Daily Links Archives: December, 2011

The Financial Times writes "US safe haven funds see bumper inflows". It says, "US money market funds are on course for some of their biggest inflows since the height of the financial crisis, in a sign that risk-averse investors are seeking safe haven in US Treasuries. The funds took in $54.9bn in November and another $36.8bn by December 21, according to data from Lipper. That is the largest two-month inflow since December 2008 and January 2009, when $195bn was invested." FT quotes Barclays Capital's Joseph Abate, "The flows are consistent with general risk aversion and a fear of exposure to non-US credit risk." The piece adds, "Money market funds have since struggled as the Securities and Exchange Commission imposed new regulations, Treasury yields hit record lows and investors became nervous about funds lending to European banks. According to Lipper, almost $1.2tn has been withdrawn from the sector since February 2009."

Investment News writes "2011 proves money market reform not needed: ICI". The piece says, "The past year has seen its fair share of market shocks, from the downgrade of the U.S. credit rating to the ongoing sovereign-debt crisis in Europe. Investors have felt the effects with wild swings in stock prices. One area that's held steady -- perhaps surprisingly so -- has been money market funds. Indeed, the funds have been rock solid despite serious concerns about their exposure to European debt.... Whether it's good enough for the SEC remains to be seen. In the first quarter of 2012, the Securities and Exchange Commission is expected to issue a proposal to help safeguard money funds, either by having a fund's net asset value float above or below $1 or by requiring a capital buffer that could be tapped in the face of excessive withdrawals.... [ICI's Karrie] McMillan believes further action by the SEC isn't necessary -- and could hurt the industry by making the funds less attractive to investors. That's the last thing money fund firms need at the moment."

Fitch Rates Western Asset Institutional Liquid Reserves 'AAAmmf' says the company's press release. The Dec. 22 statement explains, "Fitch Ratings has today assigned a 'AAAmmf' rating to Western Asset Institutional Liquid Reserves, a U.S.-registered prime money market fund governed by Rule 2a-7 of the Investment Company Act of 1940, as amended, and managed by Legg Mason Partners Fund Advisor, LLC (LMPFA). Western Asset Management (Western Asset) is the fund's subadviser and provides day-to-day portfolio management. Both LMPFA and Western Asset are wholly owned subsidiaries of Legg Mason, Inc. (NYSE: LM).... The main drivers for the rating assignment are: -- the fund's overall credit quality and diversification; -- short maturity profile; -- minimal exposure to interest rate and spread risks; -- overnight and one-week liquidity profile; -- the capabilities and resources of LM and Western Asset as investment subadvisor. The 'AAAmmf' money market fund rating reflects the fund's extremely strong capacities to achieve the investment objectives of preserving principal and providing shareholder liquidity through limiting credit, market and liquidity risk." See also, "Fitch Rates Western Asset Institutional Liquid Reserves, Ltd. 'AAAmmf'."

We mentioned this Friday, but wanted to highlight again Bloomberg's editorial entitled, "Money-Market Funds That 'Break the Buck' Can Be a Memory: View". It says, "As these events show, the Securities and Exchange Commission, which regulates mutual funds, should make them less susceptible to mass withdrawals. The need for an overhaul is magnified by Europe's debt crisis.... The SEC took an initial step a year ago by adopting several changes, some based on industry recommendations. Money-market funds now must hold at least 10 percent of their assets in cash or investments that can be swapped for cash within one day. Other changes include holding investments with shorter maturities, letting funds get their hands on cash more quickly. At least the SEC recognizes that it didn't go far enough. Last month, Chairman Mary Schapiro offered two additional proposals: requiring money-market funds to build a capital cushion and allowing share prices to float."

ICI's latest "Money Market Mutual Fund Assets" report shows assets increasing for the 7th straight week approaching the $2.7 trillion level. ICI says, "Total money market mutual fund assets increased by $14.21 billion to $2.692 trillion for the week ended Wednesday, December 21, the Investment Company Institute reported today. Taxable government funds increased by $20.62 billion, taxable non-government funds decreased by $8.14 billion, and tax-exempt funds increased by $1.73 billion." Over the past 7 weeks, money fund assets have increased by $69.8 billion, or 2.7%. YTD, money fund assets have decreased by $118 billion, or 4.2%. In other news, Bloomberg posted an editorial entitled, "Money-Market Funds That 'Break the Buck' Can Be a Memory: View". It says, "As these events show, the Securities and Exchange Commission, which regulates mutual funds, should make them less susceptible to mass withdrawals. The need for an overhaul is magnified by Europe's debt crisis.... The SEC took an initial step a year ago by adopting several changes, some based on industry recommendations. Money-market funds now must hold at least 10 percent of their assets in cash or investments that can be swapped for cash within one day. Other changes include holding investments with shorter maturities, letting funds get their hands on cash more quickly. At least the SEC recognizes that it didn't go far enough. Last month, Chairman Mary Schapiro offered two additional proposals: requiring money-market funds to build a capital cushion and allowing share prices to float."

While Crane Data is busy preparing for its second annual Money Fund University, a "basic training" conference for money market professionals January 19-20 at the Boston Hyatt, we're also busy preparing for our 4th annual Crane's Money Fund Symposium. Mark your calendars for our 2012 Money Fund Symposium, which will be June 20-22, 2012, at The Westin Convention Center Pittsburgh. Our Symposium in Philadelphia last summer attracted almost 400 speakers, sponsors, and attendees, and we expect our 4th annual money fund conference to be even bigger and better. Our 2012 keynote speakers include: Chris Donahue, CEO & Chairman of Federated Investors and Karen Dunn Kelley, CEO of Invesco Worldwide Fixed Income. (See the full preliminary agenda here.) Crane's Money Fund Symposium offers money market portfolio managers, investors, issuers, and service providers a concentrated and affordable educational experience, as well as an excellent and informal networking venue. Registration for Crane's Money Fund Symposium 2012 will (again) be $750; exhibit space is $3,000; and sponsorship opportunities are $4.5K, $6K, $7.5K, and $10K. Our mission continues to be to deliver a better and less expensive conference alternative to money market fund professionals and investors. We look forward to seeing you in Pittsburgh!

The Financial Times writes "US money funds cut lending to EU banks". The article says, "The biggest US money market funds have cut their lending to European banks to another record low while increasing their holdings of US government debt to levels reminiscent of those seen during the financial crisis. The 10 largest funds trimmed their short-term lending to European banks by 4 per cent on a US dollar basis between the end of November and the end of October, according to new data from Fitch Ratings.... While total exposure to the eurozone has been falling, the funds have also been increasing their use of secured lending to the region's financials in another sign of risk aversion. At the end of November, so-called repos accounted for 27 per cent of total European exposure, up from 17 per cent at the end of August and just 10 per cent back in late-2008."

Another comment letter has been posted in belated response to the President's Working Group Report on Money Market Fund Reform. The latest is from John D. Hawke, Jr., of Arnold and Porter, LLP on behalf of Federated Investors. Hawke writes, "Enclosed is a copy of comments we submitted on behalf of our client, Federated Investors, to the Financial Stability Oversight Council on the Council's Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies. As you are aware, we believe designation of money funds as systemically significant under the Dodd-Frank Act would be inappropriate and could have serious adverse consequences. The Commission's robust regulation and oversight of money funds has been very successful. Moreover, the Commission has recently enhanced its regulations so that money funds are even more liquid, transparent and stable than ever before. Indeed, as discussed in the attached comments, this past summer money funds were able to meet shareholder requests for redemptions during periods of significant turmoil. Under these circumstances, making further substantial changes to the regulation of money funds at this time is not warranted. In any event, the standards that could be applied to firms designated as systemically important financial institutions are not appropriate for money funds. I hope that the enclosed letter to the FSOC will be helpful to the Commission and we appreciate the opportunity to provide you with our thoughts."

MarketWatch writes "Money market funds swell as investors dump gold". It says, "One explanation for gold's nearly 5% dive on Wednesday is that money managers are cashing out of gold and shifting into money-market funds, where yields are zilch and performance is flat, but the chances of getting taken to the cleaners are slim.... Does any of this explanation bear out with asset levels in money market funds? In fact it does. Research firm iMoneyNet counts six straight weeks of gains in total money fund assets, stretching back to Nov 8. In total, these funds have gained $85 billion, adding $14.1 billion in the week ended Dec. 13 and an outsized $31.9 billion in the week ended Nov. 8. Research firm Crane Data, for its part, says money fund assets have increased for five weeks in a row -- and this likely will be week six." The piece quotes Crane Data publisher Peter Crane, "Any inflow is above average these days." It adds, "Crane Data's daily money fund assets have increased $71 billion, or 2.9%, since Oct. 31, though they're still down 4.7% year-to-date."

Alice Joe, senior director of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness writes in "Floating More Reform Could Sink an Industry". He says, "It's been over a year since the Dodd-Frank Act was signed into law and hundreds of rules are still being written. American businesses are constantly struggling to figure out how each proposed rule might affect them, and it's also putting a burden on the regulators who are tasked with writing and implementing these rules. Despite the months and years left of work ahead, there's another rule that wasn't even a part of Dodd-Frank that's starting to become a hot topic of debate -- money market funds. Last month, SEC Chairman Mary Schapiro singled out money market fund reform as the sole topic of her remarks at a conference in Washington. Many were surprised that she didn't choose to talk about those hundreds of other Dodd-Frank mandated rules that the SEC is in the midst of promulgating. We don't know for sure the Chairman's rationale for doing so, but what was adamantly clear from her speech was that regulatory changes to money market funds are coming. And soon. But just yesterday, newly confirmed SEC Commissioner Dan Gallagher declared at a Chamber event that 'We cannot know what risks money market funds pose unless ... we have a clearer understanding of the effects of the commission's 2010 money market reforms. Any rulemaking in this space could be premature and possibly unnecessary.'" The Center for Capital Markets Competitiveness also published a primer entitled, "Money Market Funds: Helping Businesses Manage Cash Flow".

Reuters writes "SEC's Gallagher skeptical on money market fund reforms". It says, "A key securities regulator expressed skepticism on Wednesday about the need for more sweeping money market fund reforms, saying that the effect of new rules implemented last year in response to the 2008 financial crisis is still unknown." Daniel Gallagher commented, "We cannot know what risks money market funds pose unless ... we have a clearer understanding of the effects of the commission's 2010 money market reforms. Any rulemaking in this space could be premature and possibly unnecessary." Reuters adds, "Gallagher's comments, which came at a U.S. Chamber of Commerce event on SEC reform, mark a contrast to those made by SEC Chairman Mary Schapiro a month ago in a major speech she made to the brokerage industry.... But Gallagher on Wednesday said he was a bit wary of new rules establishing capital buffers for money market funds, noting that such a plan could kill the industry." See the full speech, "SEC Reform After Dodd-Frank and the Financial Crisis" by [SEC] Commissioner Daniel M. Gallagher.

Morningstar writes "How Safe Is Your Cash?" The article says, "Question: A few years ago, I remember hearing that money market funds were covered by FDIC protection just like certificates of deposit and savings accounts. Are money market funds still FDIC-insured? Answer: The short answer is no, money market fundholders don't have the same guarantees that holders of CDs, money market deposit accounts, and checking and savings accounts have. But your memory serves you well because money market fund investors were accorded extra protections when the financial crisis evolved in 2008. At that time, a large money market mutual fund, the Reserve Primary Fund, "broke the buck," meaning its holdings dropped in price, which in turn caused the fund's net asset value to drop lower than $1. That event created panic selling among some holders of money market funds, prompting the Treasury Department to start a new program, similar to FDIC insurance, for money market funds."

CNNMoney writes "Companies: In FDIC we trust". The article says, "Jeff Cappelletti had his faith in the financial markets shaken in 2008, when he couldn't extricate about $1 million of his firm's overnight cash from the Reserve Fund, the world's largest money-market mutual fund. As the treasurer and risk manager of the U.S. division of G4S Secure Solutions, a firm that provides private security guards to corporations, banks and airports in 125 countries, Cappelletti now puts some of his firm's cash in an area of the market he deems impenetrable: bank accounts insured by the FDIC.... Cappelletti has been working with New York private equity firm StoneCastle Partners over the past six months to divide and distribute about $7 million of G4S's overnight cash among a few dozen community banks. StoneCastle has meted out these deposits in increments of less than $250,000 in order for the accounts to be backed by the FDIC.... StoneCastle's accounts are a twist on a longstanding practice called "brokered deposits" that have been typically used by high net worth individuals. Until recently, they were rarely used by major corporations.... Brokered deposits have been the lifeblood of community banks that need the funds to extend loans to the local community. The dark side is that they've also been a force behind some of the risky lending practices that caused community bank failures during the financial crisis."

The $108 million Old Mutual Cash Reserves Fund filed to Liquidate. The prospectus supplement filed with the SEC says, "On November 17, 2011, the Board of Trustees of Old Mutual Funds II approved a Plan of Liquidation and Dissolution pursuant to which the assets of the Old Mutual Cash Reserves Fund will be liquidated and the proceeds remaining after payment of or provision for liabilities and obligations of the Fund will be distributed to shareholders. The Liquidation is subject to approval by shareholders of the Fund at a Special Meeting of Shareholders to be held on March 9, 2012, or at any adjournments thereof. If shareholders of the Fund approve the Liquidation, on or about March 16, 2012, the Fund will begin liquidating its portfolio assets and will hold or reinvest the proceeds thereof in cash and such short-term securities as the Fund may lawfully hold or invest. As a result, the Fund will not be pursuing its investment objective after the Effective Date. The Fund anticipates that it will complete the Liquidation on or around the close of business on March 23, 2012. On or before the Liquidation Date, the Fund will make liquidating distributions to each remaining shareholder, equal to the shareholder's proportionate interest in the net assets of the Fund, in complete redemption and cancellation of the Fund's shares held by the shareholder, and thereafter the Fund will be terminated and dissolved."

Wells Fargo Advantage Money Market Funds's latest "Overview, strategy, and outlook" discusses "An alternative to LIBOR" (among other things). They write, "LIBOR was developed in the 1980s as a benchmark for short-term interest rates. The British Bankers' Association (BBA) publishes it daily for 10 currencies, with 15 different maturities quoted for each, ranging from overnight to one year.... An alternative to LIBOR is the New York Funding Rate (NYFR), introduced by ICAP PLC in 2008 specifically for this reason. The NYFR is also the trimmed mean of a survey rate, but with a few important differences. First of all, the survey is anonymous. ICAP publishes only the trimmed mean, and not the names of the individual contributors or the rates they submitted. Proponents cite this anonymity as a major advantage of the NYFR over LIBOR, arguing that survey participants are more likely to submit higher rates in times of stress, since they themselves are not at risk of being identified as experiencing funding stresses. Taken at 9:15 a.m. Eastern Time, the NYFR is defined as a "market mid-rate" where contributors will be asked to submit a rate where at least two of their peers would be likely to obtain funding. The NYFR is also a broader measure, since the types of funding considered are not limited to interbank deposits but may include other instruments such as CDs and commercial paper. The rates are published for only two terms, one month and three months, which are among the most consistently active points on the money market yield curve. Finally, the NYFR is often based on a broader sample, since at least 16 participants are required in order to publish the rate." (Note: The new November issue of our Money Fund Intelligence newsletter contains a profile, "Wells Fargo's Advantage a Focus on Information."

Allianz filed a new prospectus for Allianz Global Investors Money Market Fund. It says that the new Allianz Global Investors Money Market Fund will have Class A, Class C and an Institutional II Class. The filing says, "The Fund seeks to maximize current income, to the extent consistent with the preservation of capital and liquidity and the maintenance of a stable $1.00 per share net asset value, by investing in U.S. dollar-denominated money market securities. The Fund invests as part of a "master-feeder" structure. The Fund operates as a "feeder fund" which means it invests in a separate mutual fund, or a "master fund." The Fund currently invests substantially all of its assets in a master fund, the State Street Money Market Portfolio, a registered open-end fund advised by SSgA Funds Management, Inc. with an identical investment objective. The Master Portfolio may accept investments from other feeder funds. Each feeder fund bears the Master Portfolio’s expenses in proportion to its investments in the Master Portfolio. Each feeder fund can set its own fund-specific expenses, transaction minimums and other requirements."

On Friday, the Investment Company Institute posted "Data Update: Money Market Funds and the Eurozone Debt Crisis". The brief piece, produced by Economists Sean Collins and Chris Plantier, says, "In October, we discussed how portfolio managers of U.S. prime money market funds have addressed the ongoing debt crisis in the eurozone. Here is a look at the latest monthly data on these funds' holdings by home country of issuer. We will revisit the topic in mid-December with updated analysis once November figures become available." The table and chart, produced by ICI (using Crane Data's Money Fund Portfolio Holdings), shows U.S. Prime Money Market Funds' Holdings of Eurozone Issuers declining from 31.1% in May to 28.8% in June, 26.6% in July, 23.4% in August, 18.9% in September, and 17.4% in October. France declines from 15.7% to 7.3% during this period.

Barron's writes "How Much Risk Is Worth Higher Yields? Watch Those ‘Floating’ NAVs". It says, "Allowing money markets to float their net asset values rather than forcing them to maintain a steadier state would likely spark a run on such funds, asserts David Hirschmann, CEO of the Center for Capital Markets Competitiveness. A floating NAV -- still being considered by regulators -- is a "blunt instrument" to solve the possibility of a fund "breaking the buck," he told Dow Jones Newswires.... His message to regulators: define the problem clearly first, decide whether the changes already made have worked and proceed with caution. If he's right that investors won't see much value in money markets if NAVs are allowed to float, then ultra-short bond funds like the Pimco Enhanced Short Maturity Strategy ETF (MINT) would likely be a prime beneficiary. As noted earlier, Legg Mason has filed with the Securities and Exchange Commission to launch its first exchange-traded fund. Its mandate appears to closely resemble that of MINT's. Still, some analysts are preaching restraint. Anything yielding more than 1% under current conditions is taking oversized risks, asserts Peter Crane, whose Crane Data research firm specializes in tracking money markets." Crane says, "The search for more income at the shorter-end of the (yield) curve tends to attract the wrong type of crowd at this stage in the cycle. Some short-term bond funds could be a wreck waiting to happen." See also, WSJ's "Bank-Run Risk in the Shadows".

"Legg Mason Files For Legg Mason Western Asset Ultra-Short Duration ETF" writes ETF Daily News. The story says, "Legg Mason has filed paperwork with the SEC for a "Legg Mason Western Asset Ultra-Short Duration ETF." The fund seeks current income. The fund invests, under normal circumstances, primarily in U.S. dollar-denominated short-term, investment grade fixed income securities. The fund will typically invest in money market securities and short-term debt securities, corporate debt securities, bank obligations, commercial paper.... The fund is not a money market fund and does not seek to maintain a stable net asset value of $1.00 per share." The Western filing says, "Under normal circumstances, the effective duration of the fund's portfolio, as estimated by the fund's portfolio managers, is expected to be one year or less."

A release entitled, "Standard & Poor's Applies Its Revised Bank Criteria To 37 Of The Largest Rated Banks And Certain Subsidiaries", said yesterday, "Standard & Poor's Ratings Services today said it reviewed its ratings on 37 of the largest financial institutions in the world by applying its new ratings criteria for banks, which were published on Nov. 9, 2011. See the Ratings List for the ratings on these banks, their core and highly strategic subsidiaries, and other subsidiaries that we took rating actions on as a result of applying our new criteria to their parents. We will review all ratings that we placed on CreditWatch within 90 days. Ratings on CreditWatch are designated as Watch Neg or Watch Pos in the list below." Wells Fargo Securities Fixed-Income Strategist Garrett Sloan wrote, "The downgrades touched the short-term ratings for many large U.S. financial institutions. These include the short-term ratings for Bank of America Corp (A-2 from A1), Bank of New York Mellon Corp (A-1 from A-1+), Barclays Bank PLC (A-1 from A-1+), JPMorgan Chase Bank NA (A-1 from A-1+), Citigroup Inc (A-2 from A-1), Goldman Sachs Group (A-2 from A-1), HSBC Holdings PLC (A-1 from A-1+), HBOS PLC (A-2 from A-1), Lloyds Banking Group PLC (A-2 from A-1), Morgan Stanley (A-2 from A-1), Merrill Lynch & Co Inc (A-2 from A-1), Wells Fargo & Co (A-1 from A-1+), Royal Bank of Scotland Group PLC (A-2 from A-1)."