Daily Links Archives: February, 2010

BNY Mellon Liquidity DIRECT, the largest of the online money market mutual fund trading "portals," recently posted the First Quarter 2010 edition of its quarterly "Liquidity Directions newsletter. The new publication contains brief articles on: the company's new Margin DIRECT, an "an innovative liquidity tool that enables institutional investors to safekeep cash and securities in counterparty transactions;" an announcement "BNY Mellon Launches Liquidity Services in Asia-Pacific;" a piece on the "Liquidity DIRECT Investment Portal Revamp;" and a brief by our Peter Crane called "Money Fund Year in Review: Near-Zero Yields, Major Outflows in 2009." In the lead piece, the newsletter says, "BNY Mellon developed Margin DIRECT by combining two of its industry-leading services -- Custody and MoneyFunds DIRECT -- into a single comprehensive solution that provides safekeeping for posted margin balances away from an institutional investor's counterparties. Those balances are then directed for investment to a wide range of money market funds managed by the most venerable names in the investment industry. For institutional investors, this can result in a significant reduction in risk exposure and an opportunity to earn additional income." The newsletter also quotes Jonathan Spirgel, Head of Liquidity Services at BNY Mellon, "Businesses and institutions across the Asia-Pacific could benefit significantly from Liquidity DIRECT. No other cash management portal offers such a wide range of opportunities." In other news, see Kiplinger's "New Rules May Make Money Market Funds Safer".

Reuters writes "SEC may press suit over Reserve money fund failure". It says, "A Manhattan federal judge on Wednesday refused to dismiss a U.S. Securities and Exchange Commission lawsuit accusing Reserve Management Co and co-founder Bruce Bent Sr of fraud over the largest ever collapse of a U.S. money market mutual fund.... In his 28-page ruling, Gardephe said the SEC sufficiently alleged that the defendants had motive and opportunity to commit fraud, citing their 'significant holdings' and their 'enormous reputational stake' in the fund. The judge also said the regulator sufficiently alleged the defendants made misstatements or omissions concerning the rate of redemptions, the net asset value, and the availability of a credit agreement to support the $1 net asset value." But "Gardephe declined to let the SEC use some statements on how to value Lehman paper to support its fraud claims, in part because of the 'chaos and uncertainty' after the bankruptcy. Bruce Bent Sr. has said the bankruptcy 'created an unforeseeable and out-of-control condition for many parties.'" See the Memorandum Opinion and Order for "Securities & Exchange Commission v. Reserve Management Company, Inc.".

Dow Jones writes "Amendments To Money-Market-Fund Rules Effective May 5". The article says, "Amendments meant to make the $3.3 trillion money-market fund industry more resilient will take effect May 5. The Securities and Exchange Commission posted the final amendments, which it says offer additional shareholder protections, to its Web site Tuesday with the effective spring date. However, the posting also lists various compliance dates for the amendments, giving funds extra time to meet some requirements, such as disclosing certain portfolio information on a public Web site and to the commission. In staggering the compliance dates, the SEC appears to be making an effort to accommodate the funds's normal schedule of meetings and oversight, said Peter Crane, president of Crane Data LLC." Crane says, "There was some speculation that the maturity and liquidity provisions would be pushed out to later this year to coincide with potential interest rate hikes, but this means that most of the changes will likely go into effect before the Fed starts hiking rates. So money funds could feel that bite a little bit." They must be able to process transactions at prices other than a stable $1 net asset value no later than Oct. 31, 2011, says DJ, quoting Crane, "Systems personnel will be pleased that they have a little time to deal with that nasty issue." Overall, money funds aren't likely to be surprised by the schedule, he said. "They were gearing up for it anyhow. I think money funds are resigned to their fate at this point." See also, WSJ's "Treasury Program Mixes Up Money Markets".

"ICI Encourages Participation in America Saves Week," says a release. It comments, "The Investment Company Institute, the national association of mutual funds and other investment companies, is encouraging Americans to assess their personal savings and set a savings goal as part of the "America Saves Week" national campaign. This year's America Saves Week is February 21-28. Approximately 89 million Americans use mutual funds to save for their financial goals. ICI research has found that 94 percent of mutual fund-owning households identified saving for retirement as one of their financial goals; 76 percent said it's their primary goal." In other news, see the press release, "`ASF Strongly Concerned FDIC Safe Harbor Proposals Will Add to Investor Uncertainty and Slow Credit to Main Street." It says, "In a letter submitted to the Federal Deposit Insurance Corporation today, the American Securitization Forum (ASF), the broad-based professional forum representing the U.S. securitization markets, expressed significant concerns regarding the FDIC's proposed new rules on safe harbor for securitizations. The ASF strongly believes the proposals, which include new preconditions for safe harbor, will create substantial uncertainty for investors, thus harming the drive to reopen securitization markets and get credit flowing again to Main Street."

While the money markets await the posting of the SEC's Final Rules on Money Market Reforms (which should be posted Monday or Tuesday), we noticed a couple last-minute Comments on the initial SEC Proposals. While these were submitted prior to the final rules, one from John McGonigle, Deborah A. Cunningham and Steve Keen, on behalf of Federated Investors, Inc. contains an information-packed Powerpoint. The slides contain historical information on an example of a prime money funds' shadow price, and several statements made by the SEC on the importance of money market funds. These include the themes: "Money market funds have been one of the most important innovations within the mutual fund industry; Money market funds served as the vehicle that essentially introduced many investors to the mutual fund industry; Money market funds are of fundamental importance to the financial system; and, Money market funds have provided a great benefit to the fund investors."

"Two Marshall Money Market Funds Ranked #1 By Leading Industry Analyst Firm" says a press release. The Marshall Funds release says, "The Marshall Tax-Free Money Market Fund and the Marshall Prime Money Market Fund were recently recognized by iMoneyNet as the top performing National Funds for 2009. The Marshall Tax-Free Money Market Fund had the highest returns in its universe of 83 funds (I class) and 56 funds (Y class) according to iMoneyNet, while the Marshall Prime Money Market Fund finished 2009 as the iMoneyNet No. 1 AAA-Rated Prime Money Market Fund with the highest return in its universe of 171 funds (I class)." Tommy Huie, president and chief investment officer of M&I Investment Management Corp., says, "We are pleased to be recognized by iMoneyNet as a top-performer in 2009. These awards validate the commitment Marshall Funds has to effectively manage cash for clients. We value our relationships with corporations, institutions, foundations and endowments, state and local governments, not-for-profit organizations and Taft-Hartley plans."

ICI's weekly "Money Market Mutual Fund Assets" release says, "Total money market mutual fund assets decreased by $37.65 billion to $3.161 trillion for the week ended Wednesday, February 17.... Taxable government funds decreased by $26.91 billion [to $969.95 billion, or 30.7% of assets], taxable non-government funds decreased by $11.47 billion [to $1,809.78 billion, or 57.3% of all assets], and tax-exempt funds increased by $730 million [to $380.99 billion, or 12.0%].... Assets of retail money market funds increased by $2.73 billion to $1.050 trillion [33.2% of all money fund assets].... Assets of institutional money market funds decreased by $40.38 billion to $2.111 trillion [66.8% of assets]." Year-to-date in 2010, money fund assets have declined by $132 billion, or 4.0%, following a 14.0%, $537 billion decline in 2009 (according to ICI's weekly asset series). In other news, Dow Jones writes "Adviser Volcker: Money Funds Are 'Banks Without The Burdens'". The article says, "White House economic adviser Paul Volcker on Thursday reiterated his view that money-market mutual funds should be regulated much as banks are if they promise to maintain a stable net asset value and pay on demand, calling the funds 'banks without the burdens'."

We learned yesterday that Crane's Money Fund Symposium has been "Approved for up to 16.2 CTP/CCM recertification credits by the Association for Financial Professionals. The AFP wrote Crane Data, which applied for the credits, "CTPs and CCMs earn one credit for every fifty minutes of qualified treasury/cash management continuing education activity. CTPs and CCMs are required to provide documentation of credits if audited. AFP requires sponsors to provide verification of attendance to participants if and when requested. Sponsors may duplicate and distribute the attached Confirmation of Attendance form for CTPs and CCMs to retain in their files. Comprehensive recertification policy information may be found at www.AFPonline.org/recertguidelines." Crane's Money Fund Symposium 2010 is July 26-28, 2010, at The InterContinental Boston. Registration is $750; exhibit space is $3,000; and sponsorship opportunities are $4.5K, $6K, $7.5K, and $10K. Contact us for a conference brochure or for more details.

Stradley Ronon recently published "Fund Alert, A Rule 2a-7 Special Edition, February 2010" with the headline, "SEC Amends Rule 2a-7 to Increase Resilience of Money Market Funds". Under the section, "A First Step; Fundamental Reforms May Come," it says, "The commissioners and SEC staff members at the Meeting made clear that the Amendments are the first step in a two-step reform initiative and that additional, more fundamental reforms may be released for public comment. There is no timetable for the additional proposals, although Commissioner Luis Aguilar mentioned in his remarks at the Meeting that the SEC may solicit comment 'in the near future' on such reforms. In addition, the President's Working Group on Financial Markets (the PWG) is expected to make recommendations on fundamental reform of money market funds in a report that is now long overdue, having passed both its original target release date of Sept. 15, 2009, and its extended target release date of Dec. 1, 2009." It adds, "Commissioner Mary Schapiro mentioned the following additional reforms that are under consideration: the use of a floating net asset value (NAV) for money market funds, rather than the stable $1.00 NAV prevalent today; mandatory redemptions-in-kind for large redemptions (such as by institutional investors); 'real-time' disclosure of funds' market-based 'shadow' NAV; a private liquidity facility to provide liquidity to money market funds in times of stress; and, a possible 'two-tiered' system of money market funds, with a stable NAV only for money market funds subject to greater risk-limiting conditions and possible liquidity facility requirements."

The Financial Times writes on London-based "IMMFA" money funds and separate accounts in a piece entitled, "Money market fund preferences are shifting." It says, "Triple-A rated money market funds have been one of the undisputed winners from the financial crisis. The unsung sector vacuumed up assets as investors prized the safety of short-term government and corporate debt over the potentially greater returns of higher risk assets. Inevitably, some of this safe haven money has started to leak away as institutional investors regain a little of their appetite for risk assets. But pooled money market funds are also starting to come under threat from within -- investors still want money market assets, but not necessarily in a pooled fund format. Segregated accounts, virtually unheard of in Europe until recently, are starting to emerge." The article quotes Mark Stockley, head of international sales, cash management at BlackRock, "Segregated mandates are a larger part of our conversations in Europe than ever before." It also quotes Duncan Jones, portfolio manager for BNY Mellon Cash Investment Strategies, "It's definitely a new, growing trend." Finally, it quotes, Robin Creswell, managing principal of Payden & Rygel Global, "If your greatest priority is return of capital and liquidity, and not return on capital, then a money market fund has a raison d'etre."

"Fed in Talks With Money Market Funds to Help Drain $1 Trillion" writes BusinessWeek. The article says, "The Federal Reserve is in talks with money-market mutual funds on agreements to help drain as much as $1 trillion from the financial system as policy makers prepare for the first interest-rate increase since June 2006, according to a person familiar with the discussions. The central bank is looking to the $3.2 trillion money-market mutual-fund industry because the 18 so-called primary dealers that trade directly with the Fed have a capacity limited to about $100 billion, estimates Joseph Abate, a money-market strategist at Barclays Capital in New York. Money-market funds may welcome the opportunity to trade with the Fed after the financial crisis reduced the supply of safe assets in which they can invest." The piece quotes Deborah Cunningham, chief investment officer at Federated Investors, "There are lots of great credit stories, but the option of going with the Fed and the government -- it takes away part of the risk." BusinessWeek adds, "Conversations with the Fed 'seem pretty positive,' she said, adding that the Fed and the industry should be in a position to conduct operations before the end of the year."

Moody's Investors Service recently published, "U.S. Money Funds' Risks are Reduced, But Susceptibility to Liquidity Risk Remains," which says, "Following-up on its proposed amendments to Rule 2a-7 of the Investment Company Act of 1940, the Securities and Exchange Commission this week adopted rule changes that are scheduled to go into effect within 60 days following their publication in the Federal Register. Taken as a whole, the amendments serve to further strengthen the credit quality, interest rate robustness, liquidity, and operations of money market funds and reduce their overall risk profile. However, there are several unresolved fundamental concerns about their susceptibility to runs and systemic liquidity risk that are yet to be addressed by the SEC, which is working in concert with the President's Working Group.... In our view, this [liquidity] requirement represents an important advance in the mitigation of liquidity risk. However, as also recognized by the SEC, the new liquidity buffers do not entirely eliminate susceptibility to runs. Institutional investors, which account for 67.4% of total net assets, might now be even more likely to preemptively redeem shares in response to a credit or other event that could lead to a loss of principal.... Notwithstanding these changes, regulatory uncertainty remains and is likely to persist until the SEC completes its exploration of possible additional reforms. Such reforms may include a floating net asset value, a private liquidity facility, mandatory redemptions in kind and real time disclosure of shadow NAVs."

In a press release entitled, "Real-Time Money Market Portal Trade Transparency Now Available through MbOX, Cachematrix, "the leading provider of institutional money market fund trading technology for banks and financial institutions," "announced today that it is ... releasing an enhanced version of its MbOX portal trade transparency software to its mutual fund partners." The company says, "MbOX is an innovative web-based trade and account transparency source for money fund families who distribute their funds via money market portals. MbOX provides money fund managers with real-time transparency into money market fund trading activity and accounts, as well as running totals of net cash flows coming through each of the money market portals they offer their funds through." The release continues, "MbOX allows the fund providers the ability to view and track the underlying balances of the accounts that make up each portal omnibus position. With active-trading risk or 'hot money' MbOX has the ability to track, filter and sort trades by client name, account, or size of trade." George Hagerman, Founder and CEO, says, "Transparency into omnibus trading and disclosure of client accounts within those omnibus positions is paramount to the industry. At the same time, there are huge operational efficiencies that omnibus trading provides for the fund companies. MbOX provides the best of both worlds. Fund families get the operational efficiencies of omnibus settlement with the transparency of full disclosure."

"BNY Mellon to Host Web Seminar on New Rules for Money Market Funds" says a press release on PRNewswire. It explains, "BNY Mellon Asset Servicing, the global leader in securities servicing, will host a web seminar on the impact of proposed rule changes by the U.S. Securities and Exchange Commission on money market funds. The intent of the seminar is to educate senior-level mutual fund company executives and consultants about the proposed changes." Joseph Keenan, MD at BNY Mellon Asset Servicing, says, "These new regulations are likely to result in greater liquidity requirements, an increase in reporting and restrictions on securities investing. The changes could be dramatic and could alter the purpose and role of these funds investors' portfolios." The session is scheduled for 1 p.m. on February 10, 2010. Panelists include: ICI's Jane Heinrichs, `BNY Mellon's Matthew Bromberg, Stradley's Joan Swirsky, Dreyfus' Edward Von Sauers. JP Morgan Global Liquidity will also host two Money Market Update Webconferences on Thursday at 10:00 a.m. and 11:30 a.m.

U.S. Securities & Exchange Commission Chairman Mary Schapiro gave a speech Friday at an "SEC Speaks" event entitled, "Looking Ahead and Moving Forward," which contained a brief section on money market mutual funds. Shapiro said, "More recently, we adopted rules that will make money market funds more resilient by strengthening their credit quality, liquidity and maturity standards. Our rules also establish a new on-line disclosure regime for money market funds -- including disclosure of a fund's "shadow" or mark-to-market NAV -- and our rules take steps to limit the disruption caused by any fund "breaking the buck," or falling below the standard $1 net asset value. Importantly, our money market fund reforms are not yet done. Looking ahead, we will be considering yet more measures to address money market fund risk, especially the risk of a run on money market funds. In particular, I have directed our staff to examine the merits of a floating, mark-to-market NAV for money market funds, rather than the stable $1 price. Other ideas under consideration include mandatory redemptions-in-kind for large redemptions (such as by institutional investors); "real time" disclosure of "shadow" NAV; a private liquidity facility to provide liquidity to money market funds in times of stress; and a possible "two-tiered" system of money market funds, with a stable NAV only for money market funds subject to greater risk-limiting conditions and possible liquidity facility requirements."

SmartMoney's "For Better Yields, It's Bank -- Not Brokerage". It says, "Cash held at brokerage houses is typically deposited in so-called 'sweep' accounts. These accounts offer convenience and liquidity, with features like check-writing capabilities, a debit card and free ATM withdrawals. Some brokerages call them cash or financial management accounts, and others have even branded them 'savings accounts.' The problem is that the yields these accounts deliver are paltry these days.... There are no hard numbers on the amount of cash lying around in sweep accounts these days, and chances are that with the stock market's recovery from its 2009 lows and the Federal Reserve's rock-bottom rate policy, some investors are moving it into equities or higher-yielding bank accounts. Still, the assets parked in sweep accounts could add up to $600 billion, according to Peter Crane, president of Crane Data LLC, which tracks money-market mutual funds." The article adds, "These days, sweep accounts pay an average 0.05%, according to Crane Data, but depending on the brokerage, you could be earning as little as 0.01% and rarely more than 0.07%." Note that the piece contains a data table with rates excerpted from Crane Data's weekly Brokerage Sweep Intelligence. See also, NY Times' and AP's "4 Tips on Shopping for Money-Market Mutual Funds".

Last week, BlackRock sent out a "Cash Management Update: SEC Amends Rule 2a-7. It says, "On January 27, 2010, the Securities and Exchange Commission (SEC) voted 4 to 1 to approve amendments to Rule 2a-7 which governs money market funds. As stated in a press release issued by the SEC, the new rules are intended to increase the resilience of money market funds to economic stresses and reduce the risks of runs on the funds by tightening the maturity and credit quality standards and imposing new liquidity requirements. The text of the final rules, when they are ultimately posted, may contain additional requirements and details not summarized in today's press release." They say, "Our expectation is that the SEC will allow for an orderly transition to the new rules over the next several months. Some of the changes, as described in the press release, include: Liquidity Requirements ... Maturity Restrictions ... Eligible Securities ... [and] Increased Transparency."

Bloomberg resumes its odd preoccupation with Paul Volcker and attacks on money funds with "Goldman Sachs Wimps Out in Buck-Breaking Brawl". It says, "Throughout the financial crisis, Goldman Sachs Group Inc. extolled the use of market prices to value holdings, saying this instills needed discipline. The firm's hard-line stance turned to mush, though, when it came time to end a market myth that fueled 2008's meltdown. Goldman, along with the mutual-fund industry, argues that it is fine for money-market funds to use historical values, rather than market prices, to value holdings. This helps money-market funds maintain a stable price of $1 a share. The problem: the $1 share price gives investors the false impression that money-market funds are like bank accounts and so can't lose money. That myth was shattered in 2008, and the resulting panic worsened the credit crunch, forcing the government to backstop these funds." It adds, "At a meeting last week, the SEC endorsed beefed-up disclosures for money-market funds, along with other technical changes such as requiring funds to boost cash holdings. It stopped short, though, of even proposing that funds be required to post values that wouldn't always neatly show up as $1 a share.... More forceful action is needed, though, especially given that there have been calls for more than a year, most notably from a group run by former Federal Reserve Chairman Paul Volcker, to require that money-market funds either use floating values -- and so prepare investors for the idea that these instruments can lose money -- or be regulated as if they are bank products."

Money Management Executive writes "SEC Tightens Money Fund Rules, saying, "The Securities and Exchange Commission last Wednesday adopted several amendments to Rule 2a-7 governing money market funds that aim to reduce risks by increasing credit quality, improving liquidity, shortening maturity limits and requiring the disclosure of a fund's 'shadow' net asset value. The Commission fell short of requiring a floating NAV, but said it may still consider such a move in the future, as well as eliminating the disclosure delay on holdings and the use of credit ratings agencies."

We'll keep checking the SEC Final Rules Page for the full posting of the SEC's Money Market Fund Reform regulations, which are expected early this week. Click here to view last week's Open Meeting Webinar. Chairman Mary Schapiro, in her Statement on Money Market Funds Before the Open Commission Meeting, says, "The Commission today is considering adopting significant revisions to our oversight of money market funds -- revisions that include increasing credit quality, improving liquidity, shortening maturity limits, and requiring the disclosure of a fund's actual 'mark-to-market' net asset value, known as a 'shadow NAV,' on a delayed basis." Additional statements by SEC Commissioners include: Commissioner Luis A. Aguilar's "Fortifying the Money Market Framework Upon Which Investors and Issuers Rely," Commissioner Troy A. Paredes' brief "Statement at Open Meeting Regarding Money Market Fund Reform, and Kathleen L. Casey's "Statement on Proposing Release, Money Market Fund Reform. Casey, the only Commissioner to vote against the Money Market Fund Reform proposals, says, "While I appreciate many of the reform proposals set forth in today's adopting release, such as the enhancements to liquidity and maturity, they simply do not go far enough." Finally, click here for the SEC's Proposed Rules page (page down to June 30, 2009). See also, WSJ's "Short-Term Bonds May Disappoint Investors This Year" and WSJ's "Don't Ease Off the Repo Men". Look for Crane Data's Pete Crane Monday at the American Securitization Forum in Washington DC.