Daily Links Archives: May, 2012

The Wall Street Journal writes "US Senate Panel Sets June Money-Fund Hearing". The article comments, "Securities and Exchange Commission Chairman Mary Schapiro will defend her push for additional reforms in the $2.6 trillion money-market mutual fund industry before a Senate Banking Committee hearing set for next month. The hearing, which is scheduled for June 21 but has yet to be publicly announced, marks heightened congressional scrutiny of regulators' calls for additional reforms in the money-fund space.... Schapiro, joined by Federal Reserve and Treasury Department officials, see money-funds as one of the weakest links in the financial system, despite 2010 reforms that increased money-fund resilience. Specifically, Schapiro has said she is concerned that funds remain susceptible to sudden drops in the value of securities they own. She also warns regulators no longer have access to the tools they used to buttress the industry in 2008.... Many of the panel's senators are seen as friendly to the fund-industry, which says new rules could damp returns for millions of investors, prevent them from getting all their money at once and spread systemic risk by driving investors to unregulated corners of the financial markets."

A paper entitled, "Runs on Money Market Mutual Funds", was recently published by Russ Wermers of the University of Maryland. The Abstract says, "This paper studies daily investor flows to and from each money market mutual fund during the nine-month period prior to and including the money fund crisis of September 2008. We focus on the determinants of flows in the prime money fund category to shed light on the covariates of money fund runs, since this category was, by far, the most heavily impacted by the money fund crisis. We find that institutional investors moved their money simultaneously (or with a one-day delay) into or out of prime money funds, especially within the same fund family complex. Specifically, during September 2008, flows in a given prime institutional fund are strongly correlated with same-day flows in all other same-complex prime institutional funds, indicating that the money fund crisis was especially focused on certain types of fund complexes. To illustrate, a daily outflow of 1% of total assets from other same-complex prime institutional money funds predicts, on average, a 0.92% outflow in a given prime institutional money fund during the same day; by contrast, prime fund flows are not correlated with same-day, different complex prime fund flows. We also find that investors are sensitive to the liquidity of money fund holdings: correlated flow patterns are less likely to occur in money funds with greater levels of securities with very short maturity (seven days or less). Our analysis also suggests that prime retail flows, to some degree, follow lagged prime institutional flows, although Treasury intervention ended the crisis before substantial retail "contagion" occurred."

Attorney Melanie Fein posted another diatribe recently on the SEC's President's Working Group Comment Page. This one, entitled, "How Can The Risk of Runs on Money Market Funds Be Reduced?," says, "The question "how can the risk of runs on money market funds be reduced?" assumes that money market funds are susceptible to runs. There is little evidence to support such an assumption. In the entire history of money market funds ("MMFs") in the United States, only one "run" on MMFs ever has occurred in which in a MMF broke a dollar. That run occurred during the week of September 15, 2008 amid an unprecedented breakdown of the entire financial system triggered by the Federal Reserve's unexpected failure to rescue Lehman Brothers and a loss of confidence that the government had a coherent strategy for averting a financial disaster. The Federal Reserve had all but declared that it would not allow a systemically important institution to fail, but then did just that with Lehman, sending the financial markets into a tailspin. Even so, only one MMF "broke a dollar" in the resulting tumult. That fund's shareholders ultimately got back 99 cents on the dollar."

Fitch says "U.S. MMF Reform Could Shift Corp. Cash Management". They write, "Fitch Ratings believes additional money market fund (MMF) reform has the potential to fundamentally change the nature of the MMF industry and, in turn, significantly affect corporate cash management practices. Holdings of cash and other liquid assets at U.S. nonfinancial corporations rose to $2.2 trillion in December 2011, up 18% from the end of 2010 according to the Federal Reserve's data. That was the highest level since the series began in 1945. A significant portion of this cash is held in banks' deposits, which was already swelling with deposits after the 2008 crisis. We attribute a large part of the growth of banks' deposit to the temporary unlimited government insurance covering non-interest-bearing checking accounts until Dec. 31, 2012. As a result, total insured bank deposits, including both corporate and retail, increased from $5.9 trillion in the second quarter of 2008 to $7.3 trillion at the end of June of 2011. We believe the expiration of unlimited government insurance for non-interest-bearing checking accounts could prompt corporate treasurers to seek diversification in their cash management options. We note that, in anticipation, asset management firms' are strategically repositioning liquidity management businesses in order to capture excess corporate cash. In particular, we believe further MMF reform will likely lead managers to expand their product offerings beyond MMFs, possibly resulting in one unintended consequence. A potential decrease in information transparency for short-term market participants and regulators could occur, should more cash be moved from highly regulated and transparent MMFs into other parts of the financial system. For example, corporate investors may shift liquid funds into separately managed cash accounts (SPA) as an alternative to MMFs." See also, ICI's Money Market Mutual Fund Assets.

Fitch Ratings has released a report entitled, "U.S. Money Funds and European Banks: Holding Pattern". Subtitled, "U.S. Money Funds and European Banks: Holding Pattern, it says, "Based on a sample of the 10 largest U.S. prime money market funds (MMFs), Fitch Ratings' study reveals several trends of note: On a dollar basis, MMF exposures to European banks declined marginally by 2% since end-March and remain roughly 50% below end-May 2011 levels. In a sign of continuing risk aversion, roughly one-third of MMF exposure to European banks was in the form of repos, the highest proportion observed over Fitch Ratings' period of study. Allocations to treasurys and agencies also remained elevated, representing about 20% of MMF holdings."

The New York Cash Exchange, one of the largest conferences for corporate treasurers, starts tomorrow at the New York Hilton. Crane Data is among the 50 companies exhibiting (almost 20 of them money fund or cash investment related). Peter Crane will present "Money Funds After the Makeover: Cash Investing Strategies" tomorrow at 2pm along with Federated Investors' Debbie Cunningham and Barclays Stewart Cutler. Other money fund related presentations include: Recent Regulatory Developments in the Money Market Fund Space by Roger Merritt of Fitch Ratings; The Cash Manager's Survival Guide: Are You Equipped for Unprecedented Volatility? by Michael Morin of Fidelity Investments; Why Companies are Holding Cash and What Will Get Them to Invest with Kirk Black of BNY Mellon, Timothy Hesler of McKinsey & Company, and Ronald Hill of BlackRock; Transparency in Money Funds -- The Movement Begins with Tom Nelson of Reich & Tang, and, How to Maximize Cash Today with Peter Rizzo of Standard & Poor's, Brandon Semilof of StoneCastle Cash Management and Henley Smith of Commonwealth Asset Management.

Federated writes "European banks are in better shape even if their economies aren't". The recent commentary by Debbie Cunningham and Bill Jamison says, "While European economies continue to struggle to break free from the economic doldrums that have plagued the continent, European banks have regained some of their financial footing over the past year. Part of the reason is that the banks have improved liquidity profiles through the European Central Bank's (ECB) extensive Long Term Refinancing Operation (LTRO) program, consisting of low-cost loans designed to free up the banks to make more loans to consumers and businesses. The ECB has been providing liquidity to the banks as a way to bridge the confidence gap in euro-zone economies. After a series of shorter-term operations that did not quite satisfy markets, the ECB stepped up and produced a three-year LTRO in December 2011, with 523 banks borrowing 489 billion euro, and a second three-year auction in February, during which 800 banks borrowed 530 billion euro. The intervention was viewed as positive by markets as the banks were able to prefund their 2012 maturing debt. What the banks did not do, however, was lend the funds out to businesses, so the intervention has not had a chance to move into the economy and spur growth, as had been expected.... A handful of money market funds chose to get out of European banks altogether during 2011, and a greater number got out of the French banks or cut back drastically. Federated, however, continues to see value in the use of select European senior bank debt. Cunningham noted that Federated money market funds invest primarily in the highest level of senior bank debt issued by institutions with operations that reach around the world."

The Minneanapolis Star-Tribune writes "Big deposits become a big problem for lenders". It says, "What next -- you get a toaster to go away? A small Bloomington-based lender has, in effect, started turning away money. Star Choice Credit Union recently mailed a short letter to about 20 customers informing them that it will no longer pay interest on the amounts they have above $100,000 in their money-market accounts." The article quotes a letter from President Daniel Christiansen, "With the recent inflow of money, we have found that we can no longer pay market or above market rates on these accounts.... We're just pretty well loaned out." The piece adds, "The move illustrates the pressure on lenders of all stripes, including prosperous ones like Star Choice, as they struggle to invest cash that wary customers have parked with them for safekeeping. With interest rates scraping bottom and loan demand tepid, there aren't many options for small lenders to wring profits from their customers' savings. Credit unions face an extra complication, in that they have special limits on the volume of business loans they can make."

ICI's most recent "Money Market Mutual Fund Assets" says, "Total money market mutual fund assets decreased by $5.35 billion to $2.563 trillion for the week ended Wednesday, May 16, the Investment Company Institute reported today. Taxable government funds increased by $2.79 billion, taxable non-government funds decreased by $8.01 billion, and tax-exempt funds decreased by $127 million. Assets of retail money market funds increased by $369 million to $889.88 billion. Taxable government money market fund assets in the retail category increased by $1.12 billion to $186.81 billion, taxable non-government money market fund assets decreased by $732 million to $515.99 billion, and tax-exempt fund assets decreased by $17 million to $187.08 billion.... Assets of institutional money market funds decreased by $5.72 billion to $1.673 trillion. Among institutional funds, taxable government money market fund assets increased by $1.67 billion to $685.39 billion, taxable non-government money market fund assets decreased by $7.28 billion to $901.03 billion, and tax-exempt fund assets decreased by $110 million to $86.95 billion."

Moody's Investors Service announced the launch of a new set of "quarterly reports on money market fund trends. The ratings agency says, "The new reports were published today with performance data for Q1 2012, and cover the three sub-segments of money market funds, denominated in US Dollar (USD), Euro and Sterling." The reports are entitled, "Sterling Prime Money Market Funds: Q1 2012 Trends," "Euro Prime Money Market Funds: Q1 2012 Trends," and "US-Dollar Prime Money Market Funds: Q1 2012 Trends." Yaron Ernst, Managing Director of Moody's Managed Investments Group, comments, "Our new quarterly MMF reports track the evolution of the analytical components that drive our ratings of money market funds. These reports were designed to give investors and fund managers a better view of the sector trends, through the analytical metrics that Moody's looks at."

Late last week, S&P published, "A Supervisory Framework For U.S. Shadow Banking Is Progressing Slowly". It says, "The term "shadow banking" first became prevalent in the aftermath of the financial crisis, and it lacks a universally consistent definition. In Standard & Poor's Ratings Services' view, shadow banking is credit intermediation (involving activities and entities) outside the regular banking sector, as the Financial Stability Board (FSB) defines. Shadow banking encompasses not only special-purpose vehicles that are beyond the Federal Reserve's supervision (such as money market funds and government-sponsored enterprises) but also specific instruments such as swaps, repurchase agreements, and asset securitizations. However, the term can oversimplify investment vehicles and products that are complex and interact very differently with the formal banking system. Investors seem to be asking two key questions about shadow banking. The first is to what extent shadow banking might replace traditional banking in the U.S. financial sector. Fed data suggest that this has yet to happen. The second question is whether banking regulators will effectively and quickly implement a supervisory framework that can contain systemic risk by eliminating regulatory arbitrage and providing greater transparency. Banking regulators are taking steps toward this, though they recognize that they still have work to do. We believe swathes of shadow banking activity (in both new and existing forms) will continue to operate outside the reach of regulators once the economic recovery firms up."

"Moody's: SIFI designation still unclear for asset managers and money funds" says a press release sent out by the ratings agency yesterday. It explains, "Asset managers or money market funds that are designated as systemically important financial institutions, or "SIFIs" may be subject to new requirements regarding capital and operations, as well as heightened supervision, says Moody's Investors Service in its new report. On April 3, 2012, the Financial Stability Oversight Council (FSOC) issued a final rule and interpretive guidance under the Dodd-Frank Act outlining the process for designating systemically important non-bank financial institutions. But quantitative thresholds are still evolving and the regulations are still preliminary." Report author Dagmar Silva comments, "We expect that designated asset managers or funds would see some form of regulation affecting the capital requirement, governance and operations, which would bolster their creditworthiness, but could put them at a competitive disadvantage to peers." The release adds, "Some of the largest asset managers and money market funds (MMFs) are likely to be designated SIFIs, but which ones remain unclear, says Moody's. It is also not clear what would be the final requirements imposed on designated asset managers or MMFs. The report is entitled, "Systemically Significant Financial Institution (SIFI) Designation Still Unclear for Asset Managers and Money Markey Funds".

A press release entitled, "Deutsche Bank and Guggenheim Partners focus their discussions on a potential sale of RREEF," says, "Deutsche Bank announced today that its Management Board, which initiated a strategic review of its global Asset Management division on November 22, 2011, has agreed to focus its exclusive negotiations with Guggenheim Partners on a potential sale of RREEF, its global alternative asset management business. The Bank and Guggenheim Partners mutually agreed to end exclusive negotiations about a potential sale of DWS Americas, the mutual fund business in the Americas; DB Advisors, the global institutional asset management business; and Deutsche Insurance Asset Management, the global insurance asset management business. Deutsche Bank will continue to evaluate these businesses and is fully committed to maintaining the stability of its investment teams and to ensuring that clients continue to receive the highest level of quality in investment management services." DB Advisors is the 17th largest manager of U.S. money market funds with $43.4 billion as of April 30, according to Crane Data's Money Fund Intelligence XLS.

Federated Investors President & CEO J. Christopher Donahue writes "Regulators' Criticism of Money Market Funds -- Long on Myth, Short on Facts on The Huffington Post. He writes, "Washington regulators, from the Federal Reserve to the SEC, continue to take to the speaking circuit and the airwaves delivering myths about money market funds and citing recent history as their rationale for proposed rules that will destroy the funds' functionality, utility and effectiveness. For 50 million investors and the multitude of municipalities, corporations and other entities which depend on money market funds for efficient funding, it is crucial to set the record straight. Regulators cannot just ignore the facts or take potshots at a money market system that is vital to the American economy." Also, see ICI's latest weekly "Money Market Mutual Fund Assets" release says, "Total money market mutual fund assets increased by $1.19 billion to $2.569 trillion for the week ended Wednesday, May 9, the Investment Company Institute reported today. Taxable government funds decreased by $2.40 billion, taxable non-government funds increased by $5.03 billion, and tax-exempt funds decreased by $1.43 billion."

Dow Jones writes "Former Fed Chair Volcker Warns on Money Market Funds". It says, "Stronger oversight and regulation of the money market mutual fund industry is likely needed, former Federal Reserve Chairman Paul Volcker warned lawmakers in testimony prepared for a Senate hearing Wednesday. Echoing similar warnings from Fed Chairman Ben Bernanke and other Fed officials, Volcker said that regulators must continue their efforts to shore up the nearly $3 trillion money market mutual fund industry, warning of its lingering vulnerabilities." Volcker's remarks say, "The time has clearly come to harness money market funds in a manner that recognizes both their structural importance in diverting funds from regulated banks and their destabilizing potential.... If indeed they [the funds] wish to continue to provide on so large a scale a service that mimics commercial bank demand deposits, then strong capital requirements, official insurance protection, and stronger official surveillance of investment practices is called for.... Simpler and more appropriately, they should be treated as ordinary mutual funds, with redemption value reflecting day by day market price fluctuations." See too C-SPAN's "Senate Hearing on Federal Support for Financial Institutions", which features Treasury Strategies' Tony Carfang testifying. (Click on the "Video Playlist" link, "Senate Hearing on Financial Institutions" and go to the 1:39 mark.)

A press release Monday entitled, "BNY Mellon Adds Automated Notification Enhancements to Margin DIRECT Liquidity Management Product," says, "BNY Mellon, the global leader in investment management and investment services, today announced a series of technological enhancements to the notification capabilities of its patent pending Margin DIRECT liquidity management product. Margin DIRECT combines BNY Mellon's custody and liquidity management capabilities for institutional investors looking for segregation of pledged collateral balances away from counterparties. The new enhancements enable Margin DIRECT users to provide counterparties with electronic notification of certain critical events such as notices of exclusive control and termination events. These electronic notifications provide a timely and cost-effective alternative to written notices." It quotes Jonathan Spirgel, "It's essential to anticipate client needs, and post Dodd-Frank, demand for segregation of collateral and margin services will continue to grow. Our patent pending Margin DIRECT product is an innovative technological solution that builds on our industry leading custodial and liquidity services and makes us uniquely qualified to meet these clients needs head on." The release adds, "BNY Mellon developed Margin DIRECT by combining two of its industry-leading services -- custody and its Liquidity DIRECT liquidity management portal -- into a single comprehensive solution. Margin DIRECT provides both safekeeping and liquidity management controls for posted margin balances away from an institutional investor's counterparties, with balances held in custody and directed via a user-friendly online portal for investment to an extensive array of client-selected liquidity investment products."

The Wall Street Journal writes "Regulators Seek Plan B on Money Funds". The article says, "Federal regulators are increasingly worried that the Securities and Exchange Commission could fail to complete more-stringent rules on money-market mutual funds, forcing officials to confront how else to rein in the $2.6 trillion industry. While financial regulators would prefer the SEC to act on its own, some officials behind the scenes have started to investigate whether the Financial Stability Oversight Council, a special panel created by the 2010 Dodd-Frank financial overhaul, could act if the SEC can't agree on a proposal to shore up funds or reduce risk, according to people familiar with the situation. No formal discussion of FSOC action has taken place, the people said.... Behind the scenes, anxiety about the standoff has led some regulators to look closely at what other options the Dodd-Frank law provides. There appears to be no clear way to deal with the money funds short of having the FSOC designate each individual fund company as "systemically important" and thus subject to stricter regulation, according to people familiar with the situation. Regulators believe that the approach would be a long and politically difficult undertaking and would produce an inferior result compared to the SEC adopting new regulations, these people said. For instance, it could be difficult for regulators to designate all money funds. But internal pressure for the FSOC to act will continue to mount if it becomes clear the SEC won't be able to act, these people said."

Investment News writes "Dems join opposition to fund reform". It explains, "Democrats are joining Republicans in putting pressure on the Securities and Exchange Commission not to tighten regulations governing money market funds. In a move similar to the bipartisan opposition to a pending Labor Department regulation that would expand fiduciary-duty requirements for retirement plans, Democrats have added their voices -- and signatures -- to what initially looked like familiar Republican and industry skepticism of a regulatory proposal. Last Tuesday, 18 Republicans and 15 Democrats -- all former state and local officials -- sent a letter to SEC Chairman Mary Schapiro warning her that changes in money market funds will make raising money for infrastructure projects more difficult. When she appeared at an April 25 hearing of the House Capital Markets Subcommittee, Ms. Schapiro heard a couple of Democrats -- in addition to Republicans -- warn her to tread carefully."

Crane Data released a "beta" version of its latest product enhancement, the Money Fund Portfolio Laboratory this week. Designed as an online complement to our Money Fund Portfolio Holdings dataset, the Portfolio Laboratory allows subscribers to our Money Fund Wisdom service to build custom aggregate money fund portfolios and to "X-ray" and analyze the underlying holdings by country, issuer, maturity and category. Choose "Laboratory Beta" underneath our "Wisdom" menu to explore this new feature, or e-mail Pete for demo access or more details. In other news, ICI's latest "Money Market Mutual Fund Assets" says, "Total money market mutual fund assets decreased by $14.78 billion to $2.567 trillion for the week ended Wednesday, May 2, the Investment Company Institute reported today. Taxable government funds decreased by $3.51 billion, taxable non-government funds decreased by $12.39 billion, and tax-exempt funds increased by $1.12 billion."

A release entitled, "Reval and ICD Partner to Provide STP of Money Market Fund Investing for Companies Globally" states, "Money Market Funds (MMFs), one of the most commonly used corporate investment vehicles globally, can now be more effectively researched, traded and managed alongside an array of cash and risk activities and instruments with the straight-through processing (STP) capabilities made possible through a new partnership between Reval and Institutional Cash Distributors (ICD), the companies announced today.... Reval's deep integration with ICD's MMF trading platform, which includes ICD's exposure analytics application, Transparency Plus(R), enables treasurers to centrally view excess cash positions globally and seamlessly trade institutional MMF investments through a single sign-on from Reval." See also, WSJ's "U.S. Considers Notes That Float", which says, "After a series of meetings early this week, Treasury officials will decide whether to start issuing floating-rate debt for the first time ever."

WSJ writes "Schapiro Urged to Back Off Money-Fund Plan". It says, "Opposition to a Securities and Exchange Industry plan to tighten regulations on the U.S. money-market fund industry is intensifying, driving even some supporters to concede that a revamp isn't likely to advance. The mutual-fund industry is enlisting former mayors and state treasurers now serving in Congress to fight proposed changes to money-market fund rules, a strategy that could rally large numbers of lawmakers against the plan. Industry lobbyists have persuaded 33 Republican and Democratic lawmakers who served in state or local government to sign a letter to Securities and Exchange Commission Chairman Mary Schapiro warning against her plan to shore up the $2.6 trillion money-market mutual-fund industry. The letter from the Investment Company Institute raises concerns that her proposals "would alter the fundamental structure" of money-market funds and drive investors to "other less-regulated products," thereby dampening the demand for certain debt securities local governments use to fund infrastructure projects, according to a final draft seen by Dow Jones Newswires."

Moody's Investors Service released a study, "Money Market Funds: US-Dollar Prime Funds' Credit and Liquidity Profiles Remained Resilient Throughout 2011," says, "The credit profiles of prime rated US-dollar-denominated money-market funds (MMFs) remained resilient over H2 2011, as funds adopted conservative management styles and significantly increased their investment in Aaa-rated government securities. Exposure to Aaa, Aa1 and Aa2-rated securities accounted for more than 59% of assets under management at the end of 2011, compared with 48% six months earlier. Prime funds drastically reduced their exposures to European banks. Overnight liquidity of this segment remains high: 38% on average in H2 2011 compared to 32% during H1 2011. Liquidity has increased in light of the ongoing market anxiety surrounding euro area debt crisis. generally -- and French banks in particular -- both in terms of aggregate exposures and duration, down to US$185 billion as of December 2011 from US$425 billion in January 2011. During Q4 2011, funds reduced their sensitivity to market risk, and maintained on average a stressed NAV level above 0.995." See also, "Money Market Funds: Euro Prime Funds Maintained Stable Credit and Liquidity Profiles Throughout 2011" and "Money Market Funds: Sterling Prime Funds Reduced Sensitivity to Market Risk in 2011."