Daily Links Archives: October, 2012

This Friday, November 2, the ICI is scheduled to host a "Capital Markets Conference" in New York, which will feature SEC Commissioner Daniel Gallagher as the keynote speaker. (He's scheduled to speak from 8:45-9:15am.) The event's description says, "The Investment Company Institute's 2012 Capital Markets Conference will examine the impact of trading and market structure issues on institutional investors. Attendees will receive up-to-the-minute information on the latest developments in the financial markets from senior representatives of regulators and policymakers, securities exchanges, broker-dealers, institutional investors, and other market participants." While he's not specifically scheduled to speak on money market fund issues, the topic likely will come up given Bloomberg's recent claim that the "SEC's Gallagher Calls for Floating Price for Money Funds"." Bloomberg said Sept. 27, "U.S. Securities and Exchange Commission member Daniel Gallagher, who helped derail efforts to tighten rules for money-market mutual funds, said he would likely support a measure forcing the industry to abandon its marquee $1 share price. Requiring money funds to have a fluctuating share price "is an attractive option that I am likely to support," Gallagher, a Republican, said in an interview." We'll see if Gallagher takes the opportunity to clarify his views and correct the Bloomberg story. (There's no word yet on whether the storm damage in lower New York will impact the conference, but the event is scheduled at the Downtown Marriott.)

The New York Times writes "Mutual Fund Leaders Aim to End Jam Over Rules". The article says, "Worried about a regulatory crackdown, mutual fund executives are pushing for limited restrictions on a controversial type of fund in an effort to end a bitter dispute between the government and the financial industry. Representatives from BlackRock, Fidelity, Vanguard and other large asset managers met on Friday with the head of the Securities and Exchange Commission and other regulators to present a plan intended to ward off runs on money market funds, low-risk investment vehicles that faced crippling withdrawals by investors during the financial crisis.... [T]he industry has come together in the last month around a plan proposed by the giant money manager BlackRock, under which the funds would charge a 1 percent fee if investors wanted to withdraw their money during times of financial stress.... It was unclear if Friday's meetings would lead to a compromise. John Nester, a spokesman for the S.E.C., said that while "there were many questions asked" in the meetings, "neither the chairman nor the staff gave any indication of their views on the presentation."" See also, FT's "Future of money market funds questioned".

"PIMCO Shuts European Money Market Fund" writes Dow Jones via Fox Business News. It says, "Pacific Investment Management Co., better known as Pimco, has closed a European money market fund, citing low interest rates. The bond fund manager shut its 80 million-euro Pimco GIS Euro Liquidity Fund on Tuesday. European money market funds have been struggling since the European Central Bank cut its deposit rate to zero in July. Many European money market funds shut out new investors in a move to offer returns, albeit meager, to existing clients. Last week, J.P. Morgan Chase & Co. (JPM) amended the structure of two of its European money market funds so they can operate even if interest rates turn negative. The bank added a new share class that works like this: If the fund's yield turns negative, investors would see their number of shares decline rather than take a loss, according to a client letter sent by the bank." In other news, ICI reported its latest weekly "Money Market Mutual Fund Assets". It says, "Total money market mutual fund assets increased by $940 million to $2.569 trillion for the week ended Wednesday, October 24, the Investment Company Institute reported today. Taxable government funds decreased by $520 million, taxable non-government funds increased by $2.85 billion, and tax-exempt funds decreased by $1.39 billion."

The Federal Reserve's latest FOMC Statement says, "To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015." In other news, Federated Investors will announce earnings after the market closes Thursday. The release says, "A conference call for investors and analysts will be held at 9 a.m. Eastern on Friday, Oct. 26, 2012. President and Chief Executive Officer J. Christopher Donahue and Chief Financial Officer Thomas R. Donahue will host the call. Investors interested in listening to the teleconference should dial 877-407-0782 (domestic) or 201-689-8567 (international) or visit FederatedInvestors.com for real time Internet access."

The Wall Street Journal's CFO Journal writes "Ex-FDIC Chair Calls for Phase Out of Unlimited Deposit Guarantee" (separate subscription required), which says, "Former Federal Deposit Insurance Corp Chairman Sheila Bair said an abrupt end to the current unlimited insurance on non-interest bearing bank accounts at the end of the this year could rattle the banking system and put smaller institutions in danger. Bair, who left the FDIC in July 2011, was there for the beginning of the unlimited guarantee program during the financial crisis in 2008. She said in an interview with CFO Journal that the program was meant to be temporary, but a phase-out that staggers the end for small banks and large banks may be more stable for the banking system and the $1 trillion of corporate deposits currently protected under the guarantee. Right now, the program is slated to expire for all banks Dec. 31." Yesterday's Journal featured, "The $1 Trillion Balancing Act". It said, "A looming change in federal insurance on bank deposits is forcing corporate cash managers to reassess the safety of their banks and has them poring over their investment policies to determine how much money they can keep in any one institution."

A publication entitled, "European Voice," features the opinion piece, "Money-market resistance", written by Harvard Law Professor Mark Roe. He says, "The power of concerted lobbying was again in evidence recently when the US rejected rules that would have made the money markets safer. The United States Securities and Exchange Commission (SEC) recently rejected proposed rules [sic] aimed at making money-market funds safer in a financial crisis -- a rejection that has caused consternation among observers and other regulators. Given the risks that money-market funds can pose to the global financial system, as shown by their destabilising role in the 2008 financial crisis, it is not hard to see why they are worried.... Other regulators were watching -- as were academics and journalists -- and some regulators may now feel compelled to take over the money-market safety rules from the SEC or push the SEC back into action. With no one having a direct financial interest in the outcome pressing an alternative view, the SEC's initial decision was as predictable as it was bad."

In news sure to thrill money market fund managers and investors, Bloomberg writes "Schapiro SEC Reign Nears End With Rescue Mission Not Done". The article says, "What Mary Schapiro considered her most important task had just run aground, a symbol of the aspirations and missed opportunities of her tenure as head of the U.S. Securities and Exchange Commission. Schapiro worked for two years on a plan to head off what she calls the "terrifying" prospect of a run on money-market mutual funds like one that forced a U.S. rescue in 2008. After fellow commissioners refused to follow her lead, she teared up as she worked on a statement accusing opponents of having their heads "in the sand," two people involved in the process said.... She has told friends that the late nights and almost constant policy battles have left her exhausted and eager to depart after the November election.... For Schapiro, her legacy was meant to include money-market funds. While her proposal collapsed in the face of industry opposition and her inability to persuade her fellow commissioners, she said she still considers the process "a big success" because it raised public awareness that is helping to revive the push for new rules.... Some dissenting commissioners took her comments personally, further straining relations. Gallagher, for instance, read the statement in a news story while taking a train home. He called Schapiro from his mobile phone, blasting her for not warning him, according to a person familiar with the matter who spoke on condition of anonymity because the talk was private."

The ICI's latest weekly "Money Market Mutual Fund Assets " report says, "Total money market mutual fund assets increased by $5.84 billion to $2.568 trillion for the week ended Wednesday, October 17, the Investment Company Institute reported today. Taxable government funds decreased by $1.49 billion, taxable non-government funds increased by $8.53 billion, and tax-exempt funds decreased by $1.20 billion. Assets of retail money market funds decreased by $940 million to $886.05 billion. Taxable government money market fund assets in the retail category increased by $600 million to $186.71 billion, taxable non-government money market fund assets decreased by $360 million to $511.67 billion, and tax-exempt fund assets decreased by $1.17 billion to $187.67 billion.... Assets of institutional money market funds increased by $6.78 billion to $1.682 trillion. Among institutional funds, taxable government money market fund assets decreased by $2.08 billion to $668.39 billion, taxable non-government money market fund assets increased by $8.89 billion to $933.10 billion, and tax-exempt fund assets decreased by $30 million to $80.75 billion." Year-to-date in 2012, money fund assets have decreased by $127 billion, or 4.7%. Institutional assets have declined by $74 billion, or 4.2%, while Retail assets have fallen by $53 billion, or 5.6%. Since mid-year (the week ended June 27), money fund assets have gained $30 billion, or 1.2%, with $28 billion of the increase coming from Institutional money funds.

The Reuters article says, "Money market fund regulations adopted by U.S. securities regulators in 2010 reduced risks in the $2.5 trillion industry, according to a report sponsored by the U.S. Chamber of Commerce that questions the need for further reforms. The report, drafted by three finance and economics professors, concludes that the Securities and Exchange Commission's 2010 rules have left money market funds more liquid and better able to withstand a wave of customer withdrawals.... The report is the latest effort by the Chamber of Commerce to fend off efforts by SEC Chairman Mary Schapiro and the Financial Stability Oversight Council, or FSOC, to impose another round of rules on the money market fund industry. The chamber released the report just two days before the FSOC is slated to meet behind closed doors, where the topic of money market funds is expected to be discussed. Last month, Treasury Secretary Timothy Geithner said the FSOC will begin considering new reforms after Schapiro failed to attract the three SEC votes she needed to advance her own plan.... Three SEC commissioners ... have also expressed skepticism and have said they want first to study the effects of the 2010 reforms before proceeding with new rules. The SEC's economists are currently conducting the study requested by the three commissioners, and results could come in a few weeks, according to one person familiar with the matter. Despite his resistance to Schapiro's original proposal, Gallagher has said he hopes the agency will consider a fresh package of reforms. He has also said he would be open to considering a floating net asset value coupled with allowing fund boards to impose liquidity "gates." Any move to a floating net asset value is likely to be strongly opposed by the industry."

The Wall Street Journal's CFO Journal writes "Treasurers Worry Over Accounting for Money Fund Changes". It comments, "As Treasury Secretary Timothy Geithner moved to reintroduce money market reforms last month, corporate treasurers who invest in the funds are focused on how structural changes might complicate accounting for them. Corporate treasurers are planning for various scenarios, but are getting stumped on accounting issues, Ronni Horillo, assistant treasurer at Google, said on a panel at the Association for Financial Professionals conference in Miami on Monday." They quote Horillo, "There isn't a lot of consensus among the auditors on how they would treat any of these money market changes." The blog adds, "Money market funds trade at a stable, $1-per-share price and are currently grouped in cash and cash equivalents," which lets companies buy and sell them frequently and allows corporate boards to consider them a safe asset in their investment policies. But the Securities and Exchange Commission has been gaining support for an earlier proposal to move money market funds to a floating share price that would reflect underlying changes in the value of their assets.... Companies are hoping money market funds would retain their cash and cash equivalent status if there are changes, and that they would not have to constantly reevaluate the funds for minor gains and losses each time they buy and sell a fund, Jerry Klein, managing director of Treasury Partners, said on the panel." See also, FT's "JPMorgan stems money fund losses", which says, "JPMorgan Chase is to offer clients of its two large euro-denominated money market funds a way to address losses from investing in short-term bonds where interest rates have fallen sharply."

U.S. Chamber hosts "The Future of Money Market Mutual Fund Regulation". The notice says, "Please join the Center for Capital Markets Competitiveness (CCMC) on Tuesday, October 16 for an event that will discuss the future of Money Market Mutual Fund (MMMF) reform. On August 22, Securities and Exchange Commission (SEC) Chairman Mary Schapiro announced she did not have the necessary votes to propose additional regulations on MMMFs, halting the SECs efforts indefinitely. Even though the SEC will not be moving forward with reforms, the debate is not over. Other regulatory bodies such as the Financial Stability Oversight Council, the European Union Commission, and the International Organization of Securities Commissions, are expected to evaluate potential reforms in near future. This adds another layer of uncertainty for those that rely on MMMFs as critical cash management tools. This event will discuss not only the SEC decision, but also implications of domestic and international MMMF regulatory reform to main street businesses, state and local governments, and investors. Click here for the event agenda. Registration will begin at 11:00 a.m. followed by the program and lunch from 11:30 a.m. to 3:00 p.m."

Saturday's Wall Street Journal writes "Bent Had Deal Hope". It says, "Eight months before the collapse of the $62 billion Reserve Primary money-market mutual fund in 2008, its owners were exploring a sale, co-manager Bruce Bent Sr. disclosed in testimony during his civil trial in federal court on Friday. Mr. Bent, the chairman of Reserve Management Co., Reserve Primary's parent company, said he and his son, co-manager Bruce Bent II, had been shopping the company around in early 2008. Court documents showed that at least two dozen buyers showed interest, including Federated Investors Inc. and Bank of New York Mellon Corp.... A deal never happened, and by September 2008, the company was in trouble.... The Securities and Exchange Commission sued the Bents in 2009, alleging they lied to investors about whether they intended to shore up the fund to keep it from "breaking the buck," or falling below the $1 a share net asset value that money funds try to maintain. The trial began Tuesday in U.S. District Court for the Southern District of New York. The Bents have denied the allegations. The trial is expected to last at least two more weeks."

ICI's latest "Money Market Mutual Fund Assets" says, "Total money market mutual fund assets decreased by $1.38 billion to $2.562 trillion for the week ended Wednesday, October 10, the Investment Company Institute reported today. Taxable government funds decreased by $3.89 billion, taxable non-government funds increased by $4.64 billion, and tax-exempt funds decreased by $2.13 billion." In other news, both BlackRock and Federated Investors recently announced dates for their 3rd quarter earnings calls. BlackRock's release says, "BlackRock, Inc. ... announced that it will report third quarter 2012 earnings prior to the opening of the New York Stock Exchange on Wednesday, October 17, 2012. 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. ET." Federated's release says, "Federated Investors, Inc., one of the nation’s largest investment managers, will report financial and operating results for the quarter ended Sept. 30, 2012 after the market closes on Thursday, Oct. 25, 2012. A conference call for investors and analysts will be held at 9 a.m. Eastern on Friday, Oct. 26, 2012. President and Chief Executive Officer J. Christopher Donahue and Chief Financial Officer Thomas R. Donahue will host the call."

Reed Smith's Stephen Keen writes "FSOC and Money Market Fund Reform: A Path to Nowhere". The publication says, "In a letter (the "Geithner Letter"), to the members of the Financial Stability Oversight Counsel ("FSOC"), Treasury Secretary Geithner started the next round of debate over subjecting money market funds to further regulatory reforms. In the aftermath of SEC Chairman Schapiro's announcement that "a majority of the Commission ... will not support a staff proposal to reform the structure of money market funds", Secretary Geithner asked FSOC "to consider taking a series of additional steps to address this challenge." He characterized these steps as a "path forward to protect investors and the economy." This client alert discusses each of the steps the Geithner Letter urged FSOC to take, and why these steps will probably not lead to the structural reform of money market funds." After a lengthy discussion, Keen concludes, "We have shown that FSOC cannot implement structural reforms to money market funds by itself. While FSOC can recommend structural reforms to the SEC under section 120, unless the composition of the SEC changes, this is apt to be a protracted path to the same end as Chairman Schapiro's failed attempt at reforms. The other viable alternative is to designate funds or their managers as SIFIs. This is a convoluted path, however, that would ultimately lead to a court battle that may include a serious constitutional challenge to FSOC's designation powers. Either path will probably take more than a year to traverse, with no certain end. This is why the Geithner Letter represents a continuation along paths that will probably not lead to successful money market fund reforms."

A statement entitled, "ICI and ICI Global Disappointed with IOSCO Report on Money Market Fund Regulation" commented yesterday, "ICI President and CEO Paul Schott Stevens and ICI Global Managing Director Dan Waters responded to IOSCO's report on money market funds that includes a number of regulatory recommendations." They comment, "It is disappointing that IOSCO's report on money market funds endorses the false notion that constant net asset value (CNAV or "stable") money market funds are more susceptible to runs than variable NAV (VNAV or "floating") money market funds. This claim is contrary to empirical evidence and analysis of the history of CNAV and VNAV money market funds, including the 2008 financial crisis. This misinformed claim fuels flawed regulatory proposals, including options of imposing capital requirements and redemption holdbacks, and a strongly expressed preference for floating or VNAV funds. These are similar to proposals that the U.S. Securities and Exchange Commission declined to pursue. As ICI research has shown and as hundreds of investors in the U.S. have told the SEC, these proposals would destroy the utility of money market funds, harming the economy and retail and institutional investors alike. We are also surprised that IOSCO is proceeding with such a significant policy recommendation without consensus from its Board, an action without precedent in IOSCO's history. The SEC, the regulator of more than 50 percent of the global money market fund assets, has not endorsed this report. It is a matter of concern that IOSCO has chosen to depart from its consensus approach, particularly on an issue of such global economic importance. We will remain engaged in this debate going forward. The IOSCO report includes some recommendations that could provide additional safeguards without destroying the fundamental characteristics that have made money market funds so valuable in the economy. We regret, however, that the report failed to include any recommendations that would improve the transparency of money market fund portfolio holdings for the benefit of investors and regulators. We will continue to provide analysis and insights to IOSCO and other regulators in hopes of shaping the debate with the best outcome for investors and the global economy."

Investment News writes "Time to brace for new money fund rules" in an editorial. It says, "Financial advisers should begin preparing their clients for changes in the money market fund industry. Changes became almost inevitable when Treasury Secretary Timothy Geithner on Sept. 27 sent a letter to the Financial Stability Oversight Council urging it to consider issuing new rules for money market funds. The council can assert control over large money market funds by designating them "systemically important financial institutions".... Perhaps the best outcome for money market funds is for the SEC to revisit the matter quickly and impose new regulations before the FSOC can act. One of the commissioners who voted against Ms. Schapiro's proposals already has said he would support a floating NAV. Whether the final regulation comes from the SEC or the FSOC, investors almost certainly will find money market funds a less comfortable place than in the past to park money while seeking good investment opportunities. Now is the time for advisers to begin to prepare their clients for the coming changes. At the very least, clients may have to accept a floating NAV."

The Wall Street Journal writes "Funds Face New Battle On Rules". The article says, "Barely a month ago, the money-market mutual-fund industry was celebrating its biggest political victory in years. Now it is gearing up for another fight. In the past two weeks, executives from firms such as Federated Investors Inc., Vanguard Group Inc., Charles Schwab Corp. and Fidelity Investments, plus the Investment Company Institute, a trade group, each have called or met with banking lawyers in Washington to learn more about a new attempt to regulate mutual funds, according to company executives and lawyers familiar with the meetings. The firms also are holding internal discussions about how to proceed, and could soon begin meeting with politicians and regulators in hopes of persuading them the new plan would damage the industry, according to those people.... The industry could be facing a tougher battle this time. Members of the FSOC could see this as a chance for the new group to flex its muscle. Several firms also support new rules."

Time writes "Why Reform Will Push Money Market Fund Yields Even Lower". The article says, "Left for dead in August, the effort to reform money market mutual funds is getting a renewed boost. The stable $1 share price may be a casualty. Here's why reform would push the low yields on these funds even lower.... But with money market reform back on the table, lower yields may indeed -- seemingly against all odds -- be in store. Collectively, the 56 million savers in these funds have a lot at stake. Even a miniscule rate cut in a $2.6 trillion market could amount to more than $2 billion in lost income each year. Despite their pathetically low yields, money market mutual funds remain a popular place for both individuals and institutions to park cash over short periods; they are regarded as a safe and highly liquid alternative to similar bank products that may yield more but are saddled with minimums and restrictions."

Fund professor and Washington consultant Mercer Bullard writes on "Money Market Funds on Life Support" on Morningstar.com. The Commentary says, "As the battle over the fate of money market funds enters its fourth year, the fundamental conflict between banking and securities regulation is reaching a boiling point. Three years ago, I asked: Will Obama Kill Money Market Funds? He certainly is trying, but the MMF industry is not going down without a fight. It scored a victory in round one when SEC chairman Mary Schapiro gave up trying to persuade her fellow commissioners to support reforms that the industry argues would, in effect, eliminate MMFs as we know them. This battle has now moved to round two with Treasury secretary Timothy Geithner's request to the Financial Stability Oversight Council to pick up where the SEC has left off. Geithner's request is probably more bark than bite. It would be imprudent for a novice regulator such as FSOC to test its new powers in a fight with industry and Congress (see Sen. Pat Toomey's comments) that it may lose. And if chairman Schapiro leaves the commission, which some have predicted, her replacement may take up MMF reform again, in which case FSOC action would not be needed. "

Bloomberg Businessweek writes "U.S. Role in Lehman Collapse Allowed in Reserve Trial". It says, "The U.S. government's role in the collapse of Lehman Brothers Holdings Inc. will be allowed as evidence in the Oct. 9 trial over allegations that Reserve Primary Fund misled investors in 2008, a federal judge in Manhattan ruled. The company will be permitted to present evidence that its confidence in Lehman's finances were based in part on the U.S. Securities Exchange Commission's oversight of the investment bank under a voluntary regulatory program, according to the decision by U.S. District Judge Paul Gardephe. A trial is scheduled to begin Oct. 9 in the SEC's case alleging that the company misled investors about the safety of the fund after it suffered losses in Lehman investments. The fund, which held $785 million in debt issued by Lehman, became the first money fund in 14 years to expose investors to losses when Lehman filed for bankruptcy protection in September 2008.... The case is SEC v. Reserve Management Co. Inc. 09-cv- 04346, Southern District of New York (Manhattan)."

Reuters writes "Federated CEO says would support some money fund reform". The article says, "Federated Investors Inc. Chief Executive Christopher Donahue, who has fought increased regulation of money market funds, said on Friday he would support a limited reform proposal. Donahue, whose Pittsburgh-based firm is one of the largest sponsors of money funds, said in an interview that he would back allowing funds to limit customer withdrawals in times of stress, a practice the industry calls "voluntary gates." Reuters quotes Donahue, "That would work.... It would be enhancing the resilience of the funds." The piece adds, "Forcing funds to adopt other reforms such as a floating net asset value would still be unacceptable, however, he said. Donahue's comments come as federal regulators this week renewed their efforts to strengthen regulation of the $2.5 trillion money fund industry following the financial crisis, when dozens came under stress amid rapid withdrawals." See also, WSJ's "Money Funds' $1 Share Price At Risk".