Daily Links Archives: August, 2013

Reuters writes "Regulators unveil first global rules on shadow banking". It says, "The Financial Stability Board (FSB), the regulatory task force for the world's top 20 economies (G20), has published the first set of global standards for the $60 trillion "shadow banking" sector. The FSB said that the 2007-09 financial crisis revealed "fault lines" in the lightly regulated sector, which includes money market funds, repurchase markets and hedge funds." The standards include, "Proposals for minimum standards for calculating discounts, known as "haircuts", on collateral for securities lending and repo market participants." On "Money Market Funds," Reuters says, "European Union and United States already moving ahead with reform, representing the bulk of the world's MMF sector. These reforms to be reviewed by global regulators." See the FSB's press release, "FSB publishes policy recommendations to strengthen oversight and regulation of shadow banking" here.

A recent SEC Comment Letter comes from Chris Barnard, Germany. The well-versed apparently individual writes, "In general I would not support a floating NAV approach for the reasons outlined in my FSOC comment letter: that MMF investors are sophisticated and are aware of the nature of MMFs, and that they are not "guaranteed"; and that maintaining a stable NAV is one of the key attractions of MMFs. However, I would be more inclined to support the floating NAV approach for prime institutional MMFs only, as these invest predominantly in corporate paper with its higher credit risk and interest rate volatility compared with the investments backing Government MMFs, and higher shareholder redemptions compared with Retail MMFs. Of the two proposed alternatives, the second alternative that introduces liquidity fees and redemption gates would be more practicable and operationally easier to implement. It would also more directly mitigate the risks of runs on MMFs in times of market stress. For these reasons I would support alternative two over alternative one, as this would provide greater benefits at lower cost compared with alternative one."

The Federal Reserve Bank of New York released a statement entitled, "Information on Dealer Activity in Specific Treasury Issues Now Available." It says, "The New York Fed has long collected market information from its primary dealer trading counterparts and released these data in aggregated form to the public. Until recently, such data have only been available for broad categories of securities (for example, Treasury bills as a group) and not for specific securities. In April 2013, the Fed began releasing data on some specific Treasury issues, allowing for a more refined understanding of market conditions and dealer behavior. One of the expectations made of primary dealers is that they file FR 2004 statistical reports on an ongoing basis. The reports collect information on dealers' transaction, position, financing, and settlement activities in U.S. Treasury securities, agency debt securities, mortgage-backed securities, asset-backed securities, corporate debt securities, and municipal securities. Most information is requested weekly, for the week ending Wednesday, although some is requested daily. Moreover, most information is requested for broad categories of securities, although some is requested for specific Treasury security issues."

We learned from PreserveMoneyMarketFunds.org, that the GFOA, ICI, and Chamber of Commerce are hosting a webinar "Money Market Fund Regulation: The Impact on Municipal Finance" Tuesday (Aug. 27) at 2pm. The description says, "State and local governments rely on money market funds, both for cash management and as a crucial source of financing. Indeed, money market funds are the largest investor in short-term municipal debt. The Securities and Exchange Commission (SEC) has proposed forcing institutional tax-exempt money market funds -- which invest in municipal money market securities -- to float their net asset values (NAVs). This change would threaten the ability of state and local governments to use money market funds for cash management, as well as their ability to finance vital needs. Learn more about this threat to municipal finance -- and what to do about it -- at a webinar hosted by the Government Finance Officers Association, the Investment Company Institute, and the U.S. Chamber of Commerce. The webinar will take place TOMORROW, August 27 from 2–3 p.m. ET. Panelists for the webinar are: Kathryn Hewitt, Treasurer, Harford County, MD, Jane Heinrichs, Senior Associate Counsel, Investment Company Institute, and Alice Joe, Executive Director, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce. `To register for the webinar, go to: www.cvent.com/d/74q7v0/4W. The public comment period on the SEC’s proposal to require floating NAVs is open through mid-September -- it is essential that you make your voice heard now."

ICI's latest "Money Market Mutual Fund Assets" says, "Total money market mutual fund assets increased by $15.49 billion to $2.638 trillion for the week ended Wednesday, August 21, the Investment Company Institute reported today. Taxable government funds increased by $10.50 billion, taxable non-government funds increased by $3.24 billion, and tax-exempt funds increased by $1.75 billion." Money fund assets rose for the third week in a row and for the 9th week out of the past 12 weeks; assets are up $75 billion since May 1, with over half, $41 billion, coming from retail funds. ICI's release adds, "Assets of retail money market funds increased by $7.31 billion to $931.03 billion. Taxable government money market fund assets in the retail category increased by $1.74 billion to $200.12 billion, taxable non-government money market fund assets increased by $4.16 billion to $534.89 billion, and tax-exempt fund assets increased by $1.41 billion to $196.01 billion. Assets of institutional money market funds increased by $8.18 billion to $1.707 trillion. Among institutional funds, taxable government money market fund assets increased by $8.76 billion to $719.96 billion, taxable non-government money market fund assets decreased by $920 million to $914.03 billion, and tax-exempt fund assets increased by $340 million to $72.80 billion."

The Federal Reserve's latest "Minutes of the Federal Open Market Committee, as of July 30-31, 2013, among other things, say, "In support of the Committee's longer-run planning for improvements in the implementation of monetary policy, the Desk report also included a briefing on the potential for establishing a fixed-rate, full-allotment overnight reverse repurchase agreement facility as an additional tool for managing money market interest rates. The presentation suggested that such a facility would allow the Committee to offer an overnight, risk-free instrument directly to a relatively wide range of market participants, perhaps complementing the payment of interest on excess reserves held by banks and thereby improving the Committee's ability to keep short-term market rates at levels that it deems appropriate to achieve its macroeconomic objectives. The staff also identified several key issues that would require consideration in the design of such a facility, including the choice of the appropriate facility interest rate and possible additions to the range of eligible counterparties. In general, meeting participants indicated that they thought such a facility could prove helpful; they asked the staff to undertake further work to examine how it might operate and how it might affect short-term funding markets. A number of them emphasized that their interest in having the staff conduct additional research reflected an ongoing effort to improve the technical execution of policy and did not signal any change in the Committee's views about policy going forward."

We've begun preparing for the Association for Financial Professional's (AFP's) Annual Conference, which will take place October 27-30, 2013, at the Mandalay Bay Convention Center in Las Vegas. AFP's describes the largest gathering of corporate treasurers, "The AFP Annual Conference brings together more than 6,000 treasury and finance professionals for an experience you can't afford to miss." The event includes: "140 educational sessions across 8 tracks and 20 industries; An unbiased agenda featuring distinguished speakers such as General Colin Powell and former FDIC Chairman Sheila Bair; Abundant networking opportunities from the Welcome Reception to Industry Roundtables; Pre-conference seminars to help you learn more and make the most of time away from the office; A simple and convenient way to earn continuing education credits in just a few days; and 250 exhibiting companies showcasing innovative products and solutions to streamline operations and cut costs." Crane Data will be exhibiting along with dozens of institutional money market fund vendors and online money fund trading portals. Our Peter Crane will present, along with Chinatrust's Haiwen Hsu on "Solving the Supply Problem: Emerging Issues in Money Market Funds."

The Federal Reserve Board posted an April "International Finance Discussion Paper" entitled, "Revenge of the Steamroller: ABCP as a Window on Risk Choices." It's "Abstract" says, "We empirically examine financial institutions' motivations to take systematic bad-tail risk in the form of sponsorship of credit-arbitrage asset-backed commercial paper vehicles. A run on debt issued by such vehicles played a key role in causing and propagating the liquidity crisis that began in the summer of 2007. We find evidence consistent with important roles for both owner-manager agency problems and government-induced distortions, especially government control or ownership of banks." The paper's introduction explains, "We use credit-arbitrage asset-backed commercial paper (credit-arb ABCP) vehicles to offer evidence on the reasons major banks exposed themselves to systematic bad-tail risk in the period leading up to the financial crisis that began in 2007. By systematic bad-tail risk we mean exposure to large losses in low-probability states of the world, especially states in which such losses are unusually costly, such as when risk premiums are high. In July of 2007, just before a run on their liabilities began, credit-arb ABCP vehicles had about $700 billion in assets. Most were sponsored by banks that provided their vehicles with committed backup lines of credit and other support, so sponsors bore the vehicles' risks. When vehicles experiencing ABCP runoffs turned to their sponsors for funding, the sponsors sought large amounts of new funding in interbank and other money markets. Most sponsors were European banks but most vehicle assets and liabilities were denominated in U.S. dollars; thus, sponsoring banks were forced to raise funds outside their home money markets and their national central banks were not immediately able to provide dollar liquidity support. This increased the cost to sponsors and also helped transmit the ABCP shock throughout the global financial system."

Bloomberg's downright silly "SAC's Money Market Lesson" writes, "Bloomberg News reports that investors in SAC Capital, the $14 billion hedge fund recently indicted for encouraging insider trading, want to get their money out as soon as possible. They are worried that their funds might be seized by the government. However, SAC Capital is under no obligation to return investors' money before the end of the year because of a common hedge-fund practice known as "gating." Investors in money-market mutual funds may soon be at risk for similar treatment. At least, that is the plan favored by the industry, which the Securities and Exchange Commission cautiously endorsed as one option in June. If the rule becomes official, a fund facing mass withdrawals could temporarily deny investors their money, or impose steep redemption fees. (For finance-history geeks, this would be very similar to what banks used to do in the days before the creation of the Federal Reserve and deposit insurance: "suspension of convertability.")" See also, FT's "US money funds see value in European banks" from last week.

The European Central Bank (ECB) released its latest quarterly "Aggregated balance sheet of euro area money market funds," which shows that euro money fund balances continue to decrease. From over E1 trillion in 2011, euro money fund totals have fallen from E923 billion at the end of 2012 to E862 billion at the end of Q2 2013. (Note: We're not sure what the ECB includes in these totals. Crane Data currently tracks just E80 billion in Euro-denominated money funds. We don't consider French and Italian funds, which likely make up the bulk of the ECB's totals, true "money funds.") The ECB also released its latest "`Monthly Bulletin: Economic and monetary developments," which says about "Money Market Interest Rates, "While overnight money market interest rates remained broadly stable in July, the money market yield curve flattened after the Governing Council's announcement of forward guidance on 4 July. In the seventh maintenance period of the year, which began on 10 July, the EONIA remained at low levels, reflecting the low key ECB interest rates, as well as the amount of excess liquidity in the overnight money market, which remained high, despite the ongoing repayment of funds borrowed in the three-year longer-term refinancing operations (LTROs). Unsecured money market interest rates remained generally stable in July 2013. On 31 July the one-month, three-month, six-month and twelve-month EURIBOR stood at 0.13%, 0.23%, 0.34% and 0.54% respectively, and was thus 1 basis point higher for the one-month and three-month maturities, while unchanged for the other maturities. Consequently, the spread between the twelve-month and one-month EURIBOR -- an indicator of the slope of the money market yield curve -- decreased by 1 basis point to stand at 41 basis points on 31 July."

The latest addition to the SEC's "Comments on Proposed Rule: Money Market Fund Reform; Amendments to Form PF" shows no letup in the opposition to the floating NAV option. The latest comment is from Andrew Berger, Director, Government Affairs, Association of Indiana Counties. Berger writes, "I want to register my strong opposition to the proposal put forth by the Securities and Exchange Commission to force institutional prime and tax-exempt money market funds to abandon the stable $1.00 net asset value and "float" their per-share price (the "floating NAV"). Money market funds play a vital role in both cash management and public financing for municipal governments. As investors, state and local governments rely upon money market funds (MMFs) as the most flexible way to invest and accumulate cash in anticipation of short-term needs. MMFs provide a current market yield on a diversified, fully disclosed portfolio. While municipalities invest in MMFs, these funds also invest in America's cities, counties, and states. Money market funds hold almost three-quarters of all short-term municipal debt, providing financing for operations and public works. These funds' ability to pass through tax-exempt interest to investors helps ensure an active and liquid market for state and local debt issues. The convenience and simplicity of the stable share price are key features of MMFs. Groups representing millions of investors have said that impairing these features will drive investors and their cash out of these funds. Indeed, many state and local governments are barred from using "floating value" instruments for cash management. Driving investors out of these funds will limit financing options available to state and local governments, which could lead to higher financing costs, reduced services, increased taxes, and layoffs. Impairing MMFs could deal a severe setback to an economy in recovery. I urge the SEC not to change the fundamental nature of money market funds and undermine this important source of investment and public funding by imposing a floating NAV."

Late last week, SEC Chair Mary Jo White issued a "Statement on Commissioners Elisse B. Walter and Troy A. Paredes upon the completion of their terms, and their succession by Kara M. Stein and Dr. Michael S. Piwowar". It says, "The many contributions made by Commissioners Elisse Walter and Troy Paredes over the past five years have made the agency a stronger institution, and we owe them a deep debt of gratitude for their service. Elisse' dedication and commitment to this agency made her one of the most respected people to grace the halls of the institution.... Throughout her career, she has been a forceful and articulate advocate for investors and a wealth of knowledge that we all relied upon. As Commissioner, Elisse oversaw a comprehensive examination of the state of the U.S. municipal securities market and authored an investigative report that called for greater transparency and more timely disclosure in this $3.7 trillion market. As Chairman, she successfully led the SEC's efforts to reconcile U.S. regulation of derivatives with regulations adopted overseas, and she pressed for a greater international outlook in our day-to-day work. She also spearheaded efforts to increase financial market stability and was instrumental in advancing the Commission's efforts to reform money market funds. Troy has always been a fervent supporter of the agency's mission. His experience as a practicing attorney, law professor and author of the leading treatise on securities law, gave him a deep expertise that he brought to bear on every issue that came before the Commission. Those who worked with Troy know he always asked the probing questions to ensure we understood how our actions could impact investors, individual firms and the industry at large. He quickly established himself as a committed proponent of rigorous analysis of the costs and benefits of our securities regulations. Troy also served as major contributor in the area of corporate governance, including executive compensation and the relationship between corporate boards and shareholders. As much as we will miss Elisse and Troy, I am very pleased to be welcoming Kara and Mike and truly appreciate their continued commitment to public service. Kara M. Stein was sworn in as Commissioner earlier today Dr. Mike S. Piwowar will be sworn in next week."

The Wall Street Journal writes "Money Funds Embrace a Rule They Shunned". The piece speculates, "An unexpected ally is emerging in the Securities and Exchange Commission's effort to force money-market mutual funds to abandon their signature $1 share price: banks and other money-fund sponsors that previously opposed or were wary of such a change. In a significant turnabout, officials at some of the largest money-fund sponsors, including J.P. Morgan Chase & Co. and Goldman Sachs Group Inc. say they can get behind a key plank of the SEC's plan requiring the riskiest money funds held by large institutional investors to abandon their stable $1 share price and float in value like other mutual funds." [The companies have made no official public statements to this effect.] The Journal adds, "Behind the shift is an acknowledgment that the SEC, after months of delay, is prepared to force changes on the $2.6 trillion industry and that money funds will fare better with a floating share price than the alternatives under discussion. The floating share-price plan also is more palatable than earlier plans under discussion since it applies to just 35% of the industry. A proposal championed by former SEC Chairman Mary Schapiro last year would have required the entire industry to float their shares or post bank-like capital. Clients for some money managers say a floating share price is more palatable than restrictions on fund redemptions, which was among the options proposed by the SEC."

The advocacy website, PreserveMoneyMarketFunds.org sent an e-mail on Friday quoting comments from Jim Lazarus, Senior VP, Public Policy, San Francisco Chamber of Commerce, "The SEC's floating NAV proposal, if implemented, would diminish businesses' choices as investors, without achieving regulators' goals of improving the stability of financial system. Thus, forcing to float would provide no benefit while making it harder for my business and others to manage cash." The e-mail says, "In his comment letter to the Securities and Exchange Commission, San Francisco Chamber executive Jim Lazarus warned that forcing a floating net asset value (NAV) on money market funds (MMFs) will harm businesses across the country. Chief among the reasons outlined in his letter is the negative aspect that a floating NAV would have on cash flow management." "We use money market funds as the most flexible way to invest and accumulate cash in anticipation of short-term needs. The convenience and simplicity of MMFs—based on their stable share price—make these funds useful for our cash management," Lazarus wrote. The e-mail adds, "The proposed rule issued by the U.S. Securities and Exchange Commission could undermine the key features of money market funds. For businesses, state and local governments, and nonprofits, "floating NAV" funds would create huge headaches -- accounting issues, tax complications, and even limits on their ability to use money market funds for cash management. Organizations from throughout the nation, representing business, municipalities and states, non-profits, and individual investors have rallied once again to oppose such changes to money market funds. Many already have directed letters to the SEC's comment file voicing their concern. It's time to make your voice heard also. The public comment period on the SEC's proposal is open through September 17. Floating NAVs for money market funds will negatively affect your business or community, so let policymakers in Washington know. Visit www.preservemoneymarketfunds.org to send a letter to the SEC and to your elected representatives in one simple click. If you would like to send your own letter directly, e-mail rule-comments@sec.gov and include File Number S7-03-13 in the subject line. NOTE: The Investment Company Institute and the U.S. Chamber of Commerce have launched a series of briefings about the proposed changes to money market funds. The first is today, Monday, August 12, 10 to 11 a.m. (PT), at the Offices of Gibson Dunn, 555 Mission Street, San Francisco, CA 94105-2933. The second is Thursday, August 15, in Chicago, from 2 to 3 p.m. (CT) at the Offices of Mayer Brown, 71 South Wacker Drive, Chicago, IL 60606. If interested in attending, please contact Scarlett Rajski at srajski@mww.com or (201) 964-2442."

ICI's latest weekly "Money Market Mutual Fund Assets" report says, "Total money market mutual fund assets increased by $7.66 billion to $2.620 trillion for the week ended Wednesday, August 7, the Investment Company Institute reported today. Taxable government funds decreased by $7.45 billion, taxable non-government funds increased by $10.85 billion, and tax-exempt funds increased by $4.26 billion." Year-to-date, money fund assets have decreased by $85 billion, or 3.1%, but they have increased by $57 billion since May 1. ICI's release adds, "Assets of retail money market funds increased by $5.29 billion to $924.26 billion. Taxable government money market fund assets in the retail category increased by $1.44 billion to $198.64 billion, taxable non-government money market fund assets increased by $1.16 billion to $530.23 billion, and tax-exempt fund assets increased by $2.68 billion to $195.38 billion.... Assets of institutional money market funds increased by $2.37 billion to $1.696 trillion. Among institutional funds, taxable government money market fund assets decreased by $8.89 billion to $711.51 billion, taxable non-government money market fund assets increased by $9.69 billion to $911.71 billion, and tax-exempt fund assets increased by $1.58 billion to $72.52 billion."

A publication, "Understanding the New York Fed's Survey of Primary Dealers" was put out by the Federal Reserve Bank of New York to explain its dealer survey. The release says, "In the latest edition of Current Issues, New York Fed staff provide a detailed overview of the Bank's Survey of Primary Dealers (SPD), including an in-depth look at the purpose and evolution of the survey. The SPD is designed to provide a timely and comprehensive summary of market expectations on a range of policy-related topics. One to two weeks before each regularly scheduled Federal Open Market Committee (FOMC) meeting, the primary dealers are asked about their predictions for monetary policy and the economy. Survey responses are analyzed ahead of the meeting; aggregate results are published publicly three weeks after the FOMC meets. In "Understanding the New York Fed's Survey of Primary Dealers," Ellen Correia Golay, Steven Friedman and Michael McMorrow offer a comprehensive review of the SPD and explain how the survey has evolved in recent years to reflect both the changing macroeconomic environment and the Fed's move into new policy tools, such as forward guidance on interest rates and asset purchases. The authors also discuss how the survey has benefited from a relatively stable sample of respondents and a recurring set of core questions, allowing for time series analysis."

There have been some heavy clusters of Comments on the SEC's MMF Reform Proposal coming from the website www.SaveMoneyMarketFunds.org, which Federated Investors has been sending to clients. The SEC shows 391 responses with the letter with the following standard text, "Since we have depended on the utility, stability and liquidity of money market funds (MMFs) for some time, we want to express our strong opposition to the imposition of a floating NAV as outlined in the SEC's proposed amendments to fund regulations. This action would destroy a fundamental reason why the funds have become the preferred cash management product for tens of millions of Americans. As importantly, a floating NAV would do nothing to help achieve the stated regulatory goal of averting significant redemptions during a time of extreme financial stress, a key point raised by Commissioner Paredes in his comments on the proposal. The foundation for the popularity and usefulness for MMFs is the stable $1.00 net asset value and like the vast majority of users, we certainly understand that MMFs are investments that are not guaranteed by the government or anyone else. For us, adopting a floating NAV would create accounting, tax and administrative nightmares by, requiring the tracking of minute increases or decreases in share price each time shares are bought or sold. It is also critical that the SEC maintain the present system of same-day settlement. The hard dollar costs, time, systems/processes and personnel resources needed with a floating NAV will make MMFs just too expensive and force users to seek less attractive or unregulated alternatives. And targeting just prime funds for a floating NAV is no solution as these funds are widely used, not only by institutions, but also by individual investors in 401(k) and other retirement holdings. Since the SEC is serious about preserving MMFs and is also concerned about protecting investors from heavy redemptions should a crisis hit the financial markets, then liquidity gates, as discussed in Alternative Two, provides the only solution. Gating, a temporary restriction of redemptions, maintains a stable value and daily liquidity in all but the most extreme times, creates no tax, accounting or administrative issues and meets both investors and issuers needs. It does, however, allow for temporary redemption restrictions at the judgment of the fund board to gate the fund and protect all investors. Gating is a successfully tested response that makes sense and will preserve the benefits of money market funds. We ask you to look closely at the serious and widespread fallout that would occur with a floating NAV, as well as how gating can address the needs of all MMF stakeholders. We hope that the SEC will take our views into consideration. In light of the 2010 regulatory reforms instituted by the SEC, money market funds are working well. We urge the SEC not to regulate MMFs out of existence since there are no other financial products available that provide the same flexibility, yield and value as MMFs."

Federated Investor's latest "Month in Cash" says, "We closed out July with the release of the statement from the July 30-31 meeting of the Federal Reserve's Federal Open Market Committee (FOMC). As expected, the FOMC indicated the Fed will continue to pursue quantitative easing measures, at least for the time being, at its current pace of $85 billion per month of Treasury and mortgage-backed securities.... Repo rates remain in low, low territory, hovering in the one to four basis-point range. We do expect the Treasury to have some additional financing needs in August that should necessitate the need for some cash management bills in the two-week to one-month range, so there could be some (temporary) relief in the next few weeks with this additional supply in the marketplace. It's also likely that the expected announcement from the Fed of the beginning of the end of QE measures, possibly as early as September, will give a boost to both agencies and Treasuries. Rates in the one-week to one-month range have been holding up relatively well, in the high teens, so in cases where we can go slightly further out on the yield curve and still maintain liquidity standards, there are some (slightly) better options."

Bloomberg writes "SEC's Money-Fund Rule Boosted by Economic Study, Paredes Says". The article says, "A revised proposal to limit the systemic risk posed by money-market mutual funds shows how economic analysis can improve financial regulation, Securities and Exchange Commission member Troy A. Paredes said today. The SEC measure released in June reflects the progress the agency has made in studying the costs and benefits of new rules, Paredes said at an event sponsored by the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness." It quotes Paredes, "That proposal laid out in pretty crisp terms, 'this is what we are trying to achieve subject to the following constraint.' ... When you read that document, you understand the starting point and the subsequent analysis which adds to the transparency of government.... The release really reflects the benefit, frankly, of rooting what we do in economics and rooting what we do in the data." See also, FT's "Goldman commits to money market funds".

Earlier this week, U.S. Securities and Exchange Commission Chair Mary Jo White gave "Testimony on "Mitigating Systemic Risk in the Financial Markets through Wall Street Reforms" to the U.S. Senate Committee on Banking, Housing, and Urban Affairs. She said on Money Market Funds, "While there are many possible explanations for the redemptions from money market funds during the 2007-2008 financial crisis, regardless of the cause or causes, money market funds' experience in the 2007-2008 financial crisis demonstrates the harm that can result from rapid heavy redemptions in money market funds. Since that time, the Commission and its staff have reexamined the Commission's regulation of money market funds. This effort began with the Commission's 2010 reforms to money market fund regulation, followed by a 2011 Commission roundtable on money market funds and systemic risk, a new and detailed study in 2012 by SEC economists, and most recently a June 2013 proposal requesting public comment on additional reforms to the Commission's regulation of money market funds. The staff also has used data collected from money market funds on Form N-MFP to monitor trends and risks in this area, which was particularly useful during the Eurozone sovereign debt crisis. The Commission's recent proposal requests comment on a variety of reforms designed to reduce money market funds' susceptibility to heavy redemptions, to mitigate potential contagion effects from heavy redemptions, and to increase the transparency of their risks, while preserving the benefits of this product to both retail and institutional investors to the extent possible. There are two principal reform proposals -- which could be adopted separately or in combination. The first -- would require that all prime institutional money market funds operate with a floating net asset value. The second would require that all non-government money market funds impose a 2% liquidity fee if the fund's level of weekly liquid assets fell below 15% of its total assets, unless the fund's board determined that it was not in the best interest of the fund. The second reform alternative also would permit the fund's board of directors to temporarily suspend redemptions in the fund for up to 30 days if it crossed that liquidity threshold. With respect to both alternatives, the proposed reforms also would tighten diversification requirements, enhance disclosure requirements, improve data reporting on both registered and unregistered money market funds, and strengthen fund stress testing. We look forward to receiving public input on the proposal and whether it strikes the right balance between addressing systemic risk concerns while also maintaining money market funds as a viable investment product. The 90-day comment period ends in mid-September." See also, ICI's "Money Market Mutual Fund Assets".

The Federal Reserve issued its latest FOMC statement yesterday. It says, "Information received since the Federal Open Market Committee met in June suggests that economic activity expanded at a modest pace during the first half of the year. Labor market conditions have shown further improvement in recent months, on balance, but the unemployment rate remains elevated.... To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view 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."

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