Daily Links Archives: May, 2011

The Financial Times continues its negative barrage against money market funds with "Low rates pressure US money market funds." It says, "US money market funds are struggling to make returns after short-term interest rates fell to record lows in the wake of regulatory changes and a big decline in Treasury bill issuance. The recent drop in rates has compounded the already low level of returns money market funds have made since the Federal Reserve set overnight rates in a band of zero to 0.25 per cent in December 2008." The FT quotes Bob Brown, president of Fidelity's money market business, "Every month feels like a dog year in terms of the rate environment and the regulatory focus." The FT adds, "The low interest rate environment means a growing number of funds are losing business and coming under mounting pressure to consolidate.... The Investment Companies Institute calculates that last year the industry waived $4.5bn of fees to maintain the fixed $1 per share net asset value of funds. The amount of cash invested in money market funds has fallen from its peak of $3,900bn in January 2009 when investors fled risky investments. It now stands at levels last seen in August 2007, ICI data show. The number of fund providers has also fallen -- from 200 a decade ago to 141, according to the ICI." See also, Bloomberg opinion piece, "Make Money Market Funds Go to Market: Business Class".

The spring Treasury conference tour continues next week with the biggest of the regional shows, the New York Cash Exchange June 1-3. Crane Data will join at least 15 institutional money fund families and online trading portals in exhibiting at this annual event sponsored by the Treasury Management Association of New York. Visit us at Booth #232 and enter a drawing to win a free subscription to our monthly Money Fund Intelligence newsletter. Money fund-related sessions include: "The Future of Money Market Funds: A Treasurer's Guide" by Lance Pan of Capital Advisors Group (6/1 9am), "A Macro and Practical View of Capital Preservation" by Ronald Hill of BlackRock (6/1 2pm), "The Impact from Regulatory Reform: A New Era of Cash Management" by Michael Morin of Fidelity Investments (6/2 9am), and "Money Market Fund Yields - How we got here and where are we headed?" by Deborah Cunningham of Federated Investors (6/2 11am). In other conference news, note that Friday is the last day for the discounted hotel rate for Crane's Money Fund Symposium. If you are planning on attending and have not booked your hotel room at the Philadelphia Marriott yet, please do so today before 5pm. The Marriott is approaching a sold out situation and we want to make sure we meet our room commitments to the hotel. Reservations can be made either online at: https://resweb.passkey.com/Resweb.do?mode=welcome_gi_new&groupID=3210729 or via phone at 800-266-9432. Please identify yourself as attending the Crane Data Symposium in order to ensure you receive the discounted rate.

A press release entitled, "Fitch Rates Williams Capital Government Money Market Fund 'AAAmmf'," says, "Fitch Ratings has assigned an 'AAAmmf' rating to Williams Capital Government Money Market Fund managed by Williams Capital Management, LLC. The rating reflects the fund's extremely strong capacity to achieve its investment objective of preserving principal and providing shareholder liquidity through limiting credit, market and liquidity risks. The main drivers of the rating are the credit quality, maturity profile and liquidity of the fund's portfolio and the capabilities of Williams Capital Management, LLC as investment advisor. As of April 30, 2011, the fund had $1 billion in assets under management. The fund seeks to provide its shareholders with a level of current income that is consistent with the goals of preservation of capital and liquidity. The fund seeks to achieve its objective by investing principally in U.S. treasury obligations, U.S. government obligations and its agencies and instrumentalities and repurchase agreements fully collateralized by U.S. treasury obligations and/or senior debt obligations of U.S. government agencies."

The Kansas City Star writes "Banking reform should end $1 a share money market funds, KC Fed president says". It comments, "Regulation reforms in the wake of the financial crisis should take in money market mutual funds by ending their steady $1 a share price tags, said Tom Hoenig, president of the Federal Reserve Bank of Kansas City. Hoenig spoke this morning at a monetary and trade conference in Philadelphia. He highlighted his support for the sweeping Dodd-Frank Act that rewrites much of banking regulation.... Hoenig's call today would end the practice of allowing money funds to post a fixed $1 a share price on their shares. They should instead be required to report floating values for their shares as do mutual funds that invest in stocks and bonds, he said." It quotes Hoenig, "Shadow banks' reliance on this source of short-term funding and the associated threat of disruptive runs would be greatly reduced by eliminating the fixed $1 net asset value and requiring share values to float with their market values." See Hoenig's "Back to the Business of Banking".


The Wall Street Journal writes "T-Bills Stay Hot Despite Low Yield". It says, "Dwindling supply and rising demand are causing a squeeze in the market for three-month Treasury bills, considered among the safest investments, that is driving the market up and pushing the yields to the floor. Right now, the Treasury bills are yielding 0.05% after bottoming earlier this month at roughly 0.01%. That means three-month T-bills with a face value of $1 million bought Friday would earn an investor just over $120 at maturity. It hardly seems worth the effort, but new regulations are making it harder for some investors to go elsewhere in search of higher yields. They are battling over a dwindling supply of Treasury bills, due in part to the U.S.Treasury's effort to keep the U.S. government's debt under the legal ceiling, which Congress has so far refused to raise.... On the demand side, a rule change by the Federal Deposit Insurance Corp. has made banks less willing to make short-term borrowings using instruments known as repurchase agreements, or 'repos,' say market participants. Such short-term loans are important investments for money-market mutual funds. With less repo demand from banks, money funds are moving more cash to Treasurys, further increasing demand for short-term U.S. debt. Meanwhile, money-market funds are adjusting to an earlier wave of regulatory changes aimed at bolstering their safety. New money-fund regulations issued by the Securities and Exchange Commission last year require funds to hold a greater percentage of more-liquid, high-quality assets—typically short-term Treasurys."

We recently noticed traffic coming from a new website, www.PreserveMoneyMarketFunds.org and saw it mentioned in a recent ICI press release ahead of the SEC Roundtable. The website, which is sponsored by the ICI and which contains links and facts about money market funds, contains the sections "Facts About Money Market Funds," "The Impact on You," "What Others Are Saying," "Risks to Money Market Funds," and "News & Media." We'll see how it evolves in coming weeks, but it clearly appears to be designed to assist in the battle against the floating NAV and radical changes to the structure of money market funds.

ICI's weekly "Money Market Mutual Fund Assets" report says, "Total money market mutual fund assets decreased by $12.43 billion to $2.738 trillion for the week ended Wednesday, May 18, the Investment Company Institute reported today. Taxable government funds decreased by $8.30 billion, taxable non-government funds decreased by $4.25 billion, and tax-exempt funds increased by $120 million.... Assets of retail money market funds increased by $670 million to $910.35 billion. Taxable government money market fund assets in the retail category increased by $110 million to $168.32 billion, taxable non-government money market fund assets increased by $430 million to $544.53 billion, and tax-exempt fund assets increased by $140 million to $197.49 billion. Assets of institutional money market funds decreased by $13.11 billion to $1.828 trillion. Among institutional funds, taxable government money market fund assets decreased by $8.41 billion to $603.23 billion, taxable non-government money market fund assets decreased by $4.68 billion to $1.111 trillion, and tax-exempt fund assets decreased by $20 million to $113.46 billion."

A release entitled, "SEC Proposes Rules to Increase Transparency and Improve Integrity of Credit Ratings," says, "The Securities and Exchange Commission today voted unanimously to propose new rules and amendments intended to increase transparency and improve the integrity of credit ratings. The proposed rules would implement certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act and enhance the SEC's existing rules governing credit ratings and Nationally Recognized Statistical Rating Organizations (NRSROs)." "In passing the Dodd-Frank Act, Congress noted that credit ratings applied to structured financial products proved inaccurate and contributed significantly to the mismanagement of risks by financial institutions and investors," said SEC Chairman Mary L. Schapiro. "Our proposed rules are intended to strengthen the integrity and improve the transparency of credit ratings." The statement adds, "Under the SEC's proposal, NRSROs would be required to: Report on internal controls. Protect against conflicts of interest. Establish professional standards for credit analysts. Publicly provide -- along with the publication of the credit rating -- disclosure about the credit rating and the methodology used to determine it. Enhance their public disclosures about the performance of their credit ratings. The SEC's proposal also requires disclosure concerning third-party due diligence reports for asset-backed securities."

Crane's Money Fund Symposium sent an e-mail to registered attendees, speakers and sponsors warning them that hotel space is almost full and the discounted conference hotel rate expires next week. Crane Data President Peter Crane wrote, "Thank you for registering to attend, for sponsoring or for agreeing to speak at next month's Crane's Money Fund Symposium, which will be June 22-24 at the Philadelphia Marriott Downtown. I look forward to seeing you in Philly! I've attached the most recent agenda (note our extensive list of sponsors on page 2), as well as a preliminary attendee list, FYI. If you're not on the attendee list, you should register as a "Speaker" or a "Sponsor" ASAP via the website at: https://www.kinsleymeetings.com/Crane/register.asp." Crane added, "Please make your Hotel Reservations! The Philadelphia Marriott is approaching a sold out situation and will not extend the discounted conference rate past May 24th. If you haven't already, reserve your rooms by clicking here: https://resweb.passkey.com/go/Crane2011 or by calling 800-266-9432. The discounted conference rate is $209 plus tax (currently 15.2%). Additional information about the hotel is located on the conference website at: http://www.kinsleymeetings.com/Crane/hotel.htm." Finally, Crane's e-mail said, "If you have friends and colleagues that might be interested in attending, tell them to sign up soon! We may reach capacity and have to limit attendance at this year's event.... Let me know if you have any questions or requests, and thank you for your support!" For more information, visit www.moneyfundsymposium.com or e-mail Pete to request the latest brochure.

Federated's Donahue writes "Stability, simplicity and convenience of the $1 NAV". The article says, "At a recent Securities and Exchange Commission roundtable, regulators again discussed potential changes to money market mutual funds. Over the past 40 years, money market funds have been essential to the United States economy as they have been an important source of short-term financing for companies and state and local governments. And money market funds have been important to investors, whether individuals with a few thousand dollars or companies, governments and pension funds with hundreds of millions of dollars. All have relied on these funds as an efficient and effective way to manage their cash. Each money market fund is an investment product that seeks to maintain a $1 net asset value (NAV), which provides simple accounting and recordkeeping. However, some individuals want to undermine a system that's worked for decades by allowing the $1 money fund value to float. The specter of a floating-rate NAV isn't just Federated's concern. In recent comments to the SEC on the floating-rate proposal and in comments at the recent roundtable, representatives from elementary and secondary schools, colleges and universities, state and corporate treasurers' offices, and small and large businesses cited the debilitating costs and impacts such a change could have on their cash management operations."

The U.K.'s Independent rants, "Money market funds are still an accident waiting to happen". The piece says, "So farewell then Sheila Bair. America's most ferocious regulator says she will step down when her term as chairman of the Federal Deposit Insurance Corporation (FDIC) ends in July, robbing government of one of the few people who still seemed keen on radical reform of finance in the wake of the credit crisis. As if she wanted to demonstrate why she will be so missed, Ms Bair was on typical bold form this week, attacking the powerful money market fund industry and demanding sweeping changes. The $2.7 trillion industry is based on a 'myth', she said, and a dangerous myth at that. She is right. If the banks and fund managers ranged against her succeed in killing real reform, it will be a scandal. Money market funds are hot money masquerading as safe money, and there is nothing so dangerous as something that looks safe and turns out not to be. The run on the money market funds in the days after Lehman Brothers collapsed is the most under-appreciated aspect of the 2008 crisis."

The Windy City Summit, hosted by the Treasury Management Association of Chicago, will take place next Wednesday through Friday (May 18-20) at the Hyatt Regency Chicago. A number of institutional money market mutual fund companies, portals and Crane Data will be exhibiting (booth #313), and over 1,000 corporate financial professionals should be in attendance. In other news, ICI reported its weekly "Money Market Mutual Fund Assets ". It says, "Total money market mutual fund assets increased by $24.07 billion to $2.751 trillion for the week ended Wednesday, May 11, the Investment Company Institute reported today. Taxable government funds increased by $6.45 billion, taxable non-government funds increased by $16.00 billion, and tax-exempt funds increased by $1.62 billion."

Reuters writes "End of QE2 could ease repo collateral squeeze". The piece says, "Conditions in the repurchase market may remain rough until the Federal Reserve ends its Treasury purchasing program at the end of June, analysts said on Wednesday. The rates on general collateral in the repo market have been stunningly low since April 1, when a change in insurance assessment methods for commercial banks forced a flood of cash into the short-term financing markets, sucking up the collateral that comprises the other side of a repurchase agreement. Rates on the securities repo that traders use as general collateral fell to single basis-point ranges and even turned negative in cases where a particular type of security came into greater demand." The article quotes Ward McCarthy of Jefferies & Co., "The issue is what's part of the floating supply in the market. The Fed lending can help ease squeeze types of situations but that's an augment to a market that's just dry." See also, Bloomberg's "FDIC's Bair Says U.S. Money Funds 'Highly Unstable in a Crisis'".

The Wall Street Journal writes "FDIC's Bair Says Money Funds Run Moral Hazard". It says, "A top bank regulator on Tuesday afternoon raised concerns about potential costs to taxpayers of bailing out parts of the $2.7 trillion money-market fund industry in the event of a future financial crisis." The Journal quoted FDIC Chairman Bair, "Now we have a moral hazard issue. Money-market investors think that if the funds make a stupid investment that the government is going to step in again." The piece adds, "Bair and other regulators and industry participants have focused on money-market funds since one of the largest, the $60 billion Reserve Primary Fund, suffered a run on assets due to losses connected with Lehman Brothers' failure in September 2008."

Investment News wrote Sunday "Regulators eyeing changes to money funds". The article says, "Money market funds are front and center in Washington again, just 16 months after regulators tightened rules on the $2.7 trillion industry.... The Securities and Exchange Commission tomorrow will gather other regulators, industry executives and academics, to discuss the pros and cons of at least half a dozen proposals aimed at making money funds more resilient to economic turmoil." It adds, "Talk of new money fund regulation takes on greater significance as razor-thin yields drive away investors. Money fund assets now stand $1.2 trillion below the January 2009 high-water mark of $3.9 trillion, according to Crane Data LLC, which compiles money fund data. Among the more controversial proposals that will be considered at this week's round table is one that would require funds to maintain a floating-rate net asset value.... Rules that require money funds to have a floating NAV 'would be an accounting nightmare' for companies, and the benefits of moving to such a system have not been shown, said Peter Crane, president of Crane Data.... The SEC may endorse rule changes based on elements of many of the proposals on the table, said Barry Barbash, a partner at Willkie Farr & Gallagher LLP and former director of the Division of Investment Management." He tells IN, "In the end, it may be a combination."

The Wall Street Journal features an odd editorial that appears to support a floating NAV reform entitled, "Taxpayers and Money Market Funds". It says, "The list of regulatory flaws that Congress failed to correct with last year's 'Wall Street reform' runs even longer than Dodd-Frank's 2,300 pages. But amid this Beltway forest it's important to focus on a few giant redwoods of moral hazard. One of them will be the subject of a forum tomorrow hosted by the Securities and Exchange Commission. The agenda is 'mitigating systemic risks associated with money market funds.' The better goal would be ending taxpayer risks associated with this $2.7 trillion market. Money funds typically invest only in short-term debt from creditworthy institutional borrowers, so the funds are almost always a model of stability. Washington needs a sturdier policy for those rare moments when they aren't. The simple solution is to clarify for investors that the funds can lose value. This means allowing fund share prices to float like the securities that they are, and not remain fixed like the bank deposits they are not." In other news, see FT's "Basel III to hit money fund sector".

Watch Treasury Secretary Tim Geithner's interview with Paul Stevens at the ICI's General Membership Meeting. Stevens asks the Secretary several questions related to money market funds. Also, see ICI's weekly "Money Market Mutual Fund Assets", which says, "Total money market mutual fund assets decreased by $410 million to $2.727 trillion for the week ended Wednesday, May 4, the Investment Company Institute reported today. Taxable government funds decreased by $3.52 billion, taxable non-government funds decreased by $1.05 billion, and tax-exempt funds increased by $4.16 billion."

Federated Investors' "Month In Cash" features "FDIC throws curve to already challenging cash market", which says, "Just when it seemed as if conditions in the cash market couldn't get any more challenging, they became a little more challenging. Due to a regulatory change that effectively increased the amount of bank capital subject to FDIC assessment charges, interest rates on repurchase agreements -- a staple of overnight funding—cratered early in the month as the amount of repo-eligible collateral in the market dropped sharply. In changing its insurance assessment base, the FDIC had sought to shift more of the cost onto larger financial institutions. Though it had been widely assumed that big banks would reduce their participation in the repo market to avoid the expanded fee schedule, similar moves by many smaller institutions had a greater impact than anticipated, sending repo rates plunging from the high-teens at the end of March to the low-single digits barely one week later. In fact, the rate on some government-collateralized repos dropped to a single basis point early in the month. Given that cash managers need an allocation to overnight securities to meet daily liquidity requirements, net yields were adversely affected. By mid-month, market participants had adjusted to the super-low repo yields, in some cases shifting funds into overnight agency discount notes and Treasury bills as well as into overnight commercial paper and overnight CDs. Still, when an important component of any market sustains such a meaningful change in its supply-demand dynamic, most sectors of that market are usually impacted as well. In this instance, cash yields were further depressed by the secondary effects of the Federal Reserve's ongoing round of quantitative easing, as well as the end of the Treasury Department's Supplementary Financing Program as the debt ceiling approaches. Though repo rates had rebounded to the high single-digits by month end, the impact on cash yields was significant. Overall, the one-month, three-month and six-month London interbank offered rates (Libor) fell 3 basis points each to 0.21%, 0.27% and 0.43%, respectively, while 12-month Libor eased 2 basis points to 0.76%."

Fitch Ratings announced triple-A ratings on several SSgA Money Funds. The releases, entitled, "Fitch Rates SSgA's Money Market Fund & Prime Money Market Fund 'AAAmmf'," "Fitch Rates SSgA's U.S. Government & U.S. Treasury Money Market Funds 'AAAmmf'," "Fitch Rates 3 State Street Institutional Investment Trust's U.S. Treasury & Government MMFs 'AAAmmf'," and "Fitch Rates State Street Institutional Liquid Reserve Fund 'AAAmmf'." The first release says, "The assigned ratings reflect the funds' extremely strong capacity to achieve their investment objective of preserving capital and providing shareholder liquidity through limiting credit, market and liquidity risks. The main drivers of the rating assignments are the credit quality, diversification, maturity profile and liquidity of the fund portfolios and the capabilities and resources of SSgA FM as investment advisor. Collectively, the funds had assets under management of $20.1 billion as of April 21, 2011.... The SSgA Money Market Fund and the SSgA Prime Money Market Fund attempt to meet their investment objective by investing in a broad range of money market instruments, including certificates of deposit, bank notes and other bank instruments, commercial paper, repurchase agreements, asset backed securities, corporate obligations, instruments issued or guaranteed by the U.S. government, its agencies and sponsored entities. These instruments may bear fixed, variable or floating rates of interest or may be zero coupon securities."

Capital Advisors writes "Collateralized Commercial Paper: A New Breed or ABCP 2.0?" The white paper's Abstract says, "Collateralized commercial paper (CCP) made its debut last November to institutional cash investors. This new structure allows investors to purchase commercial paper from entities conducting term repos with broker-dealers. New regulatory changes for money market funds and tri-party repo markets provided logical explanations for its introduction. Some of the CCP features investors should be aware of include liquidity, maturity, and credit transformation as well as dealer funding diversification. We think the structure of CCP differs from multi-seller ABCP programs and more closely resembles repo-backed conduits. We advise investors to look to the issuer's standalone credit, quality and terms of the asset collateral, legal and operational considerations and regulatory uncertainty before investing in specific CCP issues."

Postings continue to show up on the SEC's page for Comments on the President's Working Group Report on Money Market Fund Reform. The most recent is from the CFA Institute, which says, "While a stable net asset value (NAV) for money market mutual funds (MMF) does not accurately reflect the true value of such instruments at any point in time, we recognize the difficulties noted in the Report with forcing the $3 trillion sector to migrate to a floating NAV. Therefore, assuming retention of a floating NAV model, we believe that additional protections should be put in place to ensure that neither the sector nor individual funds are ever considered 'too big to fail.' Such protections should include a voluntary, industry-funded, risk-based insurance fund to support a MMF only in cases of fund failure. We further propose a complete review of current disclosure requirements and more clear and prominent warnings to potential investors that MMF instruments may subject investors to loss of interest and principal." The SEC has also split out a separate section on Meetings with SEC Officials. Recent meetings include ICI and Fidelity.

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