Daily Links Archives: September, 2012

The Wall Street Journal writes "Money Funds to Benefit From Bank Outflow". It says, "Managers of U.S. money-market funds are expecting an influx of cash between now and year-end as customers brace for the end of a program that covers their deposits in case their bank goes under. Starting in 2008, after the collapse of Lehman Brothers hit investor confidence, the government began guaranteeing an unlimited amount of non-interest-bearing deposits at banks. But that program, now called the Dodd-Frank Deposit Insurance Provision, is set to expire at the end of the year. The limit is expected to be reset to $250,000 per account. About $1.6 trillion now sitting in those deposit accounts could be looking for a new home in the coming months. Industry analysts say the bulk of this newly uninsured cash will be routed into safe-haven Treasurys or money-market funds -- places that aren't quite as flexible as checking accounts but would at least offer a slight return." In other news, see `Bloomberg's "Money Fund Dealmaking Resumes After Geithner Breaks Logjam", which says, "One month ago, a U.S. Securities and Exchange Commission proposal to tighten rules for the $2.6 trillion money-market mutual fund industry was declared dead. Now, it's coming back to life. The revival was sparked by Treasury Secretary Timothy F. Geithner, who added fuel to a new round of dealmaking among regulators, funds and banks when he used the 2010 Dodd-Frank Act to force the issue back onto the SEC's agenda." See also, WSJ's "Money-Fund Curbs Test Council's Mettle" and Bloomberg Businessweek's "The Money Market Fund Death Match, Part II".

Yesterday morning, Bloomberg wrote "SEC's Gallagher Calls for Floating Price for Money Funds", which says, "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. The remarks could help revive the debate at the SEC and offer a path toward compromise for SEC Chairman Mary Schapiro, whose proposal ran aground last month. Gallagher said he couldn't vote for Schapiro's plan because its centerpiece was to make the funds hold extra capital. The cushion was too small to protect investors, Gallagher said, leading him to believe the money would be used as collateral in case the funds needed to borrow from the Federal Reserve." The piece adds, "The Financial Stability Oversight Council, an umbrella group of U.S. regulators headed by Treasury Secretary Timothy F. Geithner, may discuss money funds at a meeting tomorrow. Schapiro, a member of the council, has asked the group to consider taking action to stabilize money funds." The article backtracks a bit, saying, "In the interview, Gallagher said his support of a floating share price was contingent on the SEC "fully understanding and addressing" the tax and accounting issues that could arise. Gallagher said a fluctuating share price may need to be coupled with other protections, such as the freezing redemptions option that he and Paredes had suggested. While Schapiro's plan offered the variable share price as one alternative, Gallagher said it was secondary to the capital buffer. The proposal included about 150 pages describing the capital buffer and just 40 pages on the floating share price."

A press release entitled, "Fitch Rates BofA Treasury, Government and Government Plus Reserves at 'AAAmmf'," says, "Fitch Ratings has assigned ratings to the following three money market funds advised by BofA Advisors, LLC (BofA), an indirect, wholly owned subsidiary of Bank of America Corporation --BofA Treasury Reserves - rated 'AAAmmf'; --BofA Government Reserves - rated 'AAAmmf'; --BofA Government Plus Reserves - rated 'AAAmmf'. The main drivers for the ratings assignment are: -- The funds' overall credit quality and diversification; -- Minimal exposure to interest rate and spread risks; and -- The capabilities and resources of BofA as investment advisor. The 'AAAmmf' money market fund ratings reflect the funds' extremely strong capacities to achieve their investment objectives of preserving principal and providing shareholder liquidity through limiting credit, market, and liquidity risk.... BofA, the funds' investment advisor is a subsidiary of BofA Global Capital Management, which is a cash investment management division of Bank of America Corporation (rated 'A/F1' by Fitch), and is one of the world's largest financial institutions. BofA Global Capital Management has over $77.3 billion in assets under management (as of June 30, 2012) and is focused solely on the management of short-term debt portfolios and has access to the extensive resources of Bank of America, including the insights of the bank's economists, market strategists and fixed-income specialists. Fitch views BofA and BofA Global Capital Management's investment advisory capabilities, resource commitment, operational controls, corporate governance, and compliance procedures as consistent with the ratings assigned to the funds." (For a list of all ratings on money market mutual funds, see Crane Data's monthly Money Fund Intelligence XLS.)

A press release entitled, "StoneCastle Federally Insured Cash Account Program Surpasses $2 Billion In Assets" says, "StoneCastle Cash Management, LLC (SCCM) announced that its Federally Insured Cash Account program (FICA), the firm's leading cash management solution has exceeded $2 billion in assets. Formally launched in 2011, FICA provides institutional investors with access to hundreds of carefully-screened banks via a single account. FICA allocates customers' large deposits across its bank network, ensuring full FDIC insurance on all deposits and allowing depositors to earn competitive yields compared to money market mutual funds, treasury securities and non-insured bank accounts." Joshua Siegel, Managing Principal of StoneCastle, comments, "We are pleased to have reached this significant milestone for our FICA program. Investors have deposited more than $1 billion in FICA so far this year, increasing balances by 100% and bringing our total assets at SCCM across all products to nearly $3 billion." The release adds, "Siegel said StoneCastle conceived of FICA, with the help of state and federal banking regulators, as a vehicle for community banks to attract institutional deposits without having to deploy additional capital or resources. FICA has become one of the most popular instruments used by treasurers when investing short term balances at banks as highlighted in the 2012 Association for Financial Professionals (AFP) Liquidity Survey." Siegel adds, "FICA provides community banks with a steady stream of reliable institutional deposits and at the same time, allows institutional investors to realize competitive yields with the safety of FDIC insurance."

ICI's Paul Schott Stevens writes on "Achieving Real Consensus on Money Market Funds." He says, "We are disappointed to see Securities and Exchange Commission Chairman Mary L. Schapiro ("In the Money-Market for More Oversight," Wall Street Journal, Sept. 20) recycling the same arguments already rejected by the majority of her Commission colleagues as a basis for imposing so-called structural changes on money market funds. A "substantial consensus" exists, she argues, in favor of these changes -- a consensus of bank regulators, pundits, and journalists. This "consensus" excludes the views of hundreds of organizations on record before the SEC as opposed to these changes -- among them myriad leaders of state and local government, businesses of all kinds, and investor groups. Nor does it take into account the concerns voiced by more than 100 members of the House and Senate, from both political parties. The Chairman's "consensus" has no use for the extensive empirical analysis devoted to these issues by ICI and others over the past five years -- or for the contrary views of the majority of the SEC commissioners. Having failed to impose her own version of reform, Chairman Schapiro now calls upon the Financial Stability Oversight Council to do so. Regulators would do better to heed the SEC majority. They are not prepared to surrender the SEC's regulatory role with respect to money market funds. Instead, they simply urge more careful study of the potential adverse consequences of the SEC staff's reform agenda, of a variety of regulatory alternatives, and of the effect of the extensive changes that the SEC already has made to money market funds since 2008. That, we think, is a far more promising route for achieving real consensus."

The Financial Times writes "Triple A rated euro fund assets plunge". It says, "Assets held in euro-denominated triple A rated money market funds have slumped to their lowest level in three years. The contraction has come after the European Central Bank's shock decision in July to slash the interest rate on its deposit facility from 25 basis points to zero, prompting a swathe of funds to soft close to new money and sending yields on ultra-safe funds down to just 0.08 per cent.... The assets of euro funds rated triple A by Standard & Poor's fell 1 per cent in July and 5.6 per cent in August to E124.3bn, the lowest level since 2009, the rating agency will say on Monday. The decline has been sharpest in euro government liquidity funds, which have seen their assets crash by 60 per cent to E7.7bn since the end of 2011, even as triple A rated sterling money market funds, which still boast yields of around 40 basis points, have grown by 9.7 per cent to L155bn."

ICI's latest "Money Market Mutual Fund Assets" report says, "Total money market mutual fund assets decreased by $10.33 billion to $2.568 trillion for the week ended Wednesday, September 19, the Investment Company Institute reported today. Taxable government funds decreased by $6.68 billion, taxable non-government funds decreased by $2.04 billion, and tax-exempt funds decreased by $1.60 billion. Assets of retail money market funds increased by $1.88 billion to $888.73 billion. Taxable government money market fund assets in the retail category increased by $600 million to $187.21 billion, taxable non-government money market fund assets increased by $1.60 billion to $512.89 billion, and tax-exempt fund assets decreased by $330 million to $188.63 billion. Assets of institutional money market funds decreased by $12.20 billion to $1.679 trillion. Among institutional funds, taxable government money market fund assets decreased by $7.28 billion to $678.35 billion, taxable non-government money market fund assets decreased by $3.64 billion to $919.52 billion, and tax-exempt fund assets decreased by $1.28 billion to $81.39 billion." Year-to-date, ICI's weekly series shows money fund assets down by $127 billion, or 4.7%. Institutional assets are down by $77 billion, or 4.4%, while Retail assets are down by $50 billion, or 5.3%. See also, The Wall Street Journal's "U.S. Money Market Funds Lend To More Euro Zone Issuers", which says, "U.S. money market funds are becoming less shy about lending to euro-zone banks. Prime money market funds increased their lending to euro-zone banks by $16 billion in August, with the bulk of it--$12 billion--going to German banks, according to data from J.P. Morgan. Lending to French banks also went up by $3 billion. J.P. Morgan's sample represents 87% of U.S. prime money market funds in terms of assets under management."

Treasury Today writes "A holistic approach to managing liquidity". The article says, "By breaking down silos and bringing specialist departments together, banks are far better placed to come up with holistic end-to-end solutions for their corporate clients – and their respective needs. We speak to Jim Fuell, Managing Director, Head of Global Liquidity, EMEA, J.P. Morgan Asset Management and Yera Hagopian, Liquidity Solutions Executive, EMEA, J.P. Morgan Treasury Services, about how this approach can help address the liquidity challenges that corporates face today." Fuell comments to TT, "We're in an environment right now where global interest rates are at historically low levels. In the Eurozone, the situation is particularly exacerbated as we are experiencing an unprecedented environment with negative yields being offered, so never has it been more important for corporate investors to ensure that they understand where their cash is -- and how best to use it. As widely publicised, corporates have been carrying higher levels of cash and the cost of liquidity is becoming increasingly expensive. Not only are yields extremely poor but in some instances banks are effectively charging corporates to take their money. In evaluating the current yield outlook, corporate treasurers may begin using more of their surplus liquidity to pay down debt as suitable investment opportunities may appear scarcer than ever. From an investment management perspective, we are working closely with corporate treasurers who are asking how they can improve the return on their surplus cash."

The U.S. Chamber of Commerce's "Center for Capital Markets Competitiveness" will host a seminar entitled, "The Future of Money Market Mutual Fund Regulation" on Tuesday, October 16, 2012, from 11:00am-3:00pm. The description 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."

Investment News writes on "Schapiro's endgame". It says, "Mary Schapiro is nearly four years into her term as chairman of the Securities and Exchange Commission. She may not see a fifth. Speculation is mounting inside the beltway that, regardless of who wins the November election, Ms. Schapiro is on her way out -- probably of her own accord." Mid-way through the article, IN writes, "The withdrawal of reform proposals for money market mutual funds last month, however, marked a new low for the SEC under Ms. Schapiro. She not only lost a lengthy, high-profile battle with the fund industry but managed to alienate a key ally, Democratic commissioner Luis Aguilar, in the process." The piece quotes former SEC staffer Lynn Turner, "She tried to turn the heat up on Aguilar and all she did was make him mad. I don't disagree with the changes she was proposing, but she misplayed her hand badly." The article adds, "Although another financial regulator may take up the matter, the events were a blow for the chairman and the SEC." It quotes former SEC Chairman Harvey Pitt, "It doesn't serve anyone's purpose to have the agency appear to be dysfunctional.... It wasn't one of the SEC's better days."

Institutional money market mutual fund managers and corporate cash investors are gearing up for the Association for Financial Professionals' Annual Conference, which will be held October 14-17, 2012, at the Miami Beach Convention Center. AFP attracts thousands of corporate treasurers and hundreds of money market fund and investment professionals each year. Over 25 money fund companies and online investment trading "portals" will be exhibiting. (Crane Data will be exhibiting too; stop and see us at Booth #302 to hear about our new weekly portfolio holdings data feed and Money Fund Portfolio Laboratory product.) Sessions involving money funds and cash investing include: Guide to Money Market Fund Investing in a Post-Crisis Environment (Jerry Klein of Treasury Partners); Global Liquidity Management: Pursuit of Zero Cash Subsidiaries (Elyse Weiner of Citi); Treasury Trading on Electronic Portals: How They Can Help and How to Make Sure They Do (Justin Meadows of MyTreasury); Generating Alpha in Separately Managed Accounts (Jonathan Carlson of Bank of America Global Capital Management); When Will Cash Recover from the Crash? Ideas for Overcoming Low Rates and Reduced FDIC Coverage (Dale Sorenson of Associated Bank); Developing the Right Risk/Return Management Framework for Short Term Cash Investments (John Olivo of Goldman Sachs Asset Management); Evaluating Credit, Counterparty, and Market Risks in Money Market Funds (Roger Merritt of Fitch Ratings); and, When Cash Isn't King: How Financial Industry Reform is Reshaping Corporate Liquidity Management (Jeffery Avers of SunTrust).

The Wall Street Journal writes "Reserve Primary Fund Heads for Trial". It says, "The Securities and Exchange Commission's case against the Reserve Primary money-market mutual fund is headed toward trial on Oct. 1, with no movement by either party toward a settlement. At a pretrial hearing in U.S. District Court in New York on Wednesday, Judge Paul Gardephe warned both sides that if they want to settle, they must do so before the trial begins. The SEC sued Bruce Bent Sr. and his son, Bruce Bent II, in early 2009, alleging the two managers of the $62 billion Reserve Primary fund told regulators they would prop up the fund during the financial crisis amid heavy client redemptions, even though they didn't plan to do so." In other news, ICI released its latest weekly "Money Market Mutual Fund Assets". It says, "Total money market mutual fund assets increased by $8.04 billion to $2.578 trillion for the week ended Wednesday, September 12, the Investment Company Institute reported today. Taxable government funds increased by $4.99 billion, taxable non-government funds increased by $2.98 billion, and tax-exempt funds increased by $70 million."

Politico writes "Democrats shy from money-market-fund reform". The article says, "In one of the first major financial reform battles since the passage of sweeping Wall Street reforms in 2010, support from Hill Democrats is missing in action. Federal regulators and the Obama administration have identified the money market mutual fund industry as unfinished business left over from the financial crisis and are warning that it remains a threat to the economy. But last month an effort by Securities and Exchange Commission Chairwoman Mary Schapiro to crack down on these funds was thwarted in the face of strong industry opposition after she failed to win the support of a Democratic swing vote, Luis Aguilar, at the five-member regulatory commission. Now, the Financial Stability Oversight Council, the super panel of regulators led by Treasury Secretary Timothy Geithner, is mulling over what steps it can take to further Schapiro's plan. Geithner, Schapiro and other regulators are taking on this task, however, without strong support from congressional Democrats, allies they have been able to count on in past fights with the financial industry." The piece quotes Sen. Chuck Schumer, "We have to do it, but I think there's a great deal of concern about how to do it without ending money market mutual funds." Politico quotes Sen. Mark Begich (D-Alaska), "The regulations under review by the SEC would have been harmful to Main Street. At a time when cities across the country are struggling to keep cops on the beat, teachers in schools, and the lights on at City Hall, the last thing we should be doing is making it harder to access critical short-term funding."

The Wall Street Journal's "Heard on the Street" writes "Time for Congress to Wean U.S. Banks From an Outdated Crisis Backstop". It says, "The economic recovery remains fragile. But the government should make markets stand on their own two feet where it can. One example: unlimited insurance for $1.5 trillion in noninterest-bearing deposits at banks, largely used by businesses to park cash. This is a different program from the $250,000 insurance provided to most accounts. The Federal Deposit Insurance Corp. first provided the special backing in October 2008 during the worst of the financial crisis. In 2010, Congress extended it through 2012. Now, with Congress returning this week and the Dec. 31 deadline looming, banks are fighting for yet another extension. At the end of August, 80 state bankers' groups wrote to congressional leaders in favor of this."

Wells Fargo Advantage Money Market Funds writes in its latest "Overview, strategy and outlook", "There continues to be a strong focus by regulators and others on the market for repurchase agreements (repos). What had traditionally been a fairly quiet corner of finance devoted to financing dealers' inventories and serving as a safe short term investment vehicle has instead come to be seen as a potential source of systemic instability meriting considerable attention and reform efforts. In its annual report released in July, the Financial Stability Oversight Council (FSOC) said, "the elimination of most intraday credit exposure and the reform of collateral practices in the tri-party repo market continues to be an area of intense focus for the Council." Earlier this summer, a Federal Reserve (Fed) official testified before the Senate that "vulnerabilities remain" in the repo market, while a study by Fitch Ratings examined some of the types of collateral used by some money market funds to secure their repo investments.... Repos are fairly broadly used by MMFs, and the generally short-term maturity profile provides an ideal fit for the daily and weekly liquidity requirements of Rule 2a-7."

Friday's New York Times writes, "Sorting Out the Collapse of Reforms for Money Market Funds". It says, "Four years after the fall of Lehman Brothers, and with a presidential campaign in full swing, everyone can surely agree on one thing: we shouldn’t risk another financial crisis. But after four years of studies, hearings and round tables, the Securities and Exchange Commission late last month abandoned efforts to impose new regulations on money market funds intended to prevent another panic like the one that occurred in 2008 and eliminate the need for a taxpayer bailout of the multitrillion-dollar funds. The S.E.C.'s proposed reforms had the backing of the White House, Treasury officials, the Federal Reserve, the Bank of England, a council of academic experts, The Wall Street Journal's conservative editorial page, the former Fed chairman Paul Volcker, former Treasury Secretary Henry M. Paulson Jr. -- just about every disinterested party who weighed in on the issue. So it's no wonder many S.E.C. staff members were shocked when three of the five S.E.C. commissioners -- two Republicans and one Democrat -- indicated they wouldn't support the proposals. It was a rare case of a Democratic commissioner breaking ranks with the agency's chairwoman, Mary L. Schapiro, an Obama appointee who is a political independent."

ICI President Paul Schott Stevens recent wrote a "Viewpoint" piece entitled, "The Public Deserves Accurate Reporting of the Debate over Money Market Funds." He says, "The Financial Times has recently published a story that significantly distorts recent developments around U.S. money market funds and the actions of the U.S. fund industry. Let's correct the record. The story begins with the misleading suggestion that the U.S. fund industry has since 2008 "fought all out to preserve the status quo" in the context of financial reform. To the contrary, during the past four years, the fund industry has worked openly and constructively with regulators to change money market funds for the better. Thanks in part to our industry's cooperation, the Securities and Exchange Commission (SEC) became the first agency to address any of the financial products hit by the crisis, passing a package of sweeping changes in 2010 to tighten regulation and make money market funds more resilient. We weren't fighting "all out to preserve the status quo" then, nor when ICI and others developed detailed ideas for further reforms in 2011. No less of a distortion is the story's assertion that the fund industry has enlisted "groups such as city mayors and state treasurers to lobby on its behalf." I urge Financial Times readers and others to consult the record on the SEC's website. From the American Association of Retired Persons (AARP) to the U.S. Chamber of Commerce, an amazing array of voices from across the economy has expressed strong support for the core features of money market funds.... A majority of commissioners at the SEC recently opposed pursuing flawed "structural" changes to money market funds. They recognized the importance of the 2010 reforms and the value of money market funds to investors and to the U.S. economy. The public deserves reporting that accurately portrays the nature of the debate over money market funds. Unfortunately, the Financial Times' recent report falls well short of that mark."

The Federal Reserve Bank of New York issued a "Statement Regarding Reverse Repurchase Agreements" yesterday. It says, "As noted in the October 19, 2009, Statement Regarding Reverse Repurchase Agreements, the Federal Reserve Bank of New York has been working internally and with market participants on operational aspects of triparty reverse repurchase agreements to ensure that this tool will be ready to support any reserve draining operations that the Federal Open Market Committee might direct. Beginning Thursday, September 6, the New York Fed intends to conduct another series of small-scale reverse repurchase (repo) transactions using all eligible collateral types. The first operations will be conducted with the newest expanded reverse repo counterparties -- the eight banks announced on April 30, 2012. Subsequent operations will be open to all eligible reverse repo counterparties. Like the earlier operational readiness exercises, this work is a matter of prudent advance planning by the Federal Reserve. The operations have been designed to have no material impact on the availability of reserves or on market rates. Specifically, the aggregate amount of outstanding reverse repo transactions will be very small relative to the level of excess reserves, and the transactions will be conducted at current market rates. These operations do not represent a change in the stance of monetary policy, and no inference should be drawn about the timing of any change in the stance of monetary policy in the future. The results of these operations will be posted on the public website of the Federal Reserve Bank of New York, together with the results for other temporary open market operations. The outstanding amounts of reverse repos are reported as a factor absorbing reserves in Table 1 in the Federal Reserve's H.4.1 statistical release and as liability items in Tables 8 and 9 of that release."

The Financial Times writes "Europe's money market funds future in focus". (See also, FT's "Money market funds look to pass on losses".) It says, "It would be good news for security guards and manufacturers of safe boxes. Rather than paying banks interest on overnight deposits, the European Central Bank would charge them for the privilege. Banks would then withdraw cash from the ECB and stick it in their own vaults. The idea is becoming less ridiculous. In July, the ECB cut its main interest rate -- the price banks pay for its liquidity -– to 0.75 per cent. As a result, the rate on its deposit facility, set 75 basis points lower, is already zero. Logically, further attempts to revive the struggling eurozone economy would see the deposit facility rate turning negative.... But they could threaten the functioning of financial markets and the business model of Europe's money market funds. As Mr Draghi admitted in August, "these are largely uncharted waters".... Bank of America closed its European fund after the ECB's interest rate cut last month. Other European money market fund managers are now talking to clients about how they could pass on negative yields to investors.... Several managers are considering changing prospectuses to allow them to reduce the number of shares in a fund, passing on negative income to investors, without adjusting the net asset value. But despite the record low yields and open discussion of negative returns, Europe's money market funds have been surprisingly resilient to outflows this year, leading some to argue they could even weather negative yields." The FT quotes Fitch's Aymeric Poizot, "As long as there is lots of cash on corporate balance sheets, money market funds will still have customers."

The Federal Reserve Bank of New York writes in its Liberty Street Economics blog, "If Interest Rates Go Negative ... Or, Be Careful What You Wish For". It says, "The United States has slid into eight recessions in the last fifty years. Each time, the Federal Reserve sought to revive economic activity by reducing interest rates (see chart). However, since the end of the last recession in June 2009, the economy has continued to sputter even though short-term rates have remained near zero. The weak recovery has led some commentators to suggest that the Fed should push short-term rates even lower -- below zero -- so that borrowers receive, and creditors pay, interest. One way to push short-term rates negative would be to charge interest on excess bank reserves. The interest rate paid by the Fed on excess reserves, the so-called IOER, is a benchmark for a wide variety of short-term rates, including rates on Treasury bills, commercial paper, and interbank loans. If the Fed pushes the IOER below zero, other rates are likely to follow. Without taking a position on either the merits of negative interest rates or the Fed's statutory authority to fix the IOER below zero, this post examines some of the possible consequences. We suggest that significantly negative rates -- that is, rates below-50 basis points -- may spawn a variety of financial innovations, such as special-purpose banks and the use of certified bank checks in large-value transactions, and novel preferences, such as a preference for making early and/or excess payments to creditworthy counterparties and a preference for receiving payments in forms that facilitate deferred collection."