is going to continue to be this large, maybe there has to be whole redesigning of some of the products, whether that is in a commingled fund or in separate accounts. But we are going to be part of the solution to move this forward, as we always are. But I think this is a specific event to the U.K. pension market."
