Daily Links Archives: October, 2010

Federated Investors reported 3rd quarter earnings late Thursday and hosts a conference call at 9am Friday morning. The company's press release says, "As the equity and fixed income markets contracted in 2007 and 2008, Federated's money market assets increased by $182 billion and as markets recovered in 2009 and 2010, Federated's assets reflected industry trends as $95 billion flowed out of Federated's money market products. Since the end of 2006, Federated's money market managed assets have increased $87.3 billion to $260.9 billion at Sept. 30, 2010.... Money market assets in both funds and separate accounts were $260.9 billion at Sept. 30, 2010, down $57.2 billion or 18 percent from $318.1 billion at Sept. 30, 2009 and up $0.4 billion from $260.5 billion at June 30, 2010. Money market mutual fund assets were $233.6 billion at Sept. 30, 2010, down $54.0 billion or 19 percent from $287.6 billion at Sept. 30, 2009 and up $2.4 billion or 1 percent from $231.2 billion at June 30, 2010. Assets at Sept. 30, 2010 included $11.0 billion transitioned from SunTrust Banks, Inc.'s products late in the quarter. Federated expects an additional $3.5 billion to transition from SunTrust products into Federated money market funds before year-end." It adds, "In Q3 2010, Federated derived 51 percent of its revenue from money market assets.... As detailed at the end of this financial summary, voluntary fee waivers related to certain money market funds in order to maintain positive or zero net yields decreased during Q3 2010 compared to Q2 2010."

Dow Jones' writes "Schwab: May See 'Upward Pressure' On Money Market Fund Fee Waivers". The article says, "Charles Schwab Corp. Chief Financial Officer Joe Martinetto said the discount brokerage could 'see upward pressure on money market fund fee waivers,' but such fees wouldn't approach the high water mark of the first quarter of 2010. With interest rates low for more than a year, Schwab has been waiving fees on its money market funds so that clients' returns don't turn negative. Schwab waived $93 million in such fees in the third quarter, down from $113 million in the prior quarter. The company's first-quarter results included $125 million in fee waivers. During an interim business update for institutional investors, Martinetto said the San Francisco-based company 'expects to make up some ground' in the fourth quarter in terms of one of its revenue growth projections." In other news, coverage of the release of the President's Working Group report bumped one of last week's news stories. Northern Trust reported earnings and made several mentions of money funds. Northern said, "Waived fees in money market mutual funds were $10.4 million in the third quarter as compared with $12.9 million in the prior quarter and are attributable to the continued low level of short-term interest rates. Investment management fees benefited from the improved markets and new business, offset by waived fees in money market mutual funds due to the persistent low level of short-term interest rates. Money market mutual fund fee waivers in C&IS totaled $2.5 million in the current quarter compared with $.8 million in the prior year quarter.... Average money market assets equaled $19.2 billion, up 5% from the prior year period's average of $18.3 billion."

Bloomberg writes "CFTC Proposes Restrictions on Brokers' Use of Funds". It says, "The Commodity Futures Trading Commission moved to restrict what brokers can do with clients' assets after investments in money-market mutual funds and government-sponsored entities soured during the financial crisis. CFTC commissioners voted 4-1 today to propose limiting investments in money-market funds to 10 percent of client assets and investments in GSE securities to 50 percent. The rule would stiffen restrictions on what brokers can do with customer money, or margin, used to back futures contracts. Regulators are questioning the safety of money-market funds after the September 2008 failure of the $62.5 billion Reserve Primary Fund caused a run on the industry, exacerbating the global credit freeze. GSE securities have also faced new scrutiny after the U.S. government seized Fannie Mae and Freddie Mac two years ago amid losses that pushed the mortgage-finance companies to the brink of collapse. So-called futures commission merchants now face no restrictions on how much client money they can invest in money-market funds and GSEs. The CFTC also proposed capping investments in municipal bonds, certificates of deposit, commercial paper and corporate bonds. Republican CFTC Commissioner Scott O'Malia voted against the proposal, calling it overly 'prescriptive.'" See also "Opening Statement, Third Series Of Proposed Rulemakings Under The Dodd-Frank Act, CFTC Commissioner Scott O'Malia," which says, "I am quite concerned that the proposed rules are overly prescriptive, especially given that the Commission released an Advance Notice of Public Rulemaking on this very issue in May of 2009. My main concern with this proposal is that the Commission is proposing to significantly revise the scope and character of the types of permitted investments of customer funds in the face of numerous public comments to the contrary. In fact, the concentration limits in today's proposed rule seem to suggest that the 2,000 plus pages of the Dodd-Frank Act have done nothing to improve the safety and liquidity of money-market mutual fund investments. I strongly urge the public to comment on the reasonableness of the asset-based concentration limits, especially the 10% limit on money-market mutual funds."

The Wall Street Journal writes "Money-Fund Shakeout Bubbles Up". It says, "A game of regulatory roulette is renewing scrutiny of money-market mutual funds and could drive further consolidation in the $2.8 trillion industry. A report on money-fund overhaul options by the President's Working Group on Financial Markets, released last week, left on the table several overhaul measures that the industry has spent about two years opposing. Without fully endorsing or dismissing any particular changes, the report analyzed such steps as subjecting funds to banking regulations or requiring them to have floating share prices. More should be done to address money funds' susceptibility to runs, the report said." It quotes Moody's Henry Shilling, "The drumbeat continues for money-fund overhaul.... It's not a subject that the industry will be able to sweep under the rug." The Journal adds, "With some fund firms already backing away from the money-fund business, the prolonged regulatory uncertainty could favor the largest players and hasten industry consolidation, analysts say. Smaller firms may not be able to absorb the cost of further change, Mr. Shilling says."

T. Rowe Price's earnings statement says, "The Company decided in the fourth quarter 2010 that it will make a capital contribution to certain of its sponsored money market mutual funds. The Company is making this contribution to offset the cumulative net losses realized by those funds in recent years in order to allay any fund shareholder concerns that might arise as a result of new SEC disclosure rules. This fourth quarter contribution to the funds will result in a one-time pre-tax charge of approximately $17 million. The Company's sponsored money market mutual funds have net assets totaling approximately $28 billion at September 30, 2010." Bloomberg's article on T. Rowe Price says, "T. Rowe said in the statement it will put capital into its money-market mutual funds in the current quarter to offset cumulative past losses 'in order to allay any fund shareholder concerns that might arise as a result of new SEC disclosure rules.'.... Kennedy said the contribution represents less than one-tenth of a penny out of the $1 net asset value of its money market funds, which had $28 billion in assets as of Sept. 30. The company didn’t identify the funds that had suffered losses.... New rules approved by the U.S. Securities and Exchange Commission in January require funds to disclose the mark-to-market net asset values of funds, so-called shadow NAVs, to the SEC beginning at the end of every month, beginning with November, according to Peter Crane, president of Crane Data LLC, a money-fund research firm in Westborough, Massachusetts. The data will then be made public 60 days later." We assume this is a result of an SIV-related support action, but it also appears to be the first preemptive move to "window dress" the new "shadow NAV" reporting. T. Rowe's funds had owned Whistlejacket and some other SIVs prior to default, but they hadn't been listed among funds with support actions. See also Crane Data's Oct. 20 News "Q3 Earnings: Schwab Reveals SIV Bailout, BNY Lower MMF Distr Fees".

Bloomberg writes "Floating Money Fund Price May Backfire, Panel Says," which says, "Forcing money-market funds to give up the stable $1 share price that helped the industry attract almost $3 trillion may lead to unpredictable investor responses, according to an advisory body to the Obama administration. While a floating net asset value may reduce the risk of a run on money funds during a crisis, such a change could push investors into unregulated substitutes and hurt the industry's ability to supply companies with short-term credit, according to a report published today by the President's Working Group on Financial Markets. The report, commissioned by the U.S. Treasury Department in June 2009 after the failure of the $62.5 billion Reserve Primary Fund caused a run on the industry, examines potential regulatory changes aimed at making money funds more stable without endorsing any option. The Working Group said it would ask the Financial Stability Oversight Council, established by the Dodd-Frank reform bill, to identify the best choices and that the Securities and Exchange Commission would seek public comments." "The report may raise more questions than it answers,” Bloomberg quotes Peter Crane, president of Crane Data LLC, a money-fund research firm in Westborough, Massachusetts. "It doesn't appear to push policy in any one direction." See also, "ICI Responds to PWG Report on Money Market Funds" and ICI's weekly "Money Market Mutual Fund Assets".

Deutsche Bank's DB Advisors will host a webcast entitled, "Regulation and austerity: Bitter medicine for a better future?" today (Thursday), October 21, 2010 at 1:00pm EDT with Joe Benevento, Head of Portfolio Management, Liquidity Management, Americas and Nagesh Gopal, Product Specialist, Institutional Liquidity Management. The invitation says, "As the global economic crisis abates, austerity and regulatory reform are defining a new financial order in the developed world. Meanwhile, emerging economies hold promise as drivers of future global growth. Please join us to explore these developments in greater detail and understand their implications for short-term investment strategies." In other news, MarketWatch writes "Federated CEO bullish despite headwinds", which says, "Federated Investors, a leader in money-market mutual funds, is finding attractive acquisitions in today's low-yield environment and is looking to expand internationally, Chief Executive Christopher Donahue tells MarketWatch's Sam Mamudi."

Registration is now open for Crane's Money Fund University via the www.moneyfunduniversity.com website. MFU is a new 2-day educational conference, which will be held January 13-14, 2011, at The Westin Jersey City Newport. The preliminary agenda may be seen here, or e-mail info@cranedata.us to request the latest PDF brochure. Money Fund University will offer attendees an affordable and comprehensive two day, "basic training" course on money market mutual funds. We'll cover the history of money funds, interest rates, Rule 2a-7, ratings, rankings, money market instruments such as commercial paper and repo, portfolio construction, credit analysis, and more. Registration for Crane's Money Fund University is $500 prior to November 30 and $600 starting December 1st. Exhibit space is $2,000 and sponsorship opportunities are $3K, $4.5K, and $5K. A block of rooms has been reserved at the Westin Jersey City at the conference negotiated rate of $169 plus tax. For booking information please reference the Hotel and Travel Tab on the conference website.

Sunday's New York Times writes "Banks Shared Clients' Profits, but Not Losses", which takes a shot at securities lending. It says, "The strategy is called securities lending, a practice that is thriving even though some investments linked to it were virtually wiped out during the financial panic of 2008. These trades were supposed to be safe enough to make a little extra money at little risk.... In addition to losing money for New Orleans workers and others, securities lending also played a central role in the near-collapse of the American International Group. Through securities lending, pensions and mutual funds borrow money to make trades, adding to the risks within the financial system.... Despite such troubles, the securities lending business has rebounded after plummeting during the crisis. Today shares with a combined value of $2.3 trillion are out on loan, according to SunGard, which provides technology services to financial companies. In 2007, before the bubble burst, the total on loan was worth $2.5 trillion. The quick revival of securities lending raises concerns about whether banks and their pension customers have learned any lessons."

Fund news source ignites wrote Friday, "New Disclosure Boosts Money Fund Transparency". It said, "Fund firms last week began posting their money fund portfolio holdings in a standardized format on their websites, as required under new SEC rules. While most money funds disclosed portfolio holdings on their sites previously, the new format signals a key change in a broader effort to boost transparency of the funds, analysts say." (See Crane Data's Oct. 13 News "Money Funds Disclosing Portfolio Holdings in New SEC Mandated Format".) The ignites piece continued, "In the past, the exact information provided and the formats that were used varied, as did the timing with which the disclosure was made. Most importantly, disclosure of the Cusip for each fund is now required. In the past, abbreviations for funds and name changes made it difficult to track a given fund's holdings, says Peter Crane, president of Crane Data." The article quoted Crane, "[The new disclosure] will be useful to fund managers looking at their competition, to issuers looking at who to sell to and media and regulators looking to say 'Gotcha' to somebody." It added, "Until last week, finding out which money market funds owned a particular security took a lot of digging, but now it will be much easier to obtain that information, says Crane." "The disclosure makes a portfolio X-ray type of feature with money funds possible, whereas it wasn't before," he says. Indeed, Crane says his firm is currently building a database of portfolio holdings for clients. An institutional investor, for example, that owns 10 money market funds may have had a hard time in the past knowing exactly what percentage of a given issuer the funds held in total. With the new data, it will be easier to determine that, both for the investor and the issuer of securities."

Bloomberg writes "FDIC Proposal Tells U.S. Bondholders to 'Get in Line'". It says, "The Federal Deposit Insurance Corp. may start favoring providers of short-term financing over long-term bondholders when it winds down a systemically important financial institution, CreditSights Ltd. said. The regulator is considering paying commercial paper, bank lines of credit and other short-term obligations first in resolving the credit obligations of troubled companies. Holders of senior unsecured bonds with a maturity date of more than one year 'would be expected to 'get in line' along with other creditors,' CreditSights analysts David Hendler and Baylor Lancaster wrote in a report. The FDIC released a document yesterday that outlined how it's considering treating creditor claims when it steps in as receiver of a troubled firm. The Dodd-Frank Wall Street Reform and Consumer Protection Act granted the FDIC authority to take control of bankrupt or insolvent companies that threaten U.S. financial stability.... Favoring short-term creditors may encourage investors to continue to roll over obligations that allow a company to continue operating, the CreditSights analysts said."

The New York Fed's Oct. 12 "Statement Regarding Reverse Repurchase Agreements" says, "As noted in the October 19, 2009, Statement Regarding Reverse Repurchase Agreements, the Federal Reserve Bank of New York has been working internally and with market participants on operational aspects of triparty reverse repurchase agreements to ensure that this tool will be ready if the Federal Open Market Committee decides it should be used. In the August 3, 2010, statement, the New York Fed announced a series of small-scale, real-value transactions with primary dealers using U.S. Treasury securities, direct agency debt, and agency mortgage-backed securities (MBS) as collateral. Beginning tomorrow, the New York Fed intends to conduct another series of small-scale, real-value reverse repurchase transactions using all eligible collateral types. The first set of operations will be conducted using only the expanded repo counterparties announced on August 18, 2010. The second set of operations will be open to all eligible reverse repo counterparties. Like the earlier operational readiness exercises, this work is a matter of prudent advance planning by the Federal Reserve. The operations have been designed to have no material impact on the availability of reserves or on market rates. Specifically, the aggregate amount of outstanding transactions will be very small relative to the level of excess reserves, and the transactions will be conducted at current market rates. These operations do not represent a change in the stance of monetary policy, and no inference should be drawn about the timing of any change in the stance of monetary policy in the future. The results of these operations will be posted on the public website of the Federal Reserve Bank of New York, together with the results for other temporary open market operations. The outstanding amounts of reverse repos are reported as a factor absorbing reserves in Table 1 in the Federal Reserve's H.4.1 statistical release, and as liability items in Tables 9 and 10 of that release."

Money market mutual funds and cash investment pros are gearing up for the AFP Annual Conference, "the most important event for treasury and finance," which will be held in San Antonio, Texas, November 7-10, 2010. The event is billed as "the largest event for treasury and finance in the world." The agenda includes several sessions involving money market funds, and the exhibit hall is sure to contain well over a dozen fund sponsors. We invite attendees to visit Crane Data LLC, the publisher of Money Fund Intelligence, at AFP in San Antonio at Booth #1313. (Contact Pete or Kaio if you'd like to arrange a meeting at the show. We'd be happy to discuss our products and latest research, and we'll be giving away subscriptions to our Money Fund Intelligence newsletter and to our Money Fund University and Money Fund Symposium conferences.) Peter Crane will be speaking on "Money Market Mutual Funds: Doing More Due Diligence" with The Mosaic Co.'s Ken Bodell on Tuesday, Nov. 9, at 10:30 a.m. Other sessions of interest to cash investors include: "Investing Cash: Opportunities in the Cash and Short Duration Markets in the New Normal" with Robert Lau of Informatica and Paul Reisz of PIMCO; "Dissecting the Prime Institutional Money Fund: Conducting Due Diligence on Money Fund Investments" with Lance Pan of Capital Advisors Group and Trey Huffman, of EarthLink; and, "A Post-Modern Paradigm for Corporate Investing" with Kathleen Clune of Pacific Life Insurance Company, Nancy Edwards, Metropolitan Washington Airports Authority (MWAA), and Deborah Cunningham of Federated Investors. We hope to see you in Texas!

Barron's writes "Low Yields Are Just One of Money Markets' Woes". The error-filled article says, "A 30-day Taxable money-market fund [sic] offers an average yield of 0.04%. Little wonder then that investors on balance have pulled $1 trillion out of them since the beginning of 2009. As tough as that is on shareholders, it's more brutal on the business.... There are other challenges as well for the business.... Portfolio managers are still struggling to find investments that provide as much yield as possible without taking undue risks, while coping with new regulations designed to prevent a repeat of fund failures that were a highlight in the financial crisis. This environment contributed to the more than $40 billion of money-market funds [note: this number is incorrect] that have been sold, traded or closed so far this year. Money-market funds 'face some pretty meaningful headwinds,' says Nathan Flanders, a member of Fitch's funds and asset-management team. 'The low-yield environment, the search for suitable assets and more conservative changes to the regulatory environment' are among them." In other news, a press release entitled, "`Principal Financial Group Completes Successful Money Market Mutual Fund Test Filing Using Confluence Unity Platform," says, "Confluence, the global investment management industry's leading provider of automated data management solutions today announced that the Principal Financial Group has completed its first successful Money Market Mutual Fund test filing of Form N-MFP using XML (eXtensible Markup Language) structured content."

ICI's latest "Money Market Mutual Fund Assets" report says, "Total money market mutual fund assets decreased by $500 million to $2.805 trillion for the week ended Wednesday, October 6.... Taxable government funds decreased by $340 million, taxable non-government funds decreased by $450 million, and tax-exempt funds increased by $290 million." Following a 5-week streak of modest inflows in August, money fund assets have seen moderate outflows in September and early October. Crane's Money Fund Intelligence XLS shows money fund assets declining by $28.2 billion in September. ICI's weekly series shows money fund assets have declined by $488 billion, or 14.8% YTD. (Institutional assets account for the bulk of these declines. They're down $373 billion, or 16.8%, YTD.) Almost all of the year-to-date declines occurred in the first quarter and first half of 2010. Money fund assets remain above the $2.8 trillion level and remain at the same level they were in mid-June. In other news, Federated Investors announced its "Third Quarter 2010 Earnings and Conference Call Dates, which will be Thursday Oct. 28 at 4pm and Friday Oct. 29 at 9am, respectively.

We learned from Joan Ohlbaum Swirsky of Stradley Ronon Stevens & Young of an "Advance Notice of Proposed Rulemaking Regarding Authority To Require Supervision and Regulation of Certain Nonbank Financial Companies," which raises the possibility that the Financial Stability Oversight Council could designate money market funds as nonbank financial companies. The just-published "Advance notice of proposed rulemaking," says, "Section 113 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the 'DFA') gives the Financial Stability Oversight Council (the 'Council') the authority to require that a nonbank financial company be supervised by the Board of Governors of the Federal Reserve System ('Board of Governors') and subject to prudential standards if the Council determines that material financial distress at such a firm, or the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the firm, could pose a threat to the financial stability of the United States. This advance notice of proposed rulemaking (ANPR) invites public comment on the criteria that should inform the Council's designation of nonbank financial companies under the DFA. Comments on this ANPR must be received by November 5, 2010." Also, the SEC just minorly amended its "Staff Responses to Questions About Money Market Fund Reform" Q&A and "Staff Responses to Questions about Rule 30b1-7 and Form N-MFP."

Citi Global Transaction Services just posted an article written by John Carter entitled, "Investing Corporate Cash: Managing Risk and Efficiency." It says, "Recent Citi global research sheds light on the top treasury management priorities of major corporations. The research program, called Citi Treasury Diagnostics, benchmarks practices in six key areas of treasury operations: liquidity and investing; risk management; working capital management; subsidiary funding and repatriation; policy and governance; and technology. The results revealed that risk management continues to be a key concern as companies deal with ongoing volatility in the markets. Throughout the recent economic crisis, firms focused on the safety of cash and strengthened investment policies to guide diversification and ensure scrutiny over counterparty exposures. Many are now focusing on integrating global treasury processes for more holistic approaches to risk identification and mitigation. When it comes to investing corporate cash, capital preservation remains a priority." In other news, a release entitled, "BlackRock to Report Third Quarter 2010 Earnings on October 20th" says, "BlackRock, Inc. today announced that it will report results for the third quarter of 2010 prior to the opening of the New York Stock Exchange on Wednesday, October 20, 2010. Chairman and Chief Executive Officer, Laurence D. Fink, and Chief Financial Officer, Ann Marie Petach, will host a teleconference call for investors and analysts at 9:00 a.m."

Yesterday's Wall Street Journal had an odd, erroneous piece entitled, "Asset Managers Fight Push to Bend on Fees". It said, "Long accustomed to fixed gratuities, some asset managers are learning what it is like to be stiffed. At least, that is the unfortunate predicament facing money-market funds right now. They guarantee their investors' full principal [sic], so with short-term interest rates near zero, many have recently failed to collect enough on investments to cover their money-market management fees. [This too is incorrect.] The result: Some funds are having to forgo fees to make investors whole. Charles Schwab, for instance, which normally charges fees as high as 0.61% on its money-market funds, has seen its management-fee revenue reduced by 20% in the first half. The problem mightn't end with money-market funds. As returns fall, fixed commissions in other asset classes have begun to look overly large."

A Reuters article posted on website ForExYard.com entitled, "Regulating the shadow banking system," says, "A global regulatory body tasked by the G20 with devising ways to prevent a repeat of the financial crisis says improving oversight of the 'shadow banking' system will be one of its main priorities in 2011. Mario Draghi, head of the Financial Stability Board, argues that credit provision in the shadow banking system -- conducted by loosely regulated non-bank financial firms -- was a key contributor to the crisis. But as banks face tighter supervision and tough new capital rules, there are fears that more credit activity will move out of the regulated banking industry and into this shadow system." In other news, see also the press release "Investor Analytics develops Second Generation Money Market Stress Testing Service."

ICI's latest "Money Market Mutual Fund Assets" report says, "Total money market mutual fund assets increased by $1.83 billion to $2.805 trillion for the week ended Wednesday, September 29, the Investment Company Institute reported today. Taxable government funds increased by $6.68 billion, taxable non-government funds decreased by $2.55 billion, and tax-exempt funds decreased by $2.29 billion." The report adds, "Assets of retail money market funds decreased by $5.03 billion to $953.17 billion. Taxable government money market fund assets in the retail category decreased by $1.43 billion to $166.25 billion, taxable non-government money market fund assets decreased by $2.11 billion to $584.17 billion, and tax-exempt fund assets decreased by $1.49 billion to $202.75 billion. Assets of institutional money market funds increased by $6.86 billion to $1.852 trillion. Among institutional funds, taxable government money market fund assets increased by $8.11 billion to $661.49 billion, taxable non-government money market fund assets decreased by $440 million to $1.064 trillion, and tax-exempt fund assets decreased by $800 million to $126.49 billion." See also, The SEC's release "Former State Street Employees Charged for Misleading Investors About Subprime Mortgage Investments", which says, "The SEC's Division of Enforcement alleges that John P. Flannery and James D. Hopkins marketed State Street's Limited Duration Bond Fund as an "enhanced cash" investment strategy that was an alternative to a money market fund for certain types of investors."