Daily Links Archives: February, 2012

A press release entitled, "Deutsche Bank enters exclusive negotiations with Guggenheim Partners," says, "Deutsche Bank announced today that it is in exclusive negotiations with Guggenheim Partners on the sale of its Asset Management businesses that are subject to a previously-announced strategic review. The businesses include DWS Americas, the Americas mutual fund business; DB Advisors, the global institutional asset management business; Deutsche Insurance Asset Management, the global insurance asset management business; and RREEF, the global alternative asset management business. Guggenheim Partners is a diversified financial services firm with significant expertise in institutional asset management serving the insurance and pension sectors, as well as in intermediary-focused investments through a broad range of mutual fund solutions. The exclusive negotiations follow Deutsche Bank's announcement on 22 November 2011, that it would conduct a strategic review of its Asset Management division globally except for the DWS franchise in Germany, Europe and Asia, which the Bank had already determined to be a core part of its retail offering in those markets."

Another Comment Letter has been posted to the SEC's "President's Working Group Report on Money Market Fund Reform" page. Karrie McMillan, General Counsel of the Investment Company Institute, writes, "The Investment Company Institute is pleased to offer the following submission for consideration by the Securities and Exchange Commission as it contemplates whether any additional regulation of money market funds is appropriate. Money market funds -- which seek to offer investors liquidity, a market-based rate of return, and stability of principal, all at a reasonable cost -- serve as an effective cash management tool for investors, and as an indispensable source of short-term financing for the global economy. Given the importance of these funds, ICI and its members have devoted significant time and resources to strengthening the regulation of money market funds and making them more robust under adverse market conditions. To this end, on February 7, 2012, we submitted the attached submission as a resource to the International Organization of Securities Commissions' Standing Committee on Investment Management as it examines money market funds, particularly the U.S. money market fund industry. The submission begins with an overview of the U.S. money market (Section I). Next, it describes the regulation of U.S. money market funds, including the SEC's recent reforms and how the funds weathered their first 'stress test' since those reforms (Section II). Finally, the submission examines each of the reform options currently under serious consideration in the United States and describes how they would undermine money market funds' value to investors, effectively destroying these funds and disrupting the supply of credit to businesses, states and local governments, and consumers (Section III)."

Crane Data's Peter Crane will be featured on a Webinar hosted by StoneCastle Cash Management on Tuesday, February 28 from 4-5pm. (To register, go here.) StoneCastle's description says, "In response to the many questions related to recent money fund headlines and decline in earned credit yields, StoneCastle Cash Management is hosting the webcast, Cash Management Today: Beyond the Headlines, with special guests Peter Crane, President of Crane Data.... The call is scheduled for Tuesday, February 28th at 4pm. This call is geared for the treasury professional." In other news, ICI reported its latest weekly "Money Market Mutual Fund Assets" Thursday. It says, "Total money market mutual fund assets increased by $6.22 billion to $2.665 trillion for the week ended Wednesday, February 22, the Investment Company Institute reported today. Taxable government funds decreased by $9.86 billion, taxable non-government funds increased by $16.02 billion, and tax-exempt funds increased by $60 million." The numbers show a shift from Government to Prime funds, saying, "Assets of institutional money market funds increased by $4.25 billion to $1.743 trillion. Among institutional funds, taxable government money market fund assets decreased by $10.07 billion to $713.02 billion, taxable non-government money market fund assets increased by $14.99 billion to $934.30 billion, and tax-exempt fund assets decreased by $670 million to $95.26 billion."

CFO Magazine writes "Will SEC Rules Make Treasurers Flee Money-Market Funds?". The article says, "The Securities and Exchange Commission is releasing new rules this spring that would make U.S. money-market funds considerably less appealing to CFOs and treasurers investing corporate cash. The rules also cause yields on money funds to fall in an already low interest-rate environment. The proposed regulations will arrive in the first or second quarter, says Lance Pan, director of research for Capital Advisors Group, an investment adviser. The SEC's five commissioners would have to vote on the changes, which were recommended by the President's Working Group on Financial Markets in 2010. One proposal would require funds to adopt a 'floating' net asset value -- meaning the NAV of a fund would rise and fall daily, as happens with other mutual funds. That could scare companies away from investing in money markets, which currently have a fixed NAV of $1 per share, experts say. Another option on the table would require money markets to establish a 'capital buffer' to cushion against losses and redemptions, as well as adopt policies to prevent customers from withdrawing money in a market panic. Instead of taking out all their money at once, investors would have to redeem their shares piecemeal."

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USA Today writes "Proposed money market mutual fund rules draw fire". It says, "The Securities and Exchange Commission is considering proposals they say will make money market mutual funds safer — and the mutual fund industry loathes them. Money market funds, unlike bank money market accounts, are uninsured mutual funds that invest in high-quality, short-term debt issued by the government, corporations and municipal entities. The funds have $2.6 trillion in assets. The two proposals, each considered an alternative to the other, will be put out for public comment in late March or early April. Money funds would abandon the accounting convention that lets them keep share prices at a constant $1. The change would drive home the point to investors that money funds aren't federally insured, thus discouraging panic if a fund's share price fell below $1 -- breaking the buck, in fund parlance.... Money funds would have to keep a capital reserve in case of large redemptions. They would also put a 30-day hold on 3% to 5% of an account — a move also aimed at discouraging massive redemptions. Stevens argues that funds would have a hard time raising capital when yields are an average 0.02%, as they are now. And the 30-day hold could cause problems from brokers and other intermediaries, he says. Why the extra rules? One of the darkest moments of the 2008 financial meltdown was when the Reserve fund, one of the oldest money funds, broke the buck because of its large holdings of short-term IOUs issued by Lehman Bros."

Dechert writes "U.S. money market funds and the European sovereign debt crisis". The article says, "The financial press recently reported that the U.S. Securities and Exchange Commission will be proposing in the coming weeks new restrictions on U.S. money market funds, including capital requirements and a 'liquidity fee' that would hold back a portion of a client's account for 30 days in the event of a redemption. Explaining the need for such proposals, SEC Chairman Mary Schapiro was quoted as saying that 'Money market funds remain susceptible to runs and to a sudden deterioration in quality of holdings, and we need to move forward with some concrete ideas for proposals to address these structural risks.'" It adds, "Although the SEC will likely propose new regulations for money funds, the ability of money funds to operate successfully through the European sovereign debt crisis calls into question the need for additional regulatory measures."

The Federal Reserve Bank of New York's "Statement on the Release of the Tri-party Repo Infrastructure Reform Task Force's Final Report" says, "Earlier today [Wednesday], the Tri-Party Repo Infrastructure Reform Task Force issued a report describing the status of industry efforts to reform the tri-party repo market. While the Federal Reserve commends the Task Force for its efforts to achieve systemic risk reduction in this market, much work remains to be done. The tri-party repo market is an important part of the U.S. financial system. However, as observed during the recent financial crisis, the tri-party repo market's infrastructure exhibits significant structural weaknesses that undermine market stability in a stressed environment. The Federal Reserve was forced to take extraordinary policy actions beginning in 2008 to counteract the effect of these flaws and avert a collapse of confidence in this critical financing market. These structural weaknesses are unacceptable and must be eliminated. The Task Force was formed to develop options to address three fundamental areas of concern identified by policymakers at the Federal Reserve: (1) market participants' overreliance on intraday credit from tri-party clearing banks, (2) risk management practices that are vulnerable to procyclical pressures, and (3) the absence of an effective and transparent process for the orderly liquidation of a defaulted broker-dealer's collateral. The Task Force released a set of recommendations in May 2010 to modify industry operations and practices to sharply reduce the market's dependency on intraday credit provided by clearing banks. At that time, the Task Force indicated that the industry would complete the recommended operational changes in 2011. This goal was not achieved.... Despite these accomplishments, the amount of intraday credit provided by clearing banks has not yet been meaningfully reduced, and therefore, the systemic risk associated with this market remains unchanged." See also, ICI's weekly "Money Market Mutual Fund Assets."

The Wall Street Journal writes "Money-Fund Plan Gets Cold Shoulder". It says, "Regulators' latest plan to shore up the $2.7 trillion money-market mutual fund industry is getting an icy reception from some individual investors. As part of a proposal being floated by the Securities and Exchange Commission, investors who wish to sell all their holdings in a money-market fund would only be allowed to receive 95% to 97% of their cash back immediately. The remaining money would be returned to them after 30 days, according to the SEC. That isn't sitting well with investors like Robert "Willie" Williamson, a 66-year-old retired Navy rear admiral who lives in Annapolis, Md.... The goal of the SEC's proposal, expected to be announced as soon as the end of March, is to make sure the funds, which are designed to be safe, have enough cash on hand to pay back all investors during a market storm. It also would require money funds to boost their capital cushions, an idea that is meeting stiff resistance from the fund industry. The SEC proposal is presenting a rare instance where money-management firms and some customers are united." The Journal adds, "Industry experts warn that funds still are struggling under the weight of the 2010 rules, which have forced some funds to hold lower-yielding securities -- at a time when interest rates are at multidecade lows. The yield on the Crane 100, an index of the 100 largest money funds, sunk to 0.06% at the end of January from 4.98% in January 2007, according to Crane Data LLC, a Massachusetts-based money-fund tracker. Assets in retail money funds have fallen to $939 billion at the end of last year from a 14-year-peak of $1.2 trillion in 2007, according to Crane Data. Peter Crane of Crane Data says low returns are the main reason investors are fleeing. "Retail investors have not blinked when it comes to safety issues in money-market funds," says Mr. Crane. "It's all about yield.""

St. Louis Post-Dispatch writes "Money market funds mix low yields with high controversy". It says, "Money-market funds aren't making much money for anybody right now, but they're becoming a hot issue in Washington. The Securities and Exchange Commission is about to propose rules designed to bolster confidence in the funds. Its goal is to prevent a repeat of 2008, when one fund's losses caused a run on other funds, forcing the government to implement a temporary insurance program. The SEC hasn't made a formal proposal yet, but the mutual fund industry is already accusing the agency of regulatory overkill. The industry worries that drastic changes could cause investors to pull out much of the $2.7 trillion they hold in money market funds. Certainly no one invests in money funds today for the yields, which average just 0.03 percent.... The SEC reportedly is considering three types of new rules: A floating share price, a 30-day hold on part of each investor's account, and higher capital requirements.... The fund industry is gearing up to fight the proposed rules. Paul Schott Stevens, president of the Investment Company Institute, a trade group, posted a commentary last week saying that the proposals would "drive fund sponsors out of the industry ... and leave the remaining sponsors with a product that few investors or their financial advisers will use." The piece quotes, "Peter Crane, founder of fund-tracking firm Crane Data, thinks none of the ideas will be implemented. SEC Chairman Mary Schapiro wants tighter regulations, but it's not clear whether she has enough votes on the commission, or whether the rules could withstand a legal challenge." Crane says, "The thought that the SEC is going to harm 30 million investors is ridiculous. It's one of the most powerful voting blocs in the country: people with money."

Treasury Strategies writes "Proposed Capital Requirement for Money Market Mutual Funds: A Disaster on All Fronts". The summary of the advertorial, which appeared in American Banker yesterday, says, "Treasury Strategies believes the capital requirement proposal will result in severe negative consequences for investors, fund advisors, businesses of all sizes, and the broader overall economy. We advocate that regulators abandon this proposal." The 5-page brief explains, "In response to recent calls by regulators to impose a capital requirement on money market mutual funds, Treasury Strategies, Inc. has prepared the following analysis and critique.... Regulators have periodically called for money market mutual fund (MMF) reforms, despite the industry's nearly flawless track record.... Although it has demonstrated remarkable reliability, the $2.6 trillion MMF industry is in danger of being dismantled, and its utility destroyed, by the current ill-considered reform proposals."

The Wall Street Journal continues its odd crusade against money funds in its latest editorial, "Money Fund Make-Over". It says, "Mary Schapiro, chairman of the Securities and Exchange Commission, is about to start a fight worth having with the providers of money-market mutual funds. Specifically, she aims to prevent a taxpayer bailout the next time this $2.7 trillion market runs into trouble. Ms. Schapiro will soon ask her fellow commissioners to issue two separate rule proposals. She will then seek to enact one or the other as a final regulation. The superior alternative is a plan to clarify for money fund customers that they are investing in securities that can rise and fall, as opposed to insured bank accounts. The other proposal would require funds to hold capital in reserve and limit customer redemptions, but it would fail to resolve the central problem with money funds." In other news, the Chicago Sun Times writes "Savers on losing team in fight over money-market fund rules", saying, "Well, if you're a saver in America, you should know how that football feels. You've been passed and carried around the turf without any power to change the outcome of the game. The current fight over the future of money-market mutual funds is just the latest play. Savers have already watched their yields crunched."

AP writes "Ill-timed fight erupts over money-market funds". The article says, "A fight is breaking out between the money-market mutual fund industry and federal regulators. Whatever the outcome, investors will question whether they can continue to rely on money funds as a safe place to keep cash readily accessible. The Securities and Exchange Commission staff is drafting proposals that Chairman Mary Schapiro says are needed to safeguard the industry and the investing public in the event of another financial crisis. It's an attempt to fix weaknesses exposed when a large money-market fund collapsed in 2008, creating a scare that led the government to temporarily guarantee money fund assets so investors could be assured they'd be protected from losses. Although the SEC strengthened its rules two years ago by further restricting how money funds operate, Schapiro says more needs to be done. There's still a risk, she says, that money funds won't be able to withstand a potential spike in investor withdrawals from another shock like the Lehman Brothers bankruptcy, the event that triggered the Reserve Primary Fund's failure.... The industry largely agreed with the rules adopted a couple years ago. Since then, money funds have held up to a host of threats, from the debt crisis in Europe, to last summer's downgrade of the federal government's credit rating and near-zero short-term interest rates that have left investors earning practically nothing. Now, months after Schapiro outlined more potential safeguards, the industry is objecting loudly. Industry leaders say the moves would undercut the key rationales for investing in money funds, rather than keeping cash in a bank. They warn that the proposed fixes will make money funds so unattractive that investors will begin to pull out of them altogether." In other news, see ICI's weekly "Money Market Mutual Fund Assets" report.

SunGard also published a "Cash Management Study". A press release entitled, "SunGard's Cash Management Investment Study Highlights Growing Importance of Money Market Funds for Corporate Treasurers," says, "SunGard has completed a cash management study that highlights the growing importance of money market funds (MMFs) among corporate treasurers. As economic and regulatory challenges create greater complexity in managing cash, treasurers have become aware of the importance of defining and delivering on the right investment policies. The survey findings provide insights into corporate cash investment policies and transaction methodologies, attitudes toward risk and return, preferred cash investment instruments, and potential shifts in investment decisions in the future. Responses were collected from 215 treasurers and cash managers at corporations across a wide range of industries and geographies.... Key findings of the report include the following: Bank deposits are the most popular investment type for 67% of respondents, followed by MMFs which are used 48% of respondents; While bank deposits will continue to form the mainstay of corporate investment policy, with more than 60% of respondents noting the importance of bank deposits in the future, this represents a drop by more than 6% from today's levels; More than half of the respondents that use MMFs identify them as an extremely important part of their future investment strategy, representing an increase of more than 6%. However, more than half of respondents reported that they do not currently use MMFs; Among those using MMFs, 37% access them via online portals." SunGard quotes Enrico Camerinelli, senior analyst at Aite Group, "Finding the appropriate repositories for cash and maintaining access to liquidity are the chief concerns of treasurers today. As bank deposits remain the mainstay, money market fund investments are growing on a global scale. While investors in the US and the UK have great familiarity with money market funds, standard definitions and availability of money market funds in Europe and Asia are now driving increased adoption, especially as fragile economic conditions will demand diversified cash investment policies. As confidence in money market funds grows, companies are likely to look to increase visibility, automation and auditability that online portals offer, particularly when integrated with a treasury management system." (Look for more excerpts from this study in coming days.)

Bloomberg writes "Fund Industry Rejects Money Market Proposals". It says, "The mutual fund industry rejected plans for new rules governing money market funds, escalating a three-year confrontation with regulators over how to make the investments safer.... The [ICI's] statement marks a shift to a more confrontational approach in a debate that has lasted for more than three years. The trade group said previously it might accept one of the plans the SEC's staff is likely to propose before the end of March. With new details of the plans emerging last month, the ICI is now on record opposing both." See also, The LA Times' "SEC working on new rules for money-market funds" and Dow Jones' "Money Market Proposal Complicates Commercial Paper Outlook".

Today's Wall Street Journal writes "U.S. Sets Money-Market Plan", which says, "Regulators are completing a controversial proposal to shore up the $2.7 trillion money-market fund industry, more than three years after the collapse of Lehman Brothers Holdings Inc. sparked a panic that threatened the savings of millions of investors and forced the federal government to intervene. The Securities and Exchange Commission in the coming weeks will unveil a two-part plan to stabilize money funds, which invest in short-term debt instruments and are designed to be safe and readily accessible to investors, according to people familiar with the matter. At least three of five SEC commissioners would need to approve the proposals to submit them for public comment.... The proposal, which is set to draw stiff opposition from financial groups and could create internal tensions at the SEC, would affect both fund firms and investors. Firms would have to set aside capital reserves using one of three new methods. Investors who wish to sell all of their holdings at once would be able to get only about 95% of their money back immediately, with the remaining 5% returned to them after 30 days." The Journal quotes SEC Chairman Mary Schapiro, "Money-market funds remain susceptible to runs and to a sudden deterioration in quality of holdings, and we need to move forward with some concrete ideas for proposals to address these structural risks."

Dow Jones writes "US Treasury Whets Appetite For Potential New Notes". It says, "The U.S. government is expected to add a new type of bond to its fund-raising repertoire in the not-so-distant future, exciting some money-market-fund managers about the extra slice of yield and diversity the instruments likely will offer. The Treasury Department's latest refunding release showed its advisory committee unanimously recommended including floating-rate notes on the menu of bond securities the government routinely auctions off. Floating-rate notes pay buyers a specific premium in addition to the fluctuating rate of a given index, such as the Federal Funds rate. A final decision on offering these notes is expected in May. Bill Irving, portfolio manager for Fidelity's Government Income fund, said the investment community was somewhat surprised the notes are already "pretty much a done deal," adding, "for money-market fund investors, it'll be an attractive way to pick up some incremental yield." In the report, the committee priced hypothetical two-year floating rate notes at the three-month bill yield plus eight basis points.... If the government ends up offering these notes maturing in two years or less, demand will most likely come from money-market funds, especially the ones that are only allowed to hold government paper. In general, these super-conservative funds are stuck loading up on U.S. T-bills that yield next to nothing after having to pare back exposure from European bank debt last year."

ICI's latest "Money Market Mutual Fund Assets" report says, "Total money market mutual fund assets decreased by $21.28 billion to $2.657 trillion for the week ended Wednesday, February 1, the Investment Company Institute reported today. Taxable government funds decreased by $14.90 billion, taxable non-government funds decreased by $5.74 billion, and tax-exempt funds decreased by $630 million. Assets of retail money market funds decreased by $4.51 billion to $926.52 billion. Taxable government money market fund assets in the retail category decreased by $2.01 billion to $194.20 billion, taxable non-government money market fund assets decreased by $1.76 billion to $537.35 billion, and tax-exempt fund assets decreased by $740 million to $194.97 billion.... Assets of institutional money market funds decreased by $16.77 billion to $1.731 trillion. Among institutional funds, taxable government money market fund assets decreased by $12.89 billion to $729.95 billion, taxable non-government money market fund assets decreased by $3.99 billion to $904.67 billion, and tax-exempt fund assets increased by $110 million to $96.26 billion." See also, IFR's "European banks stage US CP comeback".

Financial Planning writes "Do No Harm", subtitled, "The SEC should consider the consequences before it makes rules for money-market funds." Susan Wyderko writes, "SEC Chairwoman Mary Schapiro has made it clear that the commission is considering substantial reforms, including floating NAVs and capital buffer requirements, and that she anticipates the commission issuing a reform proposal "in very short order." These potential reforms appear to stem from concerns about the existence of investment risk in money-market funds -- a risk inherent in the very concept of investing. However, as the 2010 report by the President's Working Group on Financial Markets made clear, radical reform options may have serious collateral consequences. A floating NAV may decrease the attractiveness of money-market funds to investors, undermining the ability of these funds to provide the short-term credit and liquidity crucial to the operation of the financial markets. New capital buffers also could have negative consequences. As SEC Commissioner Daniel Gallagher has noted, "The level of capital that would be required to legitimately backstop the funds would effectively end the industry ... and I have doubts that a smaller cap that accrues over time would be sufficient to protect investors in funds in an actual crisis.""

Crane Data' Peter Crane and State Street Global Advisors' Jeff St. Peters are scheduled to speak at The Treasury Management Association of New England's (TMANE's) 27th Annual "Sources of Education" Conference to be held May 16-18, 2012 at the Boston Marriott-Copley Place. Crane is President & Publisher of Crane Data LLC and St. Peters is a Managing Director of State Street Global Advisors and a Senior Portfolio manager within the Global Cash Management division. Their session, "The New Look of Money Funds and Cash Markets," is scheduled on 5/17/2012 from 3:45-5:00. The talk's description says, "Following many months of regulatory changes and market turmoil, money market mutual funds and investors continue to adapt to the new realities of the cash investment marketplace. Hear from money fund expert Peter Crane and portfolio manager Jeff St. Peters on how the money markets have changed, and what investors should be looking for in analyzing their money funds and cash investments. The two will review recent trends, regulations, and concerns in the money markets."