Daily Links Archives: June, 2012

The Wall Street Journal writes "Schapiro: Money-Fund Plan Would Give Funds Options". It says, "A Securities and Exchange Commission plan to shore up the $2.5 trillion money-market fund industry would give funds a choice between holding more capital and being more transparent to investors about fluctuations in the value of their holdings, SEC Chairman Mary Schapiro said Thursday. Money funds, under a plan being reviewed by the SEC's five commissioners, would have the option of maintaining a small capital cushion coupled with restrictions on investors seeking to pull out their money or abandoning the stable $1-per-share net asset value that funds strive to maintain, Ms. Schapiro said in a U.S. House hearing." The Journal quotes Schapiro, "Those would be choices that funds could choose between." It adds, "Talking to reporters after the hearing, Ms. Schapiro declined to give further details other than indicating that the size of the capital buffer would be far less than the 3% to 5% that some critics had feared." See also, Bloomberg's "The SEC Chairman's Crusade for Money-Fund Safety".

Another post to the SEC's "President's Working Group Report on Money Market Fund Reform (Request for Comment)" webpage was submitted by Melanie L. Fein of Fein Law Offices. She writes to Daniel Tarullo of the Board of Governors of the Federal Reserve System, "Your speech entitled "Shadow Banking After the Financial Crisis" delivered on June 12, 2012 continues the Federal Reserve's campaign of misinformation and misguided proposals concerning the role of money market funds ("MMFs") in the financial system. You attempt to fit MMFs into a description of the "shadow banking system" that simply does not reflect their activities and operations. MMFs are not shadow banks. They lack the attributes of either banks or shadow banks. The institutions that are most heavily engaged in "shadow banking" activities are banks themselves and their affiliates, as I show in my paper "Shooting the Messenger: The Fed and Money Market Funds," a copy of which I have enclosed.... MMFs are almost completely unleveraged. Banks and bank holding companies leverage their capital approximately ten to one.... Because MMFs do not leverage their capital, they do not "create money" in the way that banks do and they thus do not create systemic risk the way banks do. You point to a historically isolated event affecting MMFs during the financial crisis as a justification for drastic reforms that industry experts say would incapacitate MMFs -- namely, the breaking of a dollar by the Reserve Primary Fund. You assert that "the most acute phase of the crisis" was precipitated by a "disastrous run" on MMFs. You fail to mention the devastating runs on over-leveraged bank-sponsored asset-backed commercial paper ("ABCP") in 2007 that left the banking system effectively insolvent and marked the beginning of the crisis, without any run on MMFs. You point to a "general run on money funds" after a single MMF broke a dollar in 2008 but nowhere do you mention the word "Lehman" or allude to the Fed's disastrous decision to allow a systemically important financial institution fail contrary to expectations it created."

The American Enterprise Institute (AEI) will host a seminar entitled, "Do money market funds create systemic risk?" on Thursday, June 28 at 2pm. The description says, "Following the bankruptcy of Lehman Brothers in September 2008, one primary money market fund (MMF) "broke the buck" and set off a run on other similar funds. The U.S. Treasury temporarily insured MMFs to stem redemptions. In January 2010, the SEC changed the regulations governing MMFs to provide for more liquidity and disclosure of the potential risks associated with MMF investments. Still, recent speeches by Federal Reserve officials have suggested more needs to be done and carried the veiled threat that, if the SEC does not take the necessary actions, the Financial Stability Oversight Council may find that some funds threaten the stability of the U.S. financial system and place them, along with other large financial firms, under Fed supervision and regulation. This discussion will consider whether MMFs require some capital backing and are suitable candidates for SIFI treatment." The seminar will be moderated by AEI's Peter Wallison and will feature Melanie Fein of the Fein Law Office, as well as panelists Jeffrey Gordon of Columbia University, Edward Greene of Cleary Gottlieb Steen & Hamilton, and Paul Stevens of the Investment Company Institute.

Crane Data has posted the recordings, Powerpoints and binder from last week's Crane's Money Fund Symposium. The sessions are available to attendees and to Crane Data subscribers. (Access and binders may be purchased by non-attendees and subscribers for $375.) Money Fund Symposium was held June 20-22 at the Pittsburgh Westin; next year's event has been scheduled for June 19-21, 2013, at the Baltimore Hyatt Regency. In other news, The Baltimore Sun writes "Md. firms, treasurer balk at proposed money market regulations". It says, "Battle lines are being drawn over whether money market funds need more protection in the event of another financial crisis. Maryland investment firms and the state treasurer are on one side of the fight; the SEC chairman is on the other. Baltimore's T. Rowe Price is working through the Investment Company Institute, a trade group for mutual fund companies, which maintains that reforms adopted two years ago, after the last crisis, are sufficient. Legg Mason's CEO said last month that the Baltimore-based investment company might reconsider its commitment to the money market fund business if additional changes proved too drastic. And last week, Maryland's treasurer, Nancy Kopp, testifying before a congressional committee, warned that any changes to existing regulations could raise costs for states and create too large an accounting burden."

"Money-Fund Vote Is Sought" writes the weekend Wall Street Journal. The article says, "The head of the Securities and Exchange Commission is pushing her divided agency toward a vote on tougher rules for the $2.6 trillion money-market mutual-fund industry, according to government officials familiar with the matter. The vote would force SEC Chairman Mary Schapiro's four fellow commissioners to take a public position on the issue, with the goal of breaking a month's long impasse that has prevented Ms. Schapiro from advancing the new rules." Also, on Friday, The Wall Street Journal featured the editorial "A History of Money Funds". It says, "Opponents of reforming money-market funds need to make up their minds. Staying abreast of their contradictory arguments is harder than tracking which celebrities are dating a Kardashian." See also, Sunday's NY Times' "Suggested Safeguards Irk Fund Industry". Finally, see the archived webcast of last week's Senate Banking Committee hearing, "Perspectives on Money Market Mutual Fund Reforms".

ICI writes "Is SEC Data Misleading the Public on Sponsor Support of Money Market Funds?" Economist Sean Collins writes, "In her testimony at a hearing today before the Senate Banking Committee, Securities and Exchange Commission (SEC) Chairman Schapiro made this statement. "Based on an SEC staff review, sponsors have voluntarily provided support to money market funds on more than 300 occasions since they were first offered in the 1970s." The SEC has not released its analysis, so we do not know precise dates or what exactly is being measured or counted. Nevertheless, we believe the estimate of 300 occasions is highly misleading.... An August 9, 2010, report by Moody's Investors Service identified 181 cases in which U.S. funds had received "support" from their sponsors over the period from 1980 to August 2009. The bulk of these 181 instances (137 or 66 percent) occurred before the year 2000. Indeed, 60 percent of these events (108) occurred in 1994 or before. In other words, they took place either before the SEC significantly tightened the risk-limiting provisions of Rule 2a-7 in 1991 for taxable funds, or before it tightened the application of Rule 2a-7 to tax-exempt funds in 1996 and 1997. These facts serve to highlight a key question. Why, as Chairman Schapiro's testimony suggests, did the SEC staff start its count of instances of fund sponsor support in 1971? ... Whatever the correct figure for the crisis period, it is important to understand why money market fund sponsors occasionally provide support and what constitutes "support." The fact that a fund sponsor provides support does not necessarily mean that the fund is in danger of breaking the dollar. Sponsors may provide support for a number of reasons, including avoiding headline risk of a particular security or securities, to maintain a AAA credit rating for a money market fund, or to respond to investors' concerns regarding their degree of comfort with particular securities.... Until the SEC provides the data backing its analysis, we won't know how many of these conditional support agreements ultimately required sponsors to actually provide support. To the extent that support did materialize, we do not know from SEC statements whether it was significant or de minimis. Finally, we do not know whether any support that materialized actually led to losses among sponsors, or whether the securities that sponsors may have supported simply matured at par without loss."

Preliminary results from the 2012 AFP Liquidity Survey say, "If money market mutual funds (MMFs) shift to a floating net asset value (NAV), impose redemption holdbacks or seek additional reserve capital through fees, corporations say they would stop investing in these vehicles and would most likely reduce or fully liquidate their holdings, according to data released June 20 by the Association for Financial Professionals (AFP). Preliminary results from the 2012 AFP Liquidity Survey, found that organizations would be less willing to invest in MMFs and/or would reduce/eliminate their holdings of MMFs in their short-term investment portfolio under three regulatory reform proposals, which are reported to be under consideration by the U.S. Securities and Exchange Commission. Results of the full survey, which covers a broad range of liquidity issues that affect corporate treasurers, will be released in July." In other news, see NY Times' "Money Market Funds Still at Risk, S.E.C. Chief Says", "Federated's Donahue: Size of Money-Market Funds Shows Resilience", and "SEC Builds Money Fund Case".

The Senate Committee on Banking, Housing and Urban Affairs is hosting "Perspectives on Money Market Mutual Fund Reforms" on Thursday, June 21, 2012 from 10:00am-12:00pm. The description says the Committee "will meet in OPEN SESSION to conduct a hearing entitled "Perspectives on Money Market Mutual Fund Reforms." The witness on Panel I will be The Honorable Mary Schapiro, Chairman, U.S. Securities and Exchange Commission. The witnesses on Panel II will be: The Honorable Nancy Kopp, Treasurer, State of Maryland; Mr. Paul Schott Stevens, President, Investment Company Institute; Mr. J. Christopher Donahue, President, CEO and Director, Federated Investors, Inc.; Mr. Bradley S. Fox, Vice President and Treasurer, Safeway, Inc.; and Professor David S. Scharfstein, Edmund Cogswell Converse Professor of Finance and Banking, Harvard Business School. In other news, see Investment News' "SEC staff ready to roll with money market proposal -- but is Schapiro?".

A press release says, "The U.S. Chamber of Commerce's Center for Capital Markets Competitiveness (CCMC) released today a white paper titled, "Money Market Mutual Fund Reform: The Dangers of Acting Now," which examines the impacts of possible reforms to money market mutual funds (MMMFs) on businesses, municipalities, individual investors and the overall economy. The paper, authored by Georgetown University Professor James J. Angel, finds that contemplated reforms intended to reduce the chance of runs on MMMFs could, in fact, have the opposite effect and increase systemic risk. Reforms could have far reaching consequences well beyond the fund industry. The paper warns that the dangers of acting now include: Shrinking and fundamentally altering the MMMF industry; Significantly higher interest rates for issuers of commercial paper; Higher costs for state and local governments, pressuring them to increase taxes; Higher borrowing costs for corporations and governments, dampening economic recovery; An increase in systemic risk and pressure on capital adequacy for big banks; and, Decreased yields for retail investors."

A press release entitled, "Fitch Study of MMF Shadow NAV Shows Stability," says, "Fitch Ratings recently updated its study of U.S. prime money market funds' (MMFs) "shadow" net asset values (NAV), underscoring that volatility of MMFs' NAV has declined significantly since the 2007-2009 financial crisis and has held up through the recent Eurozone crisis and other stresses. We believe the stability shown by MMFs is due to high credit quality of portfolio holdings, heightened risk-aversion by MMF shareholders and managers, and, importantly, the introduction of MMF regulatory reform (Rule 2a-7 amendments) by the Securities and Exchange Commission (SEC) in May 2010. An important part of the 2010 MMF reform was the introduction of mandatory liquidity buffers, which were put in place in order to honor redemptions without reliance on the secondary market. Taxable MMFs are required to maintain minimum daily and weekly liquidity reserves of 10% and 30%, respectively. In practice, Fitch-rated prime MMFs invested over 30% of their assets in daily liquid instruments and over 43% of their assets in weekly liquid instruments at the end of April 2012. These liquidity cushions have proved to be sufficient to accommodate the investors' cash flows despite the Eurozone crisis, negative credit migration among global financial institutions, and the longer term fiscal trends facing the U.S. The shadow NAV offers investors an appraisal of the market value of a MMF's underlying assets on a per-share basis. As long as the NAV does not deviate by more than 50 basis points, the fund's $1.00 stable share price is maintained. Under new guidelines imposed by the SEC in May 2010, shadow NAVs for all U.S. MMFs are now publicly available, albeit it with a 60-day lag." See also, ICI's "Money Market Mutual Fund Assets."

We look forward to seeing many of you next week at our annual Crane's Money Fund Symposium in Pittsburgh. We're planning for a record turnout (estimating 450 and possibly approaching 500) for our 2012 Symposium, which will be held June 20-22, 2012, at The Westin Convention Center in Pittsburgh. (Crane Data's big annual money fund event attracted 395 speakers, sponsors, and attendees in Philadelphia last year.) For the full agenda and for more information, visit www.moneyfundsymposium.com. Registrations are still available though hotel reservations have gotten difficult (due to record demand and due to the NHL Draft being in Pittsburgh next weekend). Crane's Money Fund Symposium offers money market portfolio managers, investors, issuers, and service providers a concentrated and affordable educational experience, as well as an excellent and informal networking venue. Registration for Crane's Money Fund Symposium 2012 is still $750; exhibit space is $3,000; and sponsorship opportunities are $4.5K, $6K, $7.5K, and $10K. Our mission is to deliver a better and less expensive conference alternative to money market fund professionals and investors, and we hope to see you in Pittsburgh this summer! Crane Data is also assisting German conference company IQPC with a new European Money Fund Summit, which is tentatively scheduled for November 19-20, 2012, in Frankfurt, Germany. Finally, mark your calendars for next year's Money Fund University, which is tentatively scheduled for Jan. 23-24, 2013, in New York City, and for next year's Money Fund Symposium, which will be in Baltimore, June 19-21, 2013. (Watch for coverage from the Symposium late next week.)

Another comment posting to the SEC's President's Working Group Report on Money Market Fund Reform (Request for Comment) page comes from Tony Carfang, Partner, and Cathy Gregg, Partner, Treasury Strategies, Inc.. He writes, "Money Market Funds (MMFs) are important short-term cash management vehicles for our corporate consulting clients. As such, our firm has paid close attention to financial reform rulemaking and regulatory changes related to MMFs. We are concerned that MMFs are the subject of undue regulatory focus, perhaps because they have been misidentified as a proximate contributor to the financial crisis. Our analysis shows something quite different: MMFs were only tangentially involved in the crisis, and several much more significant events should be given much weightier consideration than MMFs. The attached document highlights some straightforward and important facts: Investment dollars actually started seeking higher ground in 2007...."

Monday's Wall Street Journal contains the editorial "Republicans Against Reform". It says, "Republicans claim to oppose the political favoritism of the Obama Administration, but that isn't always the case. Consider the effort in Congress to defend the taxpayer-protected business model of money-market mutual funds. Securities and Exchange Commission Chairman Mary Schapiro has been trying to change money-fund rules to protect taxpayers from bailouts like the ones they underwrote in 2008. But last week Jo Ann Emerson (R., Mo.), a baron at the House Appropriations Committee, added a provision in a funding bill that would require the SEC to study the issue again. The idea is to push any reform past the election and perhaps to a new SEC chairman. Taxpayers don't need another study to confirm that they shouldn't have to stand behind this market. Ms. Schapiro is trying to fix a current SEC rule that allows money funds to use an accounting fiction and pretend that their net asset values never change, even though the prices of their underlying securities do fluctuate. This accounting gimmick has allowed fund operators to present to investors a picture of stability, as if money funds are as safe as bank accounts."

ICI's latest weekly "Money Market Mutual Fund Assets" update says, "Total money market mutual fund assets decreased by $8.04 billion to $2.564 trillion for the week ended Wednesday, June 6, the Investment Company Institute reported today. Taxable government funds increased by $10 million, taxable non-government funds decreased by $9.37 billion, and tax-exempt funds increased by $1.32 billion." It explains, "Assets of retail money market funds increased by $2.88 billion to $890.35 billion. Taxable government money market fund assets in the retail category increased by $530 million to $187.66 billion, taxable non-government money market fund assets increased by $1.07 billion to $515.93 billion, and tax-exempt fund assets increased by $1.28 billion to $186.77 billion. Assets of institutional money market funds decreased by $10.92 billion to $1.674 trillion. Among institutional funds, taxable government money market fund assets decreased by $530 million to $681.53 billion, taxable non-government money market fund assets decreased by $10.44 billion to $906.06 billion, and tax-exempt fund assets increased by $50 million to $86.41 billion. ICI reports money market fund assets to the Federal Reserve each week. Revisions are due to data adjustments, reclassifications, and changes in the number of funds reporting. Weekly money market assets for the last 20 weeks are available on the ICI website."

Bloomberg writes "Duke, GE Tempt Savers With Higher Yield Than Money Funds". The article says, "Duke Energy Corp., Ford Motor Co. and General Electric Co. are enticing a growing number of individuals to buy their debt through investments pitched as higher-yield alternatives to checking accounts and money funds. These and other companies that sell the debt, called floating-rate demand notes, are exploiting frustration with money-market funds paying an average 0.03 percent as of May 29 and bank savings accounts at 0.13 percent. The notes, which usually require a minimum deposit such as $500 or $1,000 and offer checks to access the money, are paying 1 percent to 1.6 percent." The Bloomberg piece adds, "The notes help companies diversify their funding, which is skewed to securities such as commercial paper and bonds bought mainly by institutions. For retail investors, they provide less protection than an insured bank account or a money fund that holds debt from many issuers. The notes aren't secured."

Vanguard's CIO Gus Sauter is the latest to write a comment letter to IOSCO and the SEC. He says, "As IOSCO begins to consider which money market fund reform measures it will recommend to the Financial Stability Board, we believe the recommendations must be informed by what occurred in 2008. First, only one money market fund "broke the buck." Shortly thereafter, in an environment where multiple financial institutions were failing, many institutional money market funds experienced large-scale redemptions and other money market funds faced reduced liquidity for the securities of otherwise credit-worthy issuers. Due to this market-wide illiquidity, some money market funds were not able to raise cash to satisfy investor redemptions. For all but one fund, the 2008 financial crisis was a liquidity -- not credit -- crisis, stemming from investors' lack of confidence in certain significant financial institutions and, particularly in the U.S., uncertainty about the Federal Reserve's willingness to act as a lender of last resort. The 2008 financial crisis revealed a weakness in the then-prevailing U.S. money market fund regulations, which did not explicitly require liquidity thresholds for money market funds. As detailed in Appendix A, recent changes in U.S. money market fund regulations have greatly improved the funds' resiliency by addressing their ability to satisfy large redemption requests. These initiatives have made money market funds self-provisioning for liquidity, reducing the likelihood that a future systemic market disruption would threaten the liquidity of these funds and require government support."

Bloomberg writes "Paulson Backs Schapiro's Bid for SEC Rules on Money Market Funds". The article says, "Former Treasury Secretary Henry Paulson is backing U.S. Securities and Exchange Commission Chairman Mary Schapiro's effort to impose new rules on money- market funds. In a letter that the SEC published May 30 on its website, Paulson highlights excerpts of his 2010 book, "On the Brink," which provides his account of the financial crisis. Paulson's letter covered the period between Sept. 16 and Sept. 19, 2008 when Bank of New York Mellon Corp., BlackRock Inc. and Northern Trust Corp. reported requests for "billions in redemptions" from their money funds. Such requests exacerbated a credit crisis that began earlier that month, he wrote." The Bloomberg piece adds, "He encouraged Schapiro to use his letter to help bolster her argument that money-market funds should face tougher regulations. He did not immediately respond to an e-mail request for comment about the letter." "You should feel free to use this any way which helps you secure this important reform, including quoting from it, or sharing all or part of it with the press or members of Congress," Bloomberg says Paulson wrote in the letter dated Feb. 22."

A statement from the International Organization of Securities Commissioners entitled, "IOSCO Extends the Deadline for Comments on Its Consultation Report on MMFs" says, "The International Organization of Securities Commissions (IOSCO) has announced today that it has extended by one month the consultation period for its report on Money Market Fund Systemic Risk Analysis and Reform Options. IOSCO had received a number of requests to extend the original one month consultation period in order to allow respondents to comment in greater detail. Given the importance of the subject IOSCO has decided to provide more time for responses. The new closing period for comments is now Friday 29 June 2012, 18h00, CET. The report provides a preliminary analysis of the possible risks that money market funds (MMFs) could pose to systemic stability and consults on a range of policy options to address those risks. Comments should be sent to MoneyMarket@iosco.org, and any request for further information directed to Mohamed Ben Salem, `m.bensalem@iosco.org."

The U.S. Chamber of Commerce released a "Coalition Letter Regarding Money Market Mutual Funds" signed by more than 115 companies and organizations and addressed to the SEC's Mary Schapiro late Thursday. It says, "The undersigned organization and businesses strongly urge the Securities and Exchange Commission (SEC) to refrain from making further regulatory changes to money market mutual funds (MMMFs) that would fundamentally alter their structure and characteristics. Current rules governing MMMFs -- updated as recently as 2010 -- strike the appropriate balance between risk and return, while the regulatory changes under discussion at the SEC would significantly undermine the value and utility of MMMFs, discouraging corporate, municipal, and individual investors' use of these types of investment products. Throughout their 40-year history, MMMFs have been crucial instruments for daily cash management and have supported the efficient operation of the U.S. economy. Their existing structure gives investors a variety of benefits including preservation of capital; daily liquidity at par; enhanced diversification; robust credit analysis; the stability of high-quality, short-term assets; and administrative efficiencies. Businesses and municipalities rely heavily upon MMMFs as the preferred investment vehicle for short-term cash, allowing them to temporarily park excess cash in a stable and highly liquid investment in anticipation of a need in the near future, for instance, to pay suppliers. The SEC's proposals would make investments in MMMFs more costly and would add accounting and tax complications that will ultimately force businesses and municipalities to seek alternative investments, fundamentally constraining their cash management practices while impeding an important source of liquidity for capital markets. Driving these investors away from MMMFs would increase the use of unregistered alternative funds that lack the strong regulatory framework and transparency of today's MMMFs, increasing systemic risk. Individual investors use MMMFs as a way to earn modest interest on their savings while maintaining same-day access to funds.... However, potential new regulatory proposals would force many retail investors to find other investment alternatives in order to retain the flexibility, simplicity, and stability previously afforded by MMMFs.... We firmly believe existing regulations are sufficient to ensure their continued stability and viability. We urge the SEC against implementing any further regulatory changes that disrupt the existing structure and characteristics of these funds and would limit choices for investors, businesses, municipalities, with far reaching consequences for the American economy. We thank you for your consideration."

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