Daily Links Archives: May, 2014

A statement entitled, "Federal Reserve offers seven-day term deposits from its Term Deposit Facility" says, "On June 2, 2014, the Federal Reserve will conduct a fixed-rate offering of term deposits through its Term Deposit Facility (TDF). The Federal Reserve will offer seven-day term deposits with an interest rate of 0.26000 percent and a maximum tender amount of $7,000,000,000. As noted in the Federal Reserve Board's May 9, 2014, release, this operation is part of the continuing program of operational testing of its policy tools designed to provide eligible institutions with an opportunity to gain familiarity with term deposit operations. Additional information regarding the operation is listed below; the operation will be conducted as specified in this announcement, Regulation D, and the terms and conditions of the Term Deposit Facility (http://www.frbservices.org/centralbank/term_deposit_facility.html).

FT writes "US SEC's lack of progress on reform rules frustrates officials". It says, "The pace of passing major financial reform rules has slowed to a crawl at the US Securities and Exchange Commission, frustrating some officials at the SEC and at other regulatory agencies who are upset by the lack of activity, according to people with direct knowledge of the matter. While the SEC has issued numerous enforcement actions this year, the agency has made little progress on more than 40 rules on its 2014 agenda.... The major reforms on the SEC's to do list are new rules governing money market funds, which saw runs during the crisis, an overhaul of the opaque swaps market, and additional measures to facilitate the Jobs act. Some officials at the commission and members of the Financial Stability Oversight Council, of which the SEC is also a member, worry that the lack of progress helps market participants interested in dodging new regulations, according to people with knowledge of the matter." See also, Institutional Investor's article on Yu'e Bao, Alibaba's now almost $90 Chinese money market fund.

Last week, Bloomberg wrote "Fed Repo Program Use Surges as Exit Strategy Speculation Rises". It says, "Use of the Federal Reserve's reverse repurchase agreement facility is surging as speculation rises that policy makers may make the program a permanent tool to be used during the unwinding of unprecedented monetary stimulus. Daily usage has averaged $194 billion a day in May, compared with $86 billion in the first three months of the year and $11.8 billion on Sept. 23, the day the Fed began testing the fixed-rate facility. That has led to speculation the minutes to be released today of the Fed's last policy meeting on April 30 may show greater discussion of the program and possible changes. The facility "allows us to make a short-term safe asset more widely available to a broad range of financial market participants," New York Fed President William Dudley said yesterday in remarks before New York Association for Business Economics.... The program has helped put a floor under money-market rates, which may otherwise have slide toward zero given a seasonal shortage of bills and heightened safe-haven demand, according to Barclays Plc. The allure of the facility has risen as investors face limited Treasury bills supply and regulatory pressures increasing the need for the safest of debt."

We learned Friday that the hotel for Crane's Money Fund Symposium, which will be held June 23-25 in Boston, is now sold out. The Renaissance Boston Waterfront Hotel is now out of rooms, so we're suggesting those that haven't made reservation yet to look at either the Westin Waterfront or the Seaport Hotel, which are the two closest neighboring hotels. Crane Data and our partner company Kinsley Associates do not have any agreements or discounts with these hotels, so attendees are on their own in getting the best rate they can. The update on our Money Fund Symposium website explains, "It is past the contracted hotel cut-off date and The Renaissance Boston Waterfront is in a sold out situation. There may be some sleeping rooms available based on cancellations, but the rate quoted will be at the best available rate and not the contracted rate mentioned below. If no rooms are available at the Renaissance the following two hotels are within walking distance. No official conference block has been set-up at either hotel so the rate quoted to you by them will be the best available rate the hotels can provide. 1. Westin Waterfront, and 2. Seaport Hotel. The Renaissance Boston Waterfront Hotel is a flagship waterfront hotel in the Boston, MA Seaport District which offers easy access to the Financial District, Quincy Market, and Faneuil Hall. An upstanding addition to the Boston Harbor, the hotel provides guests with an unparalleled level of service and sophisticated accommodations."

The ICI's latest "Money Market Fund Assets" release says, "Total money market fund assets decreased by $3.89 billion to $2.58 trillion for the week ended Wednesday, May 21, the Investment Company Institute reported today. Among taxable money market funds, treasury funds (including agency and repo) increased by $4.21 billion and prime funds decreased by $8.79 billion. Tax-exempt money market funds increased by $690 million. Assets of retail money market funds increased by $660 million to $904.59 billion. Treasury money market fund assets in the retail category increased by $390 million to $201.45 billion, prime money market fund assets decreased by $120 million to $515.67 billion, and tax-exempt fund assets increased by $390 million to $187.47 billion. Assets of institutional money market funds decreased by $4.55 billion to $1.68 trillion. Among institutional funds, treasury money market fund assets increased by $3.83 billion to $715.49 billion, prime money market fund assets decreased by $8.67 billion to $892.54 billion, and tax-exempt fund assets increased by $290 million to $71.23 billion."

ICI's Paul Stevens spoke on "Financial Stability: A Conversation with Investors" at GMM Tuesday. He says, "[M]y topic today is the ongoing debate about asset management and financial stability. Both U.S. and global regulators now are examining whether asset managers and investment funds -- including U.S. mutual funds -- should be treated like the largest banks and designated "systemically important financial institutions," or SIFIs. This is not a debate about "regulation" versus "no regulation." ICI and all of its members, both U.S. and global funds, favor sound regulation to address risks to investors and the capital markets. In the past six years, we actively have supported efforts to address abuses and close regulatory gaps exposed by the global financial crisis. No -- this is instead a debate over where and how risks to the financial system at large may occur -- and what the most effective tools are to address such risks, out of the many tools that regulators have at hand. On that score, our position is clear: regulated funds and their managers do not pose risks to the financial system at large; designation of funds or asset managers as SIFIs is unnecessary; and cramming our funds into a framework of bank-style regulation will be deeply harmful to funds, their investors, and the capital markets. If you have followed this debate at all, you may have noticed that this concept of "systemic risk" is pretty slippery -- those bent on finding it seem to detect it everywhere. That is why ICI and many of its members have worked hard to assemble a large, growing body of hard data and analysis; to describe industry norms and practices; and to educate policymakers about the structure and experience of regulated funds both in the U.S. and abroad -- all to bring some rigor to the dialogue. Ultimately, the critical voices in this debate will be the voices of fund investors -- the 90 million Americans who seek to meet their financial goals by investing in our diversified, well-regulated, and relatively low-cost funds. It is important that we make sure our investors understand what’s at stake—the consequences they will suffer if regulators insist on regulating mutual funds as if they were banks."

The opening afternoon of the Investment Company Institute's 2014 General Membership Meeting kicked off at the Washington Hilton yesterday, but the agenda contained nary a mention of money market mutual funds. The "Welcome and Opening Remarks were given by Charles Schwab Investment Management's Marie Chandoha and the ` President's Address <b:>`_ was given by ICI's Paul Schott Stevens. This was followed by the "GMM Policy Forum," which featured BlackRock Chairman & CEO Larry Fink, who engaged "in a far-reaching discussion about global financial markets and key public policy issues" with ICI's Paul Stevens. We didn't catch any discussions on money market funds, but there were some interesting comments. Stevens, who spoke on the FSOC and SIFIs, quoted Alan Greenspan on the 2008 financial crisis, saying that it was not the toxic securities, but the leverage which caused the problems. He also berated "proponents of the myth of flighty investors". Fink said, "The Federal Reserve is creating more problems [than it's solving] in 2014." He told the audience, "We need to get back to basics, and focus on outcomes and objectives." He also urged the audience to keep studying. The SEC's Mary Jo White will address the audience on Thursday a.m., so watch for our coverage later Thursday or Friday.

As we mentioned Friday, the ICI released its "2014 Investment Company Fact Book" in PDF form last week, ahead of today's ICI General Membership Meeting (GMM) in Washington. (Note: our Peter Crane will be in attendance.) We excerpted from the text in our "News" already, but today we mention some of the data tables and figures. On page 46, the Fact Book shows "Net New Cash to Money Market Funds," which breaks out the flows by month and which shows the huge cash inflows in November and December of 2012 (up $68 and $76 billion, respectively). In March 2013, money fund assets declined by $58 billion, and they increased by $46 billion in Sept. and by $44 billion in Dec. 2013. On page 48, the Fact Book shows how "Net New Cash Flow to Taxable Retail Money Market Funds Is Related to Interest Rate Spread." This chart shows that money fund yields minus bank rates on average have been negative from 2009 through 2013, and that retail money fund assets suffered big outflows in 2009 with smaller negatives in 2010 and 2012. Assets have inched positive in late 2012 and 2013, however. Finally, ICI also shows that "Money Market Funds Managed 20 Percent of U.S. Businesses' Short-Term Assets in 2013." (Crane Data believes that this 20% is a record low; ICI's chart shows that it is the lowest level since 2000, the earliest year shown.) The percent businesses' held in money funds reached a record level of 37% in 2008, then declined to 31% in 2009, 24% in 2010, 23% in 2011, and 22% in 2012. The prior peak was back in 2001 and 2002, when money fund use by businesses reached 28%, but MMFs then dropped to a prior low of 21% in 2004 and 2005 before climbing in '06, '07 and '08. Finally, ICI shows the "Prime MMF Holdings of Treasury and Agency Securities and Repurchase Agreements" on page 51. This chart shows the percent in Treasury, Agencies and Repo combined rising from a low of 12% in 2007 to about 30% in 2009, dipping to around 25% in 2010-2011, then rising to a high of 36% in 2012 (and dropping off to 28% in 2013) <b:>`_.

ICI released its latest monthly summary of "Money Market Fund Holdings, April 2014" yesterday, the latest edition of its series that tracks the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds (as of April 30, 2014). (See Crane Data's May 12 News, "May MMF Portfolio Holdings Show Repo, Treasury Drop, Jump in TD, CD".) ICI's "Prime and Government Money Market Funds' Daily and Weekly Liquid Assets table shows Prime Money Market Funds' Daily liquid assets at 22.9% as of April 30, 2014, down from 26.0% on 3/31/14. "Daily liquid assets" were made up of: "All securities maturing within 1 day," which totaled 17.8% (vs. 19.0% last month) and "Other treasury securities," which added 5.1% (vs. 7.0% last month). Prime funds' Weekly liquid assets totaled 36.5% (vs. 35.9% last month), which was made up of "All securities maturing within 5 days" (30.1 vs. 27.9% in March), Other treasury securities (5.1% vs. 7.0% in March), and Other agency securities (1.3% vs. 1.1% a month ago). Government Money Market Funds' Daily liquid assets total 63.6% in April vs. 62.4% in March. All securities maturing within 1 day totaled 27.6% vs. 22.0% last month. Other treasury securities added 36.0% (vs. 40.3% in March). Weekly liquid assets totaled 84.6% (vs. 85.6%), which was comprised of All securities maturing within 5 days (35.7% vs. 33.8%), Other treasury securities (36.0% vs. 37.5%), and Other agency securities (12.9% vs. 14.3%). ICI's "Prime and Government Money Market Funds' Holdings, by Region of Issuer" table shows Prime Money Market Funds with 40.9% in the Americas (vs. 48.0% last month), 18.8% in Asia Pacific (vs. 18.7%), 40.0% in Europe (vs. 33.0%), and 0.3% in Other and Supranational (vs. 0.3%). Government Money Market Funds held 88.0% in the Americas (vs. 89.3% last month), 0.5% in Asia Pacific (vs. 0.4%), 11.5% in Europe (vs. 10.2%), and 0.1% in Supranational (vs. 0.1%). The table, "Prime and Government Money Market Funds' WAMs and WALs shows Prime MMFs WAMs and WALs both shortened by two days from last month (to 45 and 81 days, respectively) and Government MMFs' WAMs shortened by one day to 44 days and their WALs increased by two days to 71 days. ICI's release explains, "Each month, ICI reports numbers based on the Securities and Exchange Commission's Form N-MFP data, which many fund sponsors provide directly to the Institute. ICI's data report for February covers funds holding 94 percent of taxable money market fund assets." Note: ICI doesn't publish individual fund holdings.

U.S. S.E.C. Commissioner Daniel Gallagher posted "Comment Letter on the OFR Asset Management and Financial Stability Report". He says, "Today, I filed a comment letter in connection with the Office of Financial Research Asset Management and Financial Stability Report. The comment letter is available at http://www.sec.gov/comments/am-1/am1-52.pdf. It is my hope that my comments will prove useful to the discussion at the conference on the asset management industry and its activities to be held by the Financial Stability Oversight Council on May 19, 2014." Gallagher's letter, filed ahead of Monday's FSOC Conference on Asset Management, tells us, "I submit this comment letter on my own behalf and representing my own views in connection with the Office of Financial Research ("OFR") Asset Management and Financial Stability Report ("OFR Report"). The report was intended to address the purported risks to the stability of our financial markets posed by the asset management industry. Notwithstanding my position as a presidentially-appointed and Senate-confirmed Commissioner at the Securities and Exchange Commission ("SEC" or "Commission") the primary regulator of the asset management industry for the past 75 years -- I have no statutory standing whatsoever in the Financial Stability Oversight Council ("FSOC") and will therefore play no formal role in FSOC's misguided debate over whether to designate asset managers as systemically important financial institutions ("SIFIs") pursuant to Title I of the Dodd-Frank Act. As such, I commend SEC Chair Mary Jo White for posting for comment the fundamentally flawed OFR Report, and it is that document and subsequent regulatory activities about which I offer these comments. I note at the outset that virtually all of the commenters on the OFR Report thus far have sharply criticized the absence of empirical data underlying the generalizations advanced by the report and the flawed methodology used to analyze systemic risk. Many argued that FSOC should not rely on the report to inform its policy decisions and some even called for OFR to withdraw the report. Among other criticisms, many commenters observed that the report reflects a severe lack of understanding of the asset management industry (including by inaccurately describing it as a homogenized group of entities and activities), that it is riddled with unfair generalizations, that it completely fails to address how prudential regulation would address any ofthe risks it purported to identify, and that it ignores the existing oversight authority for asset managers by the SEC and other federal agencies. I also note that FSOC's SIFI designation process is being conducted in a time and manner conspicuously contemporaneous with an even broader initiative on the part of the Financial Stability Board ("FSB"), an unaccountable international body comprised of bureaucrats from many different jurisdictions to identify non-bank, non-insurer entities, including asset managers, as global SIFis, including asset managers. FSOC and FSB -- everyone's favorite "F words" these days, it seems -- are both dominated by banking regulators and are intent on expanding the jurisdiction ofthe agencies led by certain constituent members by designating non-bank entities as systemically important with little to no input from the primary regulators of those entities."

ICI asks in a new "Viewpoint," "Who Are the FSB 14?." The Fourth in a series of Viewpoints postings on funds and financial stability" piece says, "In their search for ways that investment funds can pose risks to the financial system, regulators and central bankers from around the globe have proposed an arbitrary threshold: any investment fund with assets of more than $100 billion should automatically be subjected to further examination and consideration as a possible "global systemically important financial institution," or G-SIFI. The Financial Stability Board (FSB) -- composed of financial regulators and central bankers from around the globe—said it needed to define a "practical and manageable number" of funds to subject to further analysis. Well, the FSB got a "manageable number." Only 14 funds worldwide lie above this threshold -- all of them regulated U.S. funds. But this process of selecting these funds -- or any regulated fund -- will not bring the regulators any closer to finding or managing systemic risk. Of these 14 funds, three are money market mutual funds.... Three money market funds each have assets exceeding the $100 billion threshold and, under the FSB's proposed methodology, would thus automatically be subject to further examination. (Note: ICI doesn't list the funds, but Crane Data shows the 3 money funds currently over $100 billion as Vanguard Prime MMF ($129.8B), Fidelity Cash Reserves ($116.1B), and JPMorgan Prime MM ($108.2B as of April 30).) However, money market funds have already undergone significant reforms following the extraordinary market conditions in the fall of 2008. In 2010, the SEC amended Rule 2a-7 to impose tighter standards for the liquidity, maturity, and credit quality of money market funds' holdings. These reforms were thoroughly tested by significant challenges to the financial markets in the summer of 2011 caused by the U.S. federal debt-ceiling standoff and deteriorating conditions in Eurozone debt markets. Additional reforms remain under active consideration by the SEC, the appropriate and primary regulator of the mutual fund industry. The SEC's approach is an example of an activity-based focus on risk mitigation, which we'll cover in detail in a future post."

The Wall Street Journal writes "Breaking the Buck on Corporate Cash Piles". It says, "Cash, besides being king, is seen as risk-free -- one of the few numbers usually taken at face value. Recent moves by some of America's biggest companies should force a rethink of that. At the end of 2013, S&P 500 companies had parked overseas $1.9 trillion of the profits they made outside the U.S., according to ISI Group, more than four times the level of a decade earlier. Excluding financial firms, the 232 companies that offer some disclosure on where their cash is located held $650 billion in cash and cash equivalents (such as short-term Treasurys) overseas. With 83% of that, the technology, health-care and industrial sectors dominate. That cash presents a problem: Because companies want to avoid a tax hit, many are loath to repatriate it, preventing them from returning it to shareholders or otherwise deploying it at home. Letting cash sit in the bank isn't very productive, though, especially when interest rates are so low.... That raises the risk of companies overpaying for deals or even just bringing cash home despite the tax hit. EBay, for example, last month said it would repatriate as much as $9 billion. Suddenly, investors had to factor in a $3 billion tax payment, equivalent to about 4% of eBay's apparent value evaporating. If investors aren't applying some sort of haircut to the valuations of companies with hefty amounts of cash overseas, perhaps they should be."

Barclays' Joseph Abate writes in his latest " US Weekly Money Market Update", "Usage of the Fed's fixed rate reverse repo (RRP) program is about 60% higher in May than April, reflecting the low level of market rates and the shrinkage in bill supply. As seasonal net issuance picks up in the bill market, we expect rates to move up and facility usage to decline. Average daily RRP usage this month as been nearly $200bn and accounts for roughly one-third of the outstanding amount of Treasury tri-party repo. Overnight GC rates have not traded below the Fed's fixed rate on these transactions since the end of January, despite significant and persistent downward rate pressure. Although money funds are the Fed's single biggest RRP counterparty, we estimate that the GSEs may account for about 25% of participation. The Federal Reserve might consider further testing the timing of its repo operations to absorb more late afternoon cash.... Despite being a test that is nominally temporary and set to end next January, the Fed's fixed rate RRP has been remarkably popular this month. So far in May, usage has exceeded $190bn/day across a fairly consistent number of counterparties (60). Usage is about 60% higher than the April level which itself was the previous peak since testing began last September. This month's heavy usage reflects the low level of market rates caused by the absence of competing bill supply. At the end of April, the outstanding amount of Treasury bills was 14% lower y/y (and down 11% from the end of March). Bills account for the smallest share of the total amount of marketable debt (12.2%) since early 1953. Unsurprisingly given the demand for safe assets from money market funds, the seasonal thinness in bill supply has pushed other short-term interest rates lower. Not only are bills with maturities out to 6m trading at less than 5bp, but also overnight Treasury repo has been pinned at 5bp since late April while strong demand has pushed AA financial CP rates lower (to 12bp) and 3m Libor continues to fall. Although it is impossible to prove otherwise, we suspect that the bill supply pressures would have pushed these other interest rates close to 0bp in the absence of the Fed's RRP program. Instead, the Fed's RRP program appears to have established a largely impermeable floor at its fixed rate. Indeed despite significant downward rate pressure, overnight GC has not traded below the fixed rate since the end of January."

A release entitled, "Federal Reserve announces series of expanded TDF test operations," tells us, "As part of the continuing program of operational testing of its policy tools, the Federal Reserve plans to conduct a series of eight consecutive operations offering seven-day term deposits through its Term Deposit Facility (TDF). Individual operations will be held on the first business day of each week beginning the week of May 19, 2014. The Federal Reserve currently anticipates that over the first four operations, the maximum award amount will be increased gradually to an amount not to exceed $10 billion; the interest rate paid on these initial four operations will be maintained at 26 basis points. Over the subsequent four operations, the Federal Reserve expects to increase the interest rate paid in small steps to a level not to exceed 30 basis points. Details for each of the weekly operations, including the maximum award amount, rate offered, and other terms, will be announced nearer to the time of each operation on the Board of Governors' website. These operations are designed to ensure the operational readiness of the TDF and to provide eligible institutions with an opportunity to gain familiarity with term deposit procedures. The development of the TDF and the ongoing TDF test operations are a matter of prudent planning and have no implications for the near-term conduct of monetary policy. Additional information, including the steps that institutions must complete to be eligible to participate in term deposit operations are available at http://www.frbservices.org/centralbank/term_deposit_facility.html." Note the TDF program is not available to money funds, but only to banks.

Money fund assets increased for the second week in the past 3, breaking a 7-week losing streak. ICI's latest "Money Market Fund Assets" release says, "Total money market fund assets increased by $16.47 billion to $2.59 trillion for the week ended Wednesday, May 7, the Investment Company Institute reported today. Among taxable money market funds, treasury funds (including agency and repo) increased by $6.96 billion and prime funds increased by $7.37 billion. Tax-exempt money market funds increased by $2.14 billion. Assets of retail money market funds increased by $5.30 billion to $906.64 billion. Treasury money market fund assets in the retail category increased by $1.88 billion to $201.36 billion, prime money market fund assets increased by $2.20 billion to $517.37 billion, and tax-exempt fund assets increased by $1.22 billion to $187.91 billion. Assets of institutional money market funds increased by $11.16 billion to $1.68 trillion. Among institutional funds, treasury money market fund assets increased by $5.08 billion to $712.74 billion, prime money market fund assets increased by $5.16 billion to $899.97 billion, and tax-exempt fund assets increased by $920 million to $71.20 billion." Year-to-date, money fund assets have declined by $128 billion, or 4.7%. This compares to a decline of $122 billion through the first week in May in 2013 and a decline of $126 billion through the first week of May in 2012. In both previous years, money fund assets rose through the remaining 7 1/2 months of the year and ended the year positive. We expect MMF assets to continue this pattern in 2014.

BoardIQ writes "Ahead of New Regime, Money Funds Bolster Disclosures". The piece says, "Before the Securities and Exchange Commission announces new regulations, some money market funds are providing an abundance of information in place of their previously terse disclosures. While money funds have always had to tell investors that it's possible they may break the buck, attorneys and other experts say offering more detailed language in disclosures has lately been giving directors comfort they are doing all they can to prepare investors for the regulatory changes that may be ahead.... Even if the commission imposed new requirements, there would be a process and timeline for their implementation, which could be stalled if the industry opposed them, he notes. But if a fund wanted to add a line or two indicating that change may be afoot, "it probably can't hurt," says Peter Crane, president and CEO of money fund research firm Crane Data. He notes that, "when final money market fund reform rules come out later this year, additional disclosures almost certainly are going to be part of those." "Regulatory risk looms large in the sector," Crane says. "Regulatory risk is not just a risk from a revenue standpoint, but it's probably the largest market risk at this point. The odds of a credit event starting a run and a meltdown in the sector have been relatively low ... but if the SEC does go forward with a floating NAV reform, will it cause the very run it's trying to prevent?" In some cases, money funds may decide to add additional disclosures after learning the results of stress tests, Crane says."

A release entitled, "Fitch: Changes to Bank Support Pose New Challenge for MMFs," tells us, "Potential changes to certain banks' ratings due to declining sovereign support could further constrain the universe of investable assets for MMFs, according to Fitch Ratings' 1Q14 U.S. money market funds quarterly report. Sovereign support has historically been correlated to both bank and financial institution default risk, so changes in sovereign support could potentially have a meaningful impact on the ratings of certain banks, notably in the U.S., EU and Switzerland. Fitch's financial institutions group outlined three paths that bank ratings could take based on countries' resolution frameworks, which ranged from no change in sovereign support to material weakening of sovereign support. This could impact money funds, as their exposures as of March to the U.S. and EU were 25% and 30%, respectively. As the Treasury Department continues to pay down T-bills, MMFs turned to other products to invest excess cash. The use of the Fed's reverse repo facility was at a record high of $282 billion for the quarter ended in March. Fitch-rated prime MMFs invested nearly 6.7% of assets altogether with the Fed. Demand for CP holdings in Fitch-rated Prime MMF increased to 23% of total assets in March, up from 21% at the end of December 2013. Government MMFs made noticeable asset allocation changes by moving into treasury FRNs while reducing T-bill holdings. Municipal funds increased allocation to VRDNs at the expense of municipal bonds during the first quarter." See also, The Wall Street Journal's latest editorial "Our Opinion Hasn't Changed", which is subtitled, "Money market funds are the glaring exception to a successful model."

The Financial Times writes "Money market reform a win for Uncle Sam". It tells us, "There is only one certain winner from regulators’ flawed attempts to deal with systemic risk in the $2.6tn US money market fund industry, and that is the US government. New rules look set to reduce short-term borrowing costs for the US Treasury, at the expense of higher interest charges for corporate borrowers, who use the commercial paper market to fund business expenses such as payrolls. Money market funds are among the biggest buyers of short-term debt, and have established themselves at the centre of the credit markets, so reforming them is proving a nerve-racking business. The best that can be said is that at least the Securities and Exchange Commission is trying. European Union politicians have punted the whole issue on to the next parliament. In the US, institutional prime money market funds, which invest in commercial paper, are set to fall under a new regime to prevent runs like the one that nearly brought down the financial system in 2008. Some proportion of the $900bn currently in such funds will shift into safer money market funds that invest only in Treasury debt which -- as a result of a messy compromise -- are being left untouched by the SEC."

ICI posted the comment, "ICYMI: Congress Asks Questions About SIFI Designation and Asset Managers; SEC Chair White Provides Telling Answers" last week. It says, "DC scene setter, 2013–2014: The Financial Stability Oversight Council (FSOC) is examining asset managers for possible "systemically important financial institution" (SIFI) designation, which would bring with it enhanced prudential regulation from the Federal Reserve. Such "bank-style" regulation is foreign to U.S. capital markets. Capitol Hill engages, April 29: In its Securities and Exchange Commission (SEC) oversight hearing, the House Financial Services Committee spent significant time talking to SEC Chair Mary Jo White about FSOC's review of asset managers. Chairman Jeb Hensarling (R-TX) focused his questions for SEC Chair White on the issue, as did other members of the committee; Chairman White provided some telling answers." In her testimony, the SEC Chair: Stated that the SEC has the existing authority and expertise to regulate the asset management industry; Explained the fundamental differences between banks and asset managers; and, Confirmed that "concerns" are "real" about the potential negative impact that designation could have on investors in a SIFI-designated fund. ICI's view: The FSOC should listen to its esteemed colleague at the SEC -- the only regulator with significant capital-markets expertise and extensive experience regulating mutual funds -- when it comes to discussion and deliberation of asset management issues." Note: ICI will host its annual General Membership Meeting May 20-22 in Washington, and SEC Chair Mary Jo White will speak the morning of May 22.

The latest "Comments on Proposed Rule: Money Market Fund Reform" on the SEC's website comes from David F. Freeman, Jr., Arnold and Porter LLP, on behalf of Federated Investors, Inc., Washington, District of Columbia, who critiques a recent Fed paper on gates and fees. He writes, "We are writing on behalf of our client Federated Investors, Inc. and its subsidiaries ("Federated") to respond to a paper published last week by the Staff of the Federal Reserve Bank of New York ("FRBNY") on the FRBNY website, titled "Gates, Fees, and Preemptive Runs" ("FRBNY Staff Gates & Fees Paper”). The FRBNY Staff Gates & Fees Paper analyzes Alternative Two (the "Fees and Gates" proposal) of the rulemaking proposal regarding money market mutual funds ("MMFs") currently before the Securities and Exchange Commission (the "Commission"). The abstract accompanying the FRBNY Staff Gates & Fees Paper states: "We build a model of a financial intermediary, in the tradition of Diamond and Dybvig (1983), and show that allowing the intermediary to impose redemption fees or gates in a crisis -- a form of suspension of convertibility -- can lead to preemptive runs. In our model, a fraction of investors (depositors) can become informed in advance about a shock to the return on the intermediary's assets. Later, the informed investors learn the realization of the shock and choose their redemption behavior based on this information. We prove two results: First, there are situations in which informed investors would wait until the uncertainty is resolved before redeeming if redemption fees or gates cannot be imposed, but those same investors would redeem preemptively if fees or gates are possible. Second, we show that for the intermediary, which maximizes the expected utility only of its own investors, imposing gates or fees can be ex post optimal. These results have important policy implications for intermediaries that are vulnerable to runs, such as money market funds, because the preemptive runs that can be caused by the possibility of gates or fees may have damaging negative externalities." The Freeman letter explains, "The key assumption underlying the entire analysis, that banks are currently prohibited from imposing gates or fees on redemptions, is demonstrably false. Other than demand deposit accounts ("DDAs"), banks (1) are required by Federal Reserve Regulation D to reserve the right to require seven days' advance notice of a withdrawal from MMDAs, NOW accounts and other savings accounts; (2) are not required to allow early withdrawal from CDs and other time deposits; and (3) are allowed to impose early withdrawal fees on time deposits if they choose to permit an early withdrawal from a time deposit.... In Federated's view, only the Commission's proposed Alternative Two would achieve the Commission's stated reform goals while promoting efficiency, competition, and capital formation and satisfying the Commission's own internal guidelines for economic analysis (provided that the critical modifications suggested by Federated in other letters to the Commission are adopted). Implementing the Commission's Alternative One (the "floating NAV" proposal) either by itself or in conjunction with Alternative Two, would fail to achieve the Commission's reform goals while imposing costs on investors, funds, and the economy as a whole that far outweigh any benefits, thereby contravening the Commission's statutory obligations and the Commission's guidance."

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