ESMA, or the European Securities & Markets Authority, posted a working paper entitled, "Bang for (breaking) the buck: Regulatory constraints and money market funds reforms." Written by Michel Baes, Antoine Bouveret and Eric Schaanning, write in the Abstract, "Despite substantial regulatory reforms, US and EU money market funds (MMFs) experienced severe stress in March 2020. Funds investing in private assets such as EU Low Volatility Net Asset Value (LVNAV) MMFs faced acute challenges to meet regulatory requirements while facing high redemptions. Such funds must maintain their mark-to-market net asset value (NAV) within 20 basis points of a constant net asset value and must maintain a 30% share of assets that mature within one week. We develop a stylized model to show that under certain conditions related to outflows and the market liquidity of their assets, LVNAVs may face difficulties in fulfilling both regulatory constraints at the same time." (Note: We're still taking registrations to our upcoming European Money Fund Symposium, which is Sept. 25-26 in Edinburgh, Scotland. We hope to see you there!) (Note too: Money fund assets broke the $6.0 trillion level for the first time ever on Friday, according to our Money Fund Intelligence Daily. Assets rose $30.4 billion on Sept. 1 to a record $6.010 trillion.)
They explain, "We calibrate our model to EU and US data and evaluate different regulatory reforms. Removing the use of amortised cost has the largest positive effect in terms of resilience, while higher liquidity requirements have more limited effects [and] improving the market liquidity of the assets MMFs invest in would substantially improve the resilience of MMFs. Introducing countercyclical liquidity buffers would also enhance their resilience, especially when the assets eligible to meet liquidity requirements are more liquid than the rest of the portfolio, and the effect is larger than increasing liquidity requirements. Overall, we find that, based on our market impact estimates, the NAV constraint is generally the binding one."
The paper's "Non-technical Summary" says, "Money market funds (MMFs) offer daily redemptions to investors while investing in short-term fixed income assets such as Commercial Paper (CP) or Certificate of Deposits (CDs) issued by financial institutions. Over time, MMFs have become key intermediaries in the financial system most notably on the short-term funding markets. Investors tend to treat MMF shares like deposits or a cash-like instrument and use them as short-term cash management vehicles. MMF vulnerabilities emerge from their liquidity and maturity transformation activities: they offer daily redemptions to investors while investing in instruments of longer maturity and of varying degrees of liquidity."
It tells us, "Despite substantial regulatory reforms after the Global Financial Crisis of 2007-2008, US and EU MMFs exposed to private debt experienced acute challenges during the COVID-19 crisis in March 2020. MMFs faced large redemptions from investors while short-term markets froze, resulting in liquidity issues for MMFs and the intervention of central banks to provide a backstop."
The ESMA piece comments, "This paper provides a framework to assess MMFs resilience and shows that the maximum redemptions a MMF can face depends on regulatory constraints and asset liquidity. We use detailed portfolio data for a sample of 78 US and EU MMFs with USD 1,353bn in assets to assess each individual fund resilience. The maximum redemptions a fund can face ranges between 40% and 80% of the net asset value. We use our model to assess the impact of regulatory reforms such as an increase in liquidity requirements, changes to the allowed price deviation for MMFs using amortised cost or requirements to invest in more liquid assets. Overall, we find that removing the use of amortised cost has the largest positive effect in terms of resilience, while higher liquidity requirements have more limited effects."
It adds, "This paper complements existing literature in three ways. First, we model how the interaction between regulatory requirements, asset liquidity and investor redemptions determine the resilience of MMFs. Second, we show how to measure the resilience of MMFs and how the maximum level of redemption a fund can withstand can be heterogenous across EU and US MMFs. Finally, we provide a quantitative assessment of regulatory reforms on MMF resilience."
Finally, ESMA's paper concludes, "We have shown how the use of amortised cost and liquidity requirements can create challenges for MMFs exposed to instruments with limited liquidity. In particular, in times of stress, MMFs face difficulties in selling assets to meet redemptions while complying with regulatory requirements. Using data on EU LVNAV MMFs and US Prime MMFs, we use our model to assess the impact of policy reform on the resilience of MMFs. Overall, we find that changing required liquidity requirements has limited effects on the resilience of funds. In contrast, increasing the NAV deviation and at the limit removing the use of amortised cost have a large effect on the maximum amount of redemptions a fund can meet. Relatedly, introducing countercyclical liquidity buffers can foster resilience by providing additional flexibility to MMFs in times of stress. Finally, improving the liquidity of underlying markets has also a significant impact on the resilience of MMFs. The framework outlined in this paper can be used by Authorities when considering regulatory options for MMFs."
In other news, money fund yields remained unchanged over the past week at 5.16% on average, their highest levels since 1999. They broke the 5.0% level for the first time since August 2007 six weeks ago <b:>`_. The Crane 100 Money Fund Index (7-Day Yield) was unchanged at 5.16% in the week ended Friday, 9/1, after increasing by 1 bp the previous week. We expect yields to inch higher in coming days as they finish digesting the Fed's July 26th 25 basis point hike.
Yields are up from 4.94% on June 30, 4.61% on March 31 and 4.05% on 12/31/22. Three-quarters of money market fund assets now yield 5.0% or higher. (They should get more company in coming days.) Assets of money market funds rose by $54.9 billion last week to $6.010 trillion according to Crane Data's Money Fund Intelligence Daily, and they have risen by $128.7 billion since the start of August (after rising $34.7 billion in July). Weighted average maturities were unchanged last week and mostly unchanged in July (at 24 days), after increasing by 3 days during June.
The broader Crane Money Fund Average, which includes all taxable funds tracked by Crane Data (currently 683), shows a 7-day yield of 5.05%, up 1 bp in the week through Friday. Prime Inst MFs were unchanged at 5.26% in the latest week. Government Inst MFs were up 1 bp at 5.12%. Treasury Inst MFs up 1 bps for the week at 5.10%. Treasury Retail MFs currently yield 4.87%, Government Retail MFs yield 4.82%, and Prime Retail MFs yield 5.07%, Tax-exempt MF 7-day yields were up 12 bps to 3.64%.
According to Tuesday's Money Fund Intelligence Daily, with data as of Friday (9/1), 9 money funds (out of 812 total) yield under 3.0% with $13.3 billion in assets, or 0.2%; 108 funds yield between 3.00% and 3.99% ($90.1 billion, or 1.5%), 248 funds yield between 4.0% and 4.99% ($1.289 trillion, or 21.5%) and 447 funds now yield 5.0% or more ($4.617 trillion, or 76.8%).
Our Brokerage Sweep Intelligence Index, an average of FDIC-insured cash options from major brokerages, was unchanged at 0.62% after rising 1 bp three weeks prior. The latest Brokerage Sweep Intelligence, with data as of Sept 1, shows that there was no changes over the past week. Three of the 11 major brokerages tracked by our BSI still offer rates of 0.01% for balances of $100K (and lower tiers). These include: E*Trade, Merrill Lynch and Morgan Stanley.
