Daily Links Archives: June, 2013

Crane Data, which hosted its 5th annual Money Fund Symposium last week in Baltimore, announced the release of its Money Fund Symposium 2013 Download Center earlier this week. The web page joins our previous archived Conference materials available at the bottom of our "Content" center and contains audio recordings, Powerpoint presentations and the full conference binder. The Symposium materials are available to all conference attendees as well as to all Crane Data customers (subscribers to Money Fund Intelligence and other products). We're also making preparations for our next event, the inaugural European Money Fund Symposium, which will take place on Sept. 24-25, 2013, at the Conrad Hotel in Dublin, Ireland. Crane Data will also release the preliminary agenda for its 4th annual Crane's Money Fund University, which will take place on Jan. 23-24, 2014, at the Renaissance Hotel in Providence, R.I. Our next University is expected to contain a heavy regulatory component, focusing on the SEC's recent Money Fund Reform Proposal (and perhaps the final regulations, should they be out by then). E-mail info@cranedata.com for the PDF brochures or for more information, sponsorship and speaking opportunities. Finally, our next Money Fund Symposium is scheduled for June 23-25, 2014, in Boston.

An article posted on Reuters entitled, "Fitch: Rated Chinese MMFs Weather Volatility" says, "Fitch Ratings says rated Chinese money market funds (MMFs) have so far weathered the tight liquidity conditions in China's financial sector. This reflects the high liquidity and shorter maturity profiles of these MMFs relative to the broader MMF universe in China. Fitch rates four MMFs in China 'AAAmmf(chn)' applying its national scale criteria for MMFs in less developed economies, totalling CNY30.7bn of assets as of 25 June. Volatile interbank market conditions and tight liquidity have exerted pressure on the mark-to-market net asset value (NAV) of many Chinese MMFs which are, by their nature, heavily exposed to interbank markets and short term bond markets. The overnight Shanghai interbank offered rate (SHIBOR), an average of the rate at which large banks lend between them, rose to 5.5% on June 25 2013 from 3.0% on 20 May 2013, down from a high of 13.4% on 20 June. Fitch understands that certain unrated MMFs in China have experienced material mark-to-market declines in their NAVs and at least one unrated MMF has halted redemptions. At this time, the four Fitch-rated Chinese MMFs' liquidity, credit profiles and NAVs are consistent with the assigned rating and any deviations in NAV from par are well within the 50 bps allowed by regulation. This reflects the funds more conservative portfolio guidelines relative to the industry overall and the regulatory minimum. Rated funds limit the average maturity to reset of their portfolios to 75 days or less, as per Fitch's 'AAAmmf(chn)' rating guidelines, against a maximum of 180 days under Chinese regulation.... Conditions in the money markets have stabilized recently. Nonetheless, current liquidity conditions remain tight and, therefore, rated money market funds are keeping their portfolios shorter-dated and maintaining high levels of liquidity to meet potential redemptions without being forced to sell assets into a less liquid market. Redemption pressure, thus far, has not been abnormally high for these funds. While rated MMFs have weathered conditions so far, they continue to face challenging conditions and need to maintain ample liquidity against unexpected redemptions to avoid selling assets and crystalizing losses.... Fitch rates the following Chinese money market funds: China International Fund Management Money Market Fund (CIFM) rated 'AAAmmf (chn)', Gao Hua Sheng Yu Money Market Collective Investment Scheme rated 'AAAmmf (chn)', Harvest Prime Liquidity Money Market Fund rated 'AAAmmf (chn)', and HFT Liquid Money Market Fund rated 'AAAmmf (chn)'."

Monday, the Federal Reserve Bank of New York issued a "Statement Regarding Repurchase Agreements". It says, "In November 2009, the Federal Open Market Committee (FOMC) authorized the New York Fed to undertake reverse repurchase transactions (reverse repos) for the purpose of testing operational readiness. The New York Fed has undertaken several such transactions, each one announced on the Markets section of the Bank's website. At its meeting in January 2013, the FOMC approved the Authorization for Domestic Open Market Operations to authorize the New York Fed to undertake certain open market transactions -- outright purchase and sale of securities, and repos, in addition to reverse repos -- for the purpose of testing operational readiness. The New York Fed intends to conduct its third series of small-value repos beginning Tuesday, June 25, 2013. The repos will be conducted only with the Primary Dealers and will use all eligible collateral types. Like the earlier repo and reverse repo 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 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 amount of repo is reported as a factor supplying reserves in Table 1 in the Federal Reserve's H.4.1 statistical release and as an asset items in Tables 8 and 9 of that release."

Last week, Fitch Ratings released an update entitled, "MMFs Explore Callable Commercial Paper in Value", which said, "Money market funds (MMFs) are slowly increasing exposure to a relatively new short-term instrument -- callable commercial paper (CP), according to Fitch Ratings. MMFs are exploring callable CP as a way to add additional yield and diversification to portfolios, as well as in response to banks' reduced appetite for providing back-up liquidity to traditional municipal securities. The exceptionally low-yield environment in the money markets is encouraging MMFs to seek new opportunities to offer competitive yields to their investors. Variable rate demand notes (VRDNs), which have one- or seven-day put options, traditionally comprise a majority of municipal MMFs' portfolios. However, VRDNs have been in short supply recently and have seen additional strong demand from prime MMFs, pushing VRDN yields lower. To compensate, tax-exempt MMFs have begun to consider newer instruments that offer longer durations and higher yields, such as callable CP. Banks that previously provided back-up liquidity to VRDNs have grown more reluctant to do so because of increased costs associated with Basel III's restrictions on commitments that come due in less than 30 days. Callable CP usually has maturities longer than 30 days but is expected to be called by the issuer prior to the 30 day mark, allowing the bank providing support to avoid incurring higher costs. Due to their novelty, callable commercial paper securities have the potential to yield more than traditional VRDNs and commercial paper. Fitch recognizes that while these relatively new securities have the potential of higher yields, the extended effective final maturities that accompany callable CP, disregarding the call option, will impact MMFs' weighted average lives (WAL). MMFs are subject to a 120 day regulatory maximum restriction on overall portfolio WAL. We believe the practice thus far of MMFs looking to the final maturity date of these securities for liquidity purposes is appropriately conservative for risk-averse vehicles like MMFs, especially those rated 'AAAmmf.' Additional detail is available in our report, "Callable CP: Short-Term Credit Market Primer"."

The Federal Register version of the SEC's "Money Market Fund Reform; Amendments to Form PF; Proposed Rule" was posted last week (June 19), which means that the 90-day comment period has commenced. (This gives commenters until Sept. 17, by our calculations, to post their comment letters here.) The Federal Register version is a "mere" 198-pages, compared to the 698 in the proposal's original format.

ICI's latest weekly "Money Market Mutual Fund Assets" report says, "Total money market mutual fund assets decreased by $25.04 billion to $2.587 trillion for the week ended Wednesday, June 19, the Investment Company Institute reported today. Taxable government funds decreased by $11.42 billion, taxable non-government funds decreased by $14.02 billion, and tax-exempt funds increased by $400 million." Retail assets rose for the second week in a row as Institutional assets dropped sharply. ICI adds, "Assets of retail money market funds increased by $4.43 billion to $919.19 billion. Taxable government money market fund assets in the retail category increased by $230 million to $197.21 billion, taxable non-government money market fund assets increased by $3.74 billion to $530.05 billion, and tax-exempt fund assets increased by $460 million to $191.93 billion.... Assets of institutional money market funds decreased by $29.47 billion to $1.668 trillion. Among institutional funds, taxable government money market fund assets decreased by $11.65 billion to $700.54 billion, taxable non-government money market fund assets decreased by $17.76 billion to $896.17 billion, and tax-exempt fund assets decreased by $60 million to $70.95 billion." In other news, see IBD's "Critics Rap Proposed SEC Limits On Money Market Funds".

Federal Reserve Chairman Ben Bernanke commented briefly on money funds at yesterday's news conference. At 51:00 minutes into the briefing, Kate Davidson from Politico said, "The SEC's MMF Proposal is far less comprehensive than the plan that you and the FSOC endorsed. Do you think FSOC should defer to the SEC or still press for more to be done?" Bernanke answered, "I am very glad to see that the SEC has taken up money market reform. It is by far the best outcome for the SEC to do it. It's an area where they have the expertise and where they have the experience. In terms of the actual proposal, of course it's just a proposal for comment. One of their two proposals, the floating NAV, is of course qualitatively similar one of the [FSOC] proposals. We have not yet reviewed this in enough detail to give a view. But I know for sure that by putting out a floating NAV proposal they're moving in the right direction, and I'm hopeful that what comes out will be enough to meet the very important need of stabilizing money market funds." See also the FOMC's Statement.

The U.S. Securities & Exchange Commission's Division of Investment Management "launched a new webpage that serves as a one-stop shop for the latest SEC information concerning money market funds," says a press release. It explains, "The webpage contains links to the SEC's recently proposed rule along with analysis, research, and other resources." The page is located at: http://www.sec.gov/spotlight/money-market.shtml. Norm Champ, Director of the SEC's Division of Investment Management, explains, "This webpage marks another step forward in the Division's goal of improving communications with the investing public and the mutual fund industry. We hope it serves as a useful tool for investors and the industry as they consider the proposed money market fund reforms."

A Wall Street Journal opinion piece entitled, "The SEC Gets Money-Fund Reform Half Right", written by Robert Pozen and Theresa Hamacher, endorses the floating NAV option and critiques the liquidity fees and gates option. It says, "The Securities and Exchange Commission recently proposed two new rules to help prevent sudden redemptions of money-market shares by investors from wreaking havoc on the financial system. The first proposal, requiring a "floating NAV" (net asset value), deserves support because it is limited to the most risky type of money-market funds: those held mainly by fast-moving institutions and invested largely in prime commercial paper. By contrast, the second proposal would apply to both institutional and retail money-market funds that invest mainly in commercial paper (so-called prime funds). Such funds would generally be required to impose "fees" and "gates" to slow down redemptions once a fund's liquid assets drop below 15% of total assets. This proposal could be counterproductive. To avoid these barriers to redemptions, investors would likely flee en masse as soon as their fund approached the 15% trigger.... While retail investors have been relatively slow to move in the past, the new rules will require prompt disclosure of the liquidity level of a money-market fund. When a fund's liquid assets dip below 20%, this will be widely noted by the financial press, so retail investors would be put on notice of impending barriers to redemptions. In response, some retail investors might shift their savings from money-market funds to bank deposits." (Note: Crane Data's Peter Crane has posted a Comment on this opinion piece pointing out some issues.)

Financial Advisor Magazine's website (www.fa-mag.com) writes "House To Examine Money Market Rules In July". The article says, "Proposed money market mutual fund rules by the SEC look good and should be the subject of House hearings starting in July, according to Rep. Scott Garrett (R-N.J.). Garrett, chairman of the House Capital Markets Subcommittee, praised the proposals as "thoughtful and deliberate" in a speech to the Hedge Fund Association in Washington D.C. yesterday. He said he was pleased they are the result of hard economic data. Garrett and other congressional Republicans have routinely criticized the SEC for writing rules without substantial cost-benefit analysis. Garrett also said he is happy to see the proposed money market regulations do not include a requirement for a capital buffer against losses. The congressman said it would not make sense to apply bank type regulation to money market funds, which are more security based. Garrett, noting he has yet to study the 700-page proposal in detail, said his subcommittee will start hearings on the money fund rules in July."

Fitch Ratings writes "SEC Money Fund Reform Raises Questions for LGIPs". The release says, "The Securities and Exchange Commission's (SEC) proposal for further reforms of money market funds may limit use of local government investment pools (LGIPs) unless state statutes change, according to Fitch Ratings. The SEC voted on June 5 to approve the initial proposal for further reform of the money fund industry. The proposal suggests enacting one or two substantial changes in addition to other enhancements. The first change mandates that prime institutional money market funds use floating net asset values (NAV), rather than the stable NAV of $1.00 that has been the standard since the industry's inception. The second requires nongovernment money funds to impose a 2% liquidity fee on redemptions if a fund's weekly liquid assets fall below 15% of total assets and allows fund boards of directors to impose temporary redemption gates. Additional requirements in the proposal include enhanced diversification, disclosures, and stress testing. The floating NAV proposal may have direct implications for LGIPs that are money market fund-like investment pools, and are required by law or investment policies to maintain a stable NAV per share. Government accounting rules allow LGIPs to use stable NAV as long as they operate in a manner consistent with Rule 2a-7. As noted by the SEC, state statutes and policies may need to be amended to reflect any additional changes to Rule 2a-7. Given the unknown potential impact on LGIPs, the SEC is requesting comment from the industry on the floating NAV proposal and its cost implications. The SEC is also requesting comment from industry participants concerning the effects of these proposals on efficiency, competition or capital formation." In other news, see the ICI's latest weekly "Money Market Mutual Fund Assets".

Reuters writes "Ireland calls on EU and U.S. to align money market rules". It says, "The European Union and the United States should align their rules for money market funds to avoid European funds relocating across the Atlantic, a senior regulator in Ireland said on Wednesday. Unlike the United States, the EU is considering imposing a cash buffer on major money market funds as part of efforts to regulate the shadow banking industry, which deals in trillions of dollars in assets, but operates outside the mainstream banking sector. At a conference in Dublin, Patrick Brady, director of policy and risk at the Irish central bank, warned that a divergent approach could create more problems for European regulators." He was quoted by Reuters, "There should be sufficient alignment across the Atlantic so that there is no distortion in the location of money market funds; money market funds located in the U.S. or indeed in Cayman, can invest in European banks and, therefore, present as much of a systemic risk for Europe as money market funds located in Europe."

The Investment Company Institute published a recent "Viewpoint," written by Mike McNamee entitled, "Fact Checking the Media on Money Market Funds." It says, "The media has heavily covered the unanimous vote by the Securities and Exchange Commission (SEC) to proceed with another round of regulatory changes for money market funds. In digesting this coverage, readers and journalists alike should make sure they have solid facts about money market funds. They also should be on guard for errors and omissions that tend to recur in stories and commentary on this issue. A recent Q&A item from the Associated Press illustrates one such omission. The Q&A states, '[Money market] funds have been the subject of high drama since the 2008 financial crisis. At issue have been years-long efforts by the Securities and Exchange Commission, Wall Street's cop, to reform the rules under which these funds operate in order to avoid investor panics of the sort that occurred a few years ago. Those efforts have been dogged by opposition from the mutual fund industry.' Unfortunately, the story fails to mention that in January 2010 the SEC completed a comprehensive post-crisis overhaul of the rules governing money market funds, imposing tough new requirements around credit quality, maturity, disclosure, and liquidity. Far from putting up "dogged" opposition, the industry embraced these measures and worked cooperatively with regulators to accomplish them."

MarketWatch's Chuck Jaffe writes "Fixing money-market funds before the next crisis". It says, "How you feel about the potential loss of a few pennies is different from how you might feel about the loss of a few billion pennies. Somewhere between those extremes is the reality of money-market fund reform, and the way you feel about the proposals put forth this week by the Securities and Exchange Commission depends on which pile of pennies you choose to focus on. As an individual investor, the whole thing is a matter of pennies on an investment that currently is struggling to generate much in returns. As a taxpayer, however, it's about the billions of dollars you don't want to see the U.S. Treasury laying out the next time investors worry about suffering a loss of pennies in their money funds. To see why, let's review the situation, the proposals and what it all really means."

Saturday's New York Times writes "Some Baby Steps on Money Funds". It says, "When the Securities and Exchange Commission tried last year to safeguard investors in money market mutual funds, Mary L. Schapiro, its chairwoman at the time, ran into a buzz saw of opposition from industry lobbyists. Last week, Ms. Schapiro's successor, Mary Jo White, tried her hand at bringing change to this $2.9 trillion market. Given the onslaught of lobbying against Ms. Schapiro’s efforts, it is perhaps not surprising that Ms. White’s proposal is much more incremental than her predecessor's.... The S.E.C.'s proposal "targets precisely the funds that ran the most in 2008," said Norm Champ, director of the S.E.C. division of investment management, in an interview. "The S.E.C.'s staff economic study showed that institutional investors redeemed from money market funds at a much higher rate than retail investors during the 2008 financial crisis." It's likely, though, that the panic would have spread to retail funds if the government hadn't stepped in with its insurance program. The proposal offers another attempt to prevent a run: a redemption charge.... The fund industry may not like some of this, but it is sure to be delighted about what is absent from the S.E.C.'s proposal. Unlike last year's version, this one does not require money market funds to set aside capital to protect against mass redemptions. Setting aside capital is the best way to protect shareholders from funds that take excessive risks, as well as from the perils of a panic, says David S. Scharfstein, a professor of finance and banking at Harvard Business School and an expert on money funds."

ICI's latest "Money Market Mutual Fund Assets" says, "Total money market mutual fund assets decreased by $2.53 billion to $2.611 trillion for the week ended Wednesday, June 5, the Investment Company Institute reported today. Taxable government funds decreased by $4.10 billion, taxable non-government funds decreased by $1.82 billion, and tax-exempt funds increased by $3.38 billion." After falling for four months in a row, money fund assets increased practically every week in May. Our latest Money Fund Intelligence shows assets rising by $33 billion in May; ICI's weekly prior to this week shows assets rising by $47.6 billion over the past 5 weeks <b:>`_. Year-to-date, ICI's weekly series shows money fund assets still down by $94 billion, or 3.5%. ICI's weekly also says, "Assets of retail money market funds increased by $8.49 billion to $903.67 billion. Taxable government money market fund assets in the retail category increased by $1.05 billion to $194.49 billion, taxable non-government money market fund assets increased by $5.08 billion to $518.97 billion, and tax-exempt fund assets increased by $2.36 billion to $190.22 billion.... Assets of institutional money market funds decreased by $11.02 billion to $1.707 trillion. Among institutional funds, taxable government money market fund assets decreased by $5.15 billion to $712.74 billion, taxable non-government money market fund assets decreased by $6.89 billion to $922.72 billion, and tax-exempt fund assets increased by $1.02 billion to $71.70 billion."

The SEC has released its full proposal on "Money Market Fund Reform". It says, "The Securities and Exchange Commission ("Commission" or "SEC") is proposing two alternatives for amending rules that govern money market mutual funds (or "money market funds") under the Investment Company Act of 1940. The two alternatives are designed to address money market funds' susceptibility to heavy redemptions, improve their ability to manage and mitigate potential contagion from such redemptions, and increase the transparency of their risks, while preserving, as much as possible, the benefits of money market funds. The first alternative proposal would require money market funds to sell and redeem shares based on the current market-based value of the securities in their underlying portfolios, rounded to the fourth decimal place (e.g., $1.0000), i.e., transact at a "floating" net asset value per share ("NAV"). The second alternative proposal would require money market funds to impose a liquidity fee (unless the fund's board determines that it is not in the best interest of the fund) if a fund's liquidity levels fell below a specified threshold and would permit the funds to suspend redemptions temporarily, i.e., to "gate" the fund under the same circumstances. Under this proposal, we could adopt either alternative by itself or a combination of the two alternatives. The SEC also is proposing additional amendments that are designed to make money market funds more resilient by increasing the diversification of their portfolios, enhancing their stress testing, and increasing transparency by requiring money market funds to provide additional information to the SEC and to investors."

ICI's "Statement on Proposed SEC Rulemaking for Money Market Funds" says, "Paul Schott Stevens, President and CEO of the Investment Company Institute, issued the following statement in response to today's vote by the Securities and Exchange Commission to issue for comment proposed new regulations for money market funds: "As we have long maintained, any proposal to make money market funds even more resilient must be judged against two principles. First, changes must preserve the key features of money market funds that have made them so valuable to investors and so important to the businesses and state and local governments that rely upon these funds for financing. Second, changes must preserve choice for investors by ensuring a continued robust and competitive global money market fund industry. We commend the Commission for the extensive research and discussion that the Chairman, Commissioners and staff have devoted to examining money market funds in recent months. The SEC has the regulatory expertise to address the vital issues involved. We are particularly pleased that the Commission recognized the effectiveness of liquidity fees and gates in addressing risks that might arise in a widespread crisis. We also welcome the inclusion of fees and gates as a standalone option in the proposal. We look forward to providing our analysis and industry expertise in response to the SEC’s proposals."

Investor's Business Daily writes "SEC Has Money Market Funds In Crosshairs Again Wed.". It says, "With a new chairman at the helm, the Securities and Exchange Commission on Wednesday will renew its effort to overhaul the $2.7 trillion money market industry, which was shaken during the 2008 financial crisis. An effort to radically transform money market funds failed last year when then-Chairman Mary Schapiro could not muster a majority on the five-member commission. Democrat Luis Aguilar joined with the two Republicans to defeat her measure. But that hasn't stopped regulators, including new chief Mary Jo White, who believe money market funds remain vulnerable and could worsen a future financial crisis. The money market fund issue is among the biggest and most controversial the SEC has taken up in years. No one outside the agency knows for sure what White will propose at the SEC's meeting starting at 10 a.m. ET." See also, Bloomberg's editorial "Fix Money-Market Funds Before the Next Crisis", which comments, "The U.S. Securities and Exchange Commission blew a chance last year to reduce the odds that money-market mutual funds will play a starring role in another financial crisis, as they did in 2008. The agency will take another swing at reform this week when it votes on a plan to make the funds less vulnerable to investor panics. Although the agency hasn't released a draft proposal, Bloomberg News reported that the SEC will do away with the fixed $1 a share price for some money-market funds. This is a step in the right direction, though there are several other measures the agency should consider to shore up the funds. Some might even garner support from the industry."

Reuters writes "Regulators missed chance to reform money market funds: Krawcheck". The article says, "She didn't get the job, but if Sallie Krawcheck were running the Securities and Exchange Commission she knows where her priorities would lie.... [S]he would move post-haste for "real reform" of the way money-market funds are accounted for on banks' books." "Reform of money funds (has been) way too long in coming," Krawcheck, the 48-year-old former head of Bank of America Corp's wealth management division, said Monday at Reuters Global Wealth Management Summit. "It's a big, glaring miss coming out of the downturn." The Reuters piece adds, "Krawcheck said she would oppose any halfway solutions that would apply only to part of the $2.6 trillion money-market fund industry. The SEC is believed to be considering rules that would apply to prime funds that buy securities issued by corporations but not to funds that invest primarily in government securities."

BlackRock's Laurence D. Fink, Chairman & CEO, "is scheduled to speak at the Deutsche Bank Global Financial Services Investor Conference in New York on Tuesday, June 4, 2013 beginning at approximately 8:40 a.m. (EDT). A live audio webcast of Mr. Fink's remarks will be accessible via the "Investor Relations" section of BlackRock's website, www.blackrock.com," says a press release. We expect Fink to mention the pending money fund reform proposal vote. Also, see the release, "Federated Investors, Inc.'s CEO to Present at Keefe, Bruyette & Woods Conference." It says, "Federated Investors, Inc. (NYSE: FII), one of the nation's largest investment managers, announced today that President and CEO J. Christopher Donahue is scheduled to present the company's strategy for growth at the Keefe, Bruyette & Woods Asset Management Conference at 2:50 p.m. Eastern on Wednesday, June 5, 2013. Investors and other interested parties can listen to a live webcast of the presentation via FederatedInvestors.com. To listen to the live presentation, go to the About Federated section of FederatedInvestors.com at least 15 minutes prior to register, download and install any necessary audio software."