Daily Links Archives: March, 2013

A recent ICI "Viewpoint", written by Brian Reid and entitled, "Narrowing the Focus to Prime Money Market Funds," discusses the question of whether pending money fund reform proposals will limit their dramatic changes to "prime" or general purpose funds only. It says, "One of ICI's key points in our responses to recent policy proposals for money market funds is that no case can be made for applying fundamental changes to Treasury, government, and tax-exempt money market funds. Given the nature of their investments -- and their recent experience in times of financial turmoil -- Treasury, government, and tax-exempt money market funds simply don't require further substantial reforms. ICI is far from alone in this view. Fidelity Investments recently looked at the comment letters filed with the Financial Stability Oversight Council (FSOC) on its proposed reforms for money market funds. Of the FSOC comment letters that discuss differences in types of money market funds, 95 percent agreed that Treasury funds should be excluded from additional regulatory changes. For government funds and tax-exempt funds, those numbers are 86 percent and 83 percent, respectively. Even the presidents of the 12 Federal Reserve banks recognize that different types of money market funds have distinct risk profiles and different investor redemption patterns. Let's take a closer look at the reasoning behind this strong consensus.... Even for prime money market funds, the measures regulators have advocated are clearly inappropriate.... If regulators can demonstrate the need for changes beyond the 2010 reforms, ICI believes that temporary gates and liquidity fees would fulfill regulators' stated goal of stopping excessive or unexpected redemptions from prime funds. As proposed by ICI, such measures would enhance the resiliency of prime funds without undermining their value to investors and the economy. But no changes, not even gates and fees, are necessary for tax-exempt, Treasury, and government funds. Their fundamental nature -- and recent performance in times of market difficulty -- make that plain."

Federal Reserve Chairman Ben Bernanke spoke Monday on "Monetary Policy and the Global Economy". Though the speech only had a brief mention of issues impacting money markets, he said, "The topic of this session is lessons learned from the financial crisis. For me, perhaps the central insight is that the recent crisis, despite its many exotic features, was in fact a classic financial panic--a systemwide run of "hot money" away from assets whose values suddenly became uncertain. In that respect, the crisis was akin to many other financial crises faced by governments and central banks--including that most venerable of central banks, the Bank of England --over the centuries. The response to the crisis likewise followed the classic prescriptions of liquidity provision, liability guarantees, asset evaluation and disposition, and recapitalization where necessary. Although the crisis had classic features, to a significant extent it took place in a novel institutional context, making diagnosis and response more challenging: For example, in the United States, collateralized wholesale funding rather than conventional bank deposits constituted the hot money, and run pressure was experienced not only by banks but by diverse other institutions, such as structured investment vehicles. In addition, the scale and complexity of globalized financial institutions and markets made it difficult to predict how the crisis might spread or to coordinate the response. One of the few positive aspects of this episode was the extraordinary degree of international cooperation achieved among policymakers, including the Bank of England and the Federal Reserve, in responding to the crisis."

The agenda for the New York Cash Exchange Agenda, which will take place May 29-31, 2013, at the New York Hilton, was released yesterday. Crane Data's Peter Crane will lead a panel discussiong entitled, "Major Issues in Money Markets," with J.P. Morgan Securities' Alex Roever and BlackRock's Chris Stavrakos on May 30. Other money fund-related topics include: "The Latest in Money Market Fund Analytics and Regulatory Developments -- A Global Perspective" with Fitch's Roger Merritt, "Evaluating Your Global Investment Policy for Today and the Future" with Goldman Sach's John Olivo, and "Financial Reform in 2013: Where Have We Come from, Where Are We Going" with Federated's Debbie Cunningham.

Schwab Funds began posting daily "shadow" NAVs last week, becoming the 12th money fund manager to disclose daily market NAVs (or MNAVs). (We added their 4-digit prices to our MFI Daily starting last Friday.) Their webpage, "Schwab Money Market Funds Daily Mark-to-Market Values," explains, "At Schwab, we are committed to providing our clients with information that helps them to better understand their investments in the Schwab Money Market Funds. Along with other major money fund sponsors, we are now disclosing the Mark-to-Market Values of our domestic money funds on a daily basis. We view this as a positive step toward providing additional transparency into how the Schwab Money Market Funds are managed. It's important however to keep these few key points in mind: Disclosing the Mark-to-Market Value is for informational purposes only. It should not be confused with a "Floating Net Asset Value (NAV)", which means that investors would buy and sell at something other than a fixed or constant NAV. As always, the Schwab Money Market Funds continue to seek to maintain and transact at a stable $1.00 per share NAV. Certain factors can cause a money fund's Mark-to-Market Value to fluctuate slightly above or below $1.0000, such as interest rate changes, market and credit conditions and the constant flow of assets into and out of the fund. What's important to remember is that a fund's Mark-to-Market Value can have daily fluctuations, even during very stable market environments. As the investment adviser for the Schwab Money Market Funds, Charles Schwab Investment Management (CSIM) continues to utilize a rigorous and disciplined investment approach that prioritizes safety, high credit quality, strong liquidity and diversification across issuers over yield."

Yet another money fund is calling it quits as Dreyfus liquidates its small Money Market Instruments and Govt MM Instruments funds. The funds, Dreyfus Money Market Govt (DMMXX), $26M and Dreyfus Money Market MM (DMIXX), $11M, will be removed from our MFI Daily Monday. The original liquidation filing said, "The Board of Directors of Dreyfus Money Market Instruments, Inc. has approved the liquidation of each of Money Market Series and Government Securities Series ... each a series of Dreyfus Money Market Instruments, Inc., effective on or about March 6, 2013 with respect to Money Market Series and on or about March 7, 2013 with respect to Government Securities Series.... Accordingly, effective on or about December 28, 2012, each Fund will be closed to any investments for new accounts, except that new accounts may be established for "sweep accounts" and by participants in group retirement plans (and their successor plans), provided the plan sponsor has been approved by The Dreyfus Corporation and established the Fund as an investment option in the plan before the Closing Date. Each Fund will continue to accept subsequent investments until the respective Liquidation Date." In other news, ICI's latest "Money Market Mutual Fund Assets" says, "Total money market mutual fund assets decreased by $26.49 billion to $2.625 trillion for the week ended Wednesday, March 20, the Investment Company Institute reported today. Taxable government funds decreased by $680 million, taxable non-government funds decreased by $25.33 billion, and tax-exempt funds decreased by $470 million."

The latest FOMC Statement from the Federal Reserve says, "To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent."

Fitch Ratings published a press release recently entitled, "Treasury Partners Launches Online Fitch Money Market Fund Research." It says, "Treasury Partners announced today that its corporate clients who manage their overnight liquidity will now have direct access to Fitch Solutions' comprehensive global money market funds research. This research, which will be available via Treasury Partners' online money market portal, comprises a broad range of industry analysis and market commentary, rating actions, and other relevant content." "We're confident our clients will find this new service very beneficial," said Jerry Klein, Treasury Partners' Director of Corporate Cash Management. "It's the latest example of our ongoing commitment to supporting our portal clients in making sound investment decisions," he added. "Corporate treasury and financial professionals are among Fitch's most valuable constituencies," Ian Rothery, Managing Director, Fitch Solutions said. Treasury Partners serves these same markets, and we greatly appreciate this opportunity to share our research with their clients." The release adds, "Fitch's Fund & Asset Manager Rating team provides credit ratings and comprehensive opinions on nearly 1,000 funds across the globe, including money market funds, closed-end funds, and bond funds."

WSJ.com writes "U.S. Money Funds, Investors Pan SEC's Floating-Value Format". The article says, "Corporate executives say they will pull cash from money-market funds if regulators implement a proposal requiring that funds' share prices float. The pushback comes as the Securities and Exchange Commission is expected to issue new regulatory proposals in the coming weeks. Under one proposal that has gained momentum, regulators would force fund values to float instead of remaining constant at $1 per share. Shifting to an unstable net asset value, or NAV, would be a drastic change for the $2.6 trillion industry as it would mark the first time that the funds wouldn't be perceived any more like bank deposits, giving investors back $1 for every $1 invested. Companies say they would respond by selling out of money-market funds, which they have used for decades because of their cash-equivalent nature.... A wave of redemptions would be just the latest blow to the money-market industry, which is already grappling with yields on the securities they buy languishing near all-time lows. Returns are so low that many fund sponsors have cut their management fees and a few have exited the business. Floating NAVs was among the proposals put forward by the Financial Stability Oversight Council. The rationale was that, if the NAV floated and the price fluctuated, however little, investors would be aware there is risk associated with investments in money funds."

ICI's Brian Reid presented recently on "Money Market Funds: Lessons from Five-Plus Years". His speech, prepared for iMoneyNet's Money Market Expo (MMX) conference last week in Orlando, says, "[A] friend recently asked me, "What have you learned in the past five years about money market funds?" And that gave me a fresh start on this speech. I have learned more about the short-term markets and money market funds in five years than I had learned in the prior 20 years at ICI and as a staff economist at the Federal Reserve Board. I have also learned that some policy proposals can be far more complex than what they seem on paper. But the most important lessons for me have been not been about the economics of the markets and funds -- but about the regulatory process. Five years ago, I thought that was a simple four-step process: Potential regulatory issues are identified by the industry or regulators; Regulators propose reforms; Then, various constituencies provide comments and present data and arguments in favor or against the proposals. Finally, the regulator uses those comments to arrive at rules that it believes will achieve its public policy goal. What I have come to learn is that this textbook explanation doesn't capture several important factors in the policy process. So this morning I want to fill in the blanks and discuss three key elements about policymaking that I have learned firsthand over the past five years."

ICI's latest "Money Market Mutual Fund Assets" report says, "Total money market mutual fund assets increased by $5.32 billion to $2.652 trillion for the week ended Wednesday, March 13, the Investment Company Institute reported today. Taxable government funds increased by $1.95 billion, taxable non-government funds increased by $4.97 billion, and tax-exempt funds decreased by $1.60 billion.... Assets of retail money market funds decreased by $1.36 billion to $911.61 billion. Taxable government money market fund assets in the retail category decreased by $270 million to $195.15 billion, taxable non-government money market fund assets decreased by $320 million to $520.12 billion, and tax-exempt fund assets decreased by $760 million to $196.34 billion.... Assets of institutional money market funds increased by $6.68 billion to $1.740 trillion. Among institutional funds, taxable government money market fund assets increased by $2.23 billion to $707.32 billion, taxable non-government money market fund assets increased by $5.29 billion to $951.71 billion, and tax-exempt fund assets decreased by $840 million to $80.97 billion."

MarketWatch writes "SEC nominee White backs money-fund reform". The piece says, "President Barack Obama's nominee to head the Securities and Exchange Commission, Mary Jo White, told lawmakers Tuesday that if confirmed she would seek to take prompt action to reform the $2.7 trillion money-market-fund industry. White said she has been studying the issue, adding that she understands the value of money market funds. As expected, White added that she doesn't have a conclusion yet about how to proceed." She said, "Money-market funds, which are very important investment products, are in the heartland of the SEC's expertise. It is in the SEC's responsibilities as it is focused on now and has been before in determining what additional reforms there should be to that investment product." MarketWatch adds, "Reform efforts stalled last year but commissioners at the agency recently seem to be opening up to the idea that more regulation is necessary. The Obama administration has been keen on imposing a capital buffer or some other reforms for the industry."

Reuters writes "Fidelity backs money funds redemption fee during market stress". The story says, "Fidelity Investments, the largest provider of U.S. money market funds, said on Tuesday it would support imposing a 1 percent redemption fee on large institutional money funds during times of extreme market stress. The $2.5 trillion money fund industry has been battling U.S. regulators over reform proposals that Boston-based Fidelity and other providers say could wreck the industry. But in recent weeks, Fidelity has acknowledged that institutional prime money market funds are vulnerable to large, abrupt redemptions in times of financial turmoil. In a speech planned for Tuesday afternoon, Nancy Prior, Fidelity's president of money market funds, put a finer point on Fidelity's views on what it sees as impending regulation." The piece adds, "Prior conceded that the industry appeared headed down the path of more regulation."

An update from PreserveMoneyMarketFunds.org, a lobbying offshoot of ICI, says, "Recent news reports note that the Securities and Exchange Commission is concerned about the accounting and tax implications of forcing money market funds to adopt floating net asset values (NAVs). SEC staff are reaching out to the Internal Revenue Service in their search for solutions. Here's a better idea: drop the floating NAV idea altogether. Floating the NAV would undermine the convenience and simplicity of money market funds -- and would cause millions of investors to face new accounting, tax, and legal complications. That's in part why hundreds and hundreds of businesses, not-for-profits, public entities, and individuals have gone on the record opposing proposals to float NAVs. For regulators, addressing these complications is no easy task. As Bloomberg reports, "IRS officials have told the securities regulator that they don't have much flexibility to interpret current tax law." Even if the complications could be addressed, floating NAVs likely won't further regulator goals of improving the stability of the financial system.... There are sensible ways to improve the regulation of money market funds. A floating NAV proposal, however, sure doesn't look like one of them."

MarketWatch writes "Aguilar Q&A on money-fund reform". The article says, "Luis Aguilar wants to clear up a "persistent misconception" about the Securities and Exchange Commission's efforts to increase regulation of the $2.7 trillion money-market-fund industry. In an email interview with MarketWatch, Aguilar, a Democratic commissioner at the agency, rebutted assertions that a majority of the commission has been opposed to considering additional capital buffers or other reforms for the industry." Aguilar comments, "First, there seems to be a persistent misconception that a majority of the commission opposed consideration of money-market-fund reforms. This is simply not true. Speaking for myself, my consistent position has been that the commission, as the independent agency responsible for protecting investors and overseeing the U.S. securities markets, had an obligation to make sure it was fully informed on this issue. Specifically, the commission had to understand the causes of investor redemptions from money-market funds in 2008, the impact of the commission's 2010 amendments to strengthen the principal rule that governs money-market funds, and the potential impact of additional reforms on investors and the cash management industry as a whole. To that end, I had for some time requested the SEC staff to conduct a study on these issues, a request in which a majority of the commission concurred.... The study has allowed productive discussions to ensue, and the staff is currently developing a series of recommendations regarding potential reforms. I look forward to considering the staff's recommendations, and I am optimistic that the commission will move forward in an expedited manner."

ICI's latest "Money Market Mutual Fund Assets" says, "Total money market mutual fund assets decreased by $16.70 billion to $2.646 trillion for the week ended Wednesday, March 6, the Investment Company Institute reported today. Taxable government funds decreased by $11.85 billion, taxable non-government funds decreased by $4.87 billion, and tax-exempt funds increased by $10 million.... Assets of retail money market funds increased by $470 million to $912.96 billion. Taxable government money market fund assets in the retail category decreased by $390 million to $195.42 billion, taxable non-government money market fund assets increased by $640 million to $520.44 billion, and tax-exempt fund assets increased by $220 million to $197.10 billion.... Assets of institutional money market funds decreased by $17.17 billion to $1.733 trillion. Among institutional funds, taxable government money market fund assets decreased by $11.46 billion to $705.09 billion, taxable non-government money market fund assets decreased by $5.51 billion to $946.41 billion, and tax-exempt fund assets decreased by $200 million to $81.82 billion."

Bloomberg writes "SEC Said to Discuss Floating NAV for Money Funds With IRS". The article says, "Staff of the U.S. Securities and Exchange Commission have met with the Internal Revenue Service to discuss tax implications should money-market mutual funds adopt a floating share price, two people familiar with the talks said. Discussions have centered on the tax treatment of small gains and losses for investors in funds, said the people, who asked not to be named because the talks weren't public. IRS officials have told the securities regulator that they don't have much flexibility to interpret current tax law, one of the people said. The discussions suggest SEC staffers are developing a more detailed proposal to force money funds to adopt a floating share price, a move the industry has said would destroy their appeal. One such proposal prepared last year under the direction of former SEC Chairman Mary Schapiro was rejected by three of her four fellow commissioners in August, even before they were presented with a formal draft." The Bloomberg piece adds, "A floating share price may also create new accounting challenges for investors, although they could be directly addressed by the SEC, one of the people said. The agency has the authority to set accounting standards. The commission staff is grappling with concerns that a money fund with a floating share value might not be considered a cash equivalent, the person said. That could make them less attractive to institutional investors and businesses that need to hold a certain percentage of assets in cash. The SEC could propose to clarify the cash status of money funds as part of a new rule proposal, the person said."

Fitch writes "European Banks Not Reliant on European CNAV MMF Funding". The brief says, "Fitch Ratings says that European banks demonstrate limited reliance on European Constant NAV (CNAV) money market funds as a source of funding. Fitch estimates that European CNAV money market funds provide eligible European banks with approximately 1% of their deposit and short term funding, on average, with a maximum of 3.4%. Only five banks in the sample had funding from European money market funds in excess of 2% of total funding. Extrapolated to all European money market funds (including variable NAV funds), the average European bank exposure to European money market funds as a source of funding would be 2% (on a simple pro-rata basis). Banks have been under pressure to lengthen their funding profiles in response to regulatory reforms, notably Basel III. Some banks have enacted specific policies to reduce their funding through money market funds. This has resulted in a reduced supply of eligible securities for inclusion in money market fund portfolios. Nonetheless, investors continue to demand exposure to money market funds, notably because of the high level of cash on corporate balance sheets. Fitch notes the diversification potential of money market funds compared to direct deposits with banks.... Fitch's sample covered all European banks that appear in rated money market fund portfolios as of end January 2013, a sample of 33 banks in total. Fitch derived bank funding levels (deposit and short term funding) as of the most recent reporting date were compared to total combined money market fund portfolio holdings as of the same date. Fitch rates 43 European money market funds as of January 2013 with total assets of approximately EUR290bn. As of end-September 2012 the European money market fund industry had total assets of EUR1,054bn according to European Fund and Asset Management Association (EFAMA) data. At end December 2012 money market funds belonging to the Institutional Money Market Funds Association (IMMFA) had total assets under management of approximately EUR500bn."

Federated Investors' latest "Month in Cash" is entitled, "Bernanke to Congress -- Easing works". Money Markets CIO Deborah Cunningham writes, "Ben Bernanke's testimony before Congress late in February provided no real surprises. The Federal Reserve (the Fed) chairman strongly defended the level of the Fed's asset purchases across its various quantitative easing programs, while simultaneously downplaying the risks of over-accommodation, including the potential for losses and market disruption, when the QE program eventually winds down. Bernanke also downplayed the risk of a "reach for yield" in the markets -- the idea investors desperate for returns in such a low rate environment are going further out the curve and down the credit spectrum than might be prudent. In his testimony, Bernanke acknowledged this may occur, but countered the Fed's easing policies actually reduced overall risk by improving the larger economic environment. Of course, if the economy continues to recover, the migration toward lesser credit investments might not have as much of an impact, but if investors add too much duration risk in a quest for higher yield, the Fed is going to have to keep a close watch and take action. Bernanke may be unconcerned by the risks of open-ended easing, and the delicate process of unwinding, but the markets themselves are. There are a lot of questions swirling around over how long QE can go on, and what happens when the music stops. The latest Federal Open Market Committee (FOMC) meeting minutes revealed more members are beginning to have the same questions as the markets do as to how long this can go on and how we get out of it. And in weeks since the meeting we've seen some public comments by regional Fed presidents openly questioning the current policy direction. Still, what matters in the end is the vote, and FOMC meetings don't, traditionally, end up in closely split voting. Despite the increased level of questioning that took place during the meeting, the most recent Fed statement had, as has been the case for so long, just one actual dissenting vote. That's not to say that dissenters won't have an impact, it's just that changes in Fed policy, when and if they happen, will take place behind the scenes, the new transparency notwithstanding."

The Investment Company Institute and the Federal Bar Association are gearing up for the 2013 Mutual Funds and Investment Management Conference, which takes place March 17-20, 2013, in Palm Desert, Calif., and which `will likely feature several sessions involving money fund regulation. The keynote on Monday morning (3/18) will be delivered by Norm Champ, Director of the Division of Investment Management of the U.S. Securities and Exchange Commission, so we're guessing that this should be the next major update on the status of money fund regulations. ICI General Counsel Karrie McMillan will speak prior to Champ, and she likely will discuss money fund regulations. A panel Monday afternoon entitled, "Money Market Funds: The Regulatory Hot Potato," moderated by ICI's Jane Heinrichs will feature: Goldman Sachs' Dave Fishman, Charles Schwab's Rick Holland, Reed Smith's Stephen Keen, and the SEC's Craig Lewis. (Crane Data's Peter Crane will be in Palm Desert covering the event.)

ICI's latest weekly "Money Market Mutual Fund Assets" report shows money market fund assets increasing slightly after six straight weeks of decline. The Institute's release says, "Total money market mutual fund assets increased by $5.77 billion to $2.663 trillion for the week ended Wednesday, February 27, the Investment Company Institute reported today. Taxable government funds decreased by $2.29 billion, taxable non-government funds increased by $9.28 billion, and tax-exempt funds decreased by $1.21 billion." They explain, "Assets of retail money market funds increased by $60 million to $912.38 billion. Taxable government money market fund assets in the retail category decreased by $760 million to $195.81 billion, taxable non-government money market fund assets increased by $1.55 billion to $519.69 billion, and tax-exempt fund assets decreased by $730 million to $196.88 billion.... Assets of institutional money market funds increased by $5.72 billion to $1.750 trillion. Among institutional funds, taxable government money market fund assets decreased by $1.53 billion to $716.55 billion, taxable non-government money market fund assets increased by $7.73 billion to $951.92 billion, and tax-exempt fund assets decreased by $480 million to $82.02 billion."