Daily Links Archives: July, 2014

Cachematrix issued a press release on Tuesday announcing a new partnership with Regions Bank. Money fund portal technology provider Cachematrix announced yesterday that "its technology is now powering Regions Banks' Global Investment Portal." "We are pleased to provide a solution that will allow our corporate and institutional clients to manage their liquidity efficiently, securely and with confidence," says Jason Sweatt, senior vice president, liquidity and deposits management at Regions Bank. He adds, "Cachematrix is a leader in financial software development with the expertise required to develop a custom platform tailored to the unique needs of our clients." The press release explains, "With the addition of Cachematrix technology, Regions Bank is now able to provide its corporate clients with cutting edge functionality to meet the needs of its extensive client base investing in money funds. This feature set includes: Full research and trading capabilities on money fund offerings across many fund families and categories; Full holdings level portfolio transparency and research via ATLAS analytics package; Full suite of compliance and dual authorization functionality; Global Dynamic Messaging functionality; Integrated online statements and trade confirmations; DDA account drawdown with balance validation; Straight Through Processing via integration with SunGard AddVantage; Single Sign-On integration with Regions Bank's OnePass System." The release quotes Cachematrix founder and CEO George Hagerman, "I am very excited that Regions Bank has partnered with Cachematrix to power its liquidity management platform. Centralizing liquidity management functions through a consolidated technology solution is a core foundation for growth within a bank, and we are seeing this become more commonplace as the industry continues to evolve." In other news, the Federal Reserve Board of Governors issued a Statement after its meeting on Wednesday, but made no major changes on interest rate policy. "To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress -- both realized and expected -- toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored. 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. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run."

Vikram Rai at Citi Research posted a piece, "Final Money Fund Reform: How Will It Affect Money Markets?." Writes Rai, "We expect inflows into govt. MMFs at the expense of institutional prime MMFs which will lead to less demand for credit products like CP, ABCP, CD, VRDNs and legacy repo. But since the compliance date for the floating NAV rule is more than 2 years away, this development is likely to play out slowly. Credit spreads on ultra-short term securities may widen slightly. However, regulatory pressure on banks to fund at longer maturities is likely to prevent bank commercial paper spreads from widening substantially. To the extent prime funds look to build liquidity in anticipation of potential outflows, prime funds may either increase investment in front-end Treasuries and repo (which could lead to wider credit spreads) or by reinvesting more in shorter maturity securities (which could lead to a steepening of the money market curve). As funds begin to comply, inflows into govt. MMFs could increase as some investors allocate out of floating NAV funds. Given the scarcity of investable short-term Treasuries, govt. MMFs could turn more to the Fed's ON RRP program; the usage of this program typically spikes during quarter ends and MMF reform would only add to the short term market's reliance on the Fed's program." He adds, "Currently the yield differential between institutional prime funds and institutional govt. funds is less than 2bp. But, an increase in this spread could incentivize corporate treasures and other investors to modify their guidelines such that they are able to invest in floating NAV funds and take advantage of higher yields. Additionally, short-term investors have shown flexibility and resilience when adapting to shocks in the past, for instance modifying AAA only mandates when US Treasuries were downgraded. Market participants have speculated that eligible investors could reallocate out of institutional prime funds into short duration funds, which offer higher yields. In our view, the majority of money fund investors, who look to liquidity and return of principal before the return on investment, are unlikely to transition to ultra-short duration funds. But those who are in a position to take on the added risk of short-term bonds continue to allocate a portion of their portfolios to this asset class in lieu of money funds. In the current environment, where front-end rates are priced lower than Fed's target rate and where the market expects rate hikes within the next 12–18 months, flows out of money funds and into ultra-short duration funds may be limited further."

Moody's issued a release last Friday that looks at "Six Things To Watch For in The Wake of New US Money Fund Rules." "1. Will money fund managers alter their investment strategies? Yes. VNAV pricing will help keep sponsors on the straight and narrow. Watch for more conservative and more liquid investments. 2. Who will actually use gates and fees? Probably no one, absent extreme conditions. 3. Will tax treatment change to accommodate VNAV? Very likely. 4. Will money be on the move? Some money will move to alternative products to avoid VNAV pricing or the risk of gates and fees. The changes to product structure are likely to cause MMF investors to shift some balances to alternative liquidity products with differing risk characteristics to meet the multiple needs of liquidity investors. These alternative liquidity products will include bank deposits, separately managed accounts, ultra- and short-duration bond funds, cash plus funds and cash exchange-traded funds (ETFs). That said, we expect that government MMFs will still be a popular re-investment choice for investors redeeming money from non-government MMFs. 5. Will the new rules cause further industry consolidation? Absolutely. Smaller players who have hung on until now may throw in the towel. A combination of changing product structures, low interest rates and higher operational expenses could hinder many of the remaining small-to-medium size sponsors, leading them to exit the industry. 6. Will European regulators take a page out of the SEC's new rule book? Hard to predict. It remains to be seen whether the European Commission will align itself with the changes to be implemented in the US, or whether the two regulatory regimes ultimately will differ substantially." Fitch Ratings also issued a release, "US Money Fund Reform to Transform Cash Management." "Money market fund reform will have its largest impact on institutional prime and municipal money funds while fundamentally changing cash management for corporate treasurers, according to Fitch Ratings. The new rules will reshape the landscape of liquidity products for cash investors.... Although opposition to the proposed rules has focused mostly on the floating NAV, we believe that fees and gates on redemptions may be just as problematic for many corporate treasurers. Corporations rely on money funds to invest cash for routine business expenses like payroll, and the inability to access this cash if a gate is imposed raises operational concerns. Importantly, the new rules will require money fund users to update investment policies, whether to approve investments in floating NAV, or to add alternative investment options. This can be a complicated process that will require a careful, strategic approach. We understand many investors have been waiting for clarity on the new regulations before making investment policy changes. The SEC set the implementation period for the main aspects of reform at two years, giving money managers and shareholders time to adjust to the new regulatory regime." In other news, The Financial Times wrote Monday, "New Money Market Fund Rules Backfire." "What will happen? As market stress rises, it becomes more likely that a fund will erect gates, and the incentive to get out kicks in even earlier. This was a warning made by Federal Reserve governors to the SEC last year, which has been ignored. We may ultimately find that the SEC has increased rather than decreased systemic risk and, more worryingly, opened the intellectual door to further moves in this wrong-headed direction." Also, Marketwatch posted "New Money Market Rules Need to be Tested By Crisis." "It was way too late to fix the problems that surfaced six years ago -- the fact that it took this long and that the rules were adopted by a split vote of commissioners shows how hard real reform is -- but the real question is whether it will stop the financial crisis of 2018, 2024 or whenever the next generational catastrophe hits."

Several leading money fund industry law firms offered their takes on the SEC reforms last week, including Dechert, Stradley Ronon, and Bingham. Stradley's Joan Ohlbaum Swirsky and Amy Smith write, "We expect many questions to arise from the implementation of the new rules and interpretation of the 869-page adopting release. The following are a few issues funds and boards may consider regarding the fundamental reforms. Will the money market funds fit within the retail or U.S. government exemptions from reform, and if not, will the funds seek to restructure to fit within the exemption? How prepared is the money market fund for possible migration of assets from the fund? Will migration of assets from the money market fund affect the fund family in general or the adviser? Will service provider expenses increase (for example, services to value assets at market value rather than amortized cost)? What other operational and expense burdens will the money market funds bear? Will intermediaries be unwilling to change systems to offer money market funds subject to the floating NAV or fees/gates, so that distribution channels will shrink? Will yields be reduced by increased operational and compliance costs and potential increased demand for U.S. government securities? How will funds communicate with shareholders about upcoming changes? Are there adequate methods to monitor shareholder flows? What are expectations about shareholder flows?" Bingham issued its own "legal alert" on reforms. "Today's amendments are largely consistent with the reforms the SEC proposed on June 5, 2013, with some significant modifications. Two key differences from the proposal are the definitions of "retail" money market funds and "government" money market funds. The SEC ... adopted a definition that would require retail money market funds to have policies and procedures in place that are reasonably designed to ensure that its investors are natural persons. Under the new rules, a "government" money market fund will refer to a fund that invests at least 99.5% of its assets in cash, government securities, and repurchase agreements collateralized by government securities." Dechert posted the news as well. "The Amendments begin a new phase of the regulation of money market funds that has permeated the investment management industry since the 2008 financial crisis. An upcoming DechertOnPoint will provide more analysis of the Amendments, as well as their potential impact on the money market fund industry." Stay tuned.

The torrent of commentary on the SEC's adoption of money fund reforms continued Thursday. The latest batch includes an update, "SEC Money Fund Reforms Will Reshape US Money Markets," written by Brian Smedley, US Rates Analyst at Bank of America Merrill Lynch. Smedley writes, "Various surveys taken over the past year indicate that a majority of money fund investors will find a floating-NAV fund to be unattractive, especially given the potential for gates and fees to be imposed during a stress period. We suspect that this will be particularly true if the minimal spread between institutional prime and government funds persists as the compliance deadline approaches. As noted above, currently the average institutional prime fund yields just 1.3bp more than the average institutional government fund, according to Crane Data. In our view, the spread between prime and government fund yields will need to widen; the extent of widening will depend on the value that investors assign to the fixed-NAV feature, which is significant. A wider prime-government fund spread will require an increase in prime funds' gross portfolio yields, which will in turn require an increase in yields on credit instruments that prime funds hold, including CDs, CP, bank notes and nontraditional repo. But meaningfully higher credit spreads on these products are unlikely to materialize absent substantial outflows from prime funds. We continue to believe that investors could move a substantial portion of the $964bn currently invested in institutional prime and muni funds into fixed-NAV government funds. Gauging the size and timing of these flows is difficult, but we would not be surprised to see half a trillion dollars shift over the next couple of years, particularly as the compliance deadline approaches in 2016." Also, the Institutional Money Market Fund Association released a statement on the SEC action. "IMMFA welcomes the fact that the SEC has taken note of a number of concerns raised by the MMF industry, evidenced in today's announcement." Said Susan Hindle Barone, IMMFA's Secretary General, "A number of aspects of the new rule, in particular, the fact that government funds have been excluded and that for other funds a two year implementation period has been granted, are very positive for the sector." She went on, "The SEC has engaged in a thorough rulemaking process and has considered the impact of the new rule on investors, for example by addressing tax and accounting issues and by allowing the retention of amortised cost accounting. Without these concessions, the switch to floating NAV products would have been far more challenging." She adds, "However, it is very disappointing that forced conversion to floating NAVs is being imposed on Prime MMFs. We will continue to argue that the principal systemic risk in the MMF sector, namely the threat of runs in MMF at times of market stress, can only be prevented with certainty by the imposition of fees and gates. We consider that the move to floating NAV will have no material impact on the diminution of this risk, and therefore imposes costs on investors for no benefit." Wells Fargo Securities' Garrett Sloan writes, "[T]he published Treasury guidance, and the SEC's two-year implementation window should give many money market investors time to consider their options, and time to determine just how much of an operational burden the floating NAV will be using Treasury's simplified approach. Certainly some will consider it too much of a burden, just as some CEOs may not be able to bear market fluctuations in their cash and cash equivalents holdings. But we are encouraged by the fact that the Treasury has made such concessions specifically for prime institutional money market funds, and hope they are effective." Alex Roever at JP Morgan Securities writes, "The new definition of retail funds would likely prompt some money to shift between institutional money funds and retail money funds. Across the money fund business, there are many cases where investors in institutional share classes of prime funds would actually qualify as "retail" under the natural persons rule. The converse is also true (institutions in retail share classes), although we suspect to a lesser degree. As a result, there's a great client sorting that needs to take place in the prime fund business after which our understanding of what is institutional and what is retail may change substantially. The bigger the actual institutional exposure, the larger the potential exodus from prime institutional funds, and the bigger the potential pullback from banks in the wholesale funding markets. Whatever the shifts may be, we expect prime fund managers will be building their liquidity in anticipation of potential outflows." Dechert and Reich & Tang also issued statements on the rules. Said Reich & Tang, "Our expectation is that none of our Money Market Funds will be subject to a floating net asset value once the revised rules are implemented.... Reich & Tang's internal policy is to manage its funds with a minimum of 35% weekly liquidity at all times." Finally, see ICI's Money Market Fund Assets, which says, "Total money market fund assets decreased by $2.18 billion to $2.56 trillion for the week ended Wednesday, July 23."

The SEC's vote to adopt "Money Market Fund Reform Rules" was covered by a host of media outlets on Wednesday, including Bloomberg, which published, "Money Funds Get New Restrictions Aimed at Preventing Runs". Dave Michaels writes, "The riskiest money-market mutual funds will be required to abandon their stable, $1-share value and allow their prices to float under rules adopted by the U.S. Securities and Exchange Commission. The rules, approved today on a 3-2 vote, conclude a four-year struggle to toughen regulations after a run at one money fund during the 2008 credit crisis brought the $2.6 trillion industry to near-collapse, halted only by a federal backstop.... The rules include an agreement with the Treasury Department and Internal Revenue Service to reduce the tax burden from investing in a fund whose share price can change." The Wall Street Journal published a piece, "SEC Approves Tighter Money Fund Rules." Andrew Ackerman writes, "U.S. securities regulators on Wednesday took a long-awaited step to reduce risk in the $2.6 trillion money-market mutual-fund industry, completing rules intended to prevent a repeat of an investor stampede out of the funds during the 2008 financial crisis." The article continues, "The final rule is less ambitious than an earlier proposal considered at the SEC.... SEC commissioners Kara Stein, a Democrat, and Michael Piwowar, a Republican, voted against the changes." The New York Times wrote "S.E.C. Approves Rules on Money Market Funds", and The Financial Times wrote, "US Approves Money Market Funds Reform". USA Today published, "SEC Ends $1 a Share for Some Money Funds"; Fox Business posted, "SEC Ends Staple for Some Money Funds"; CNBC wrote "Split US SEC Adopts Long-Awaited Money Market Fund Reform"; and Reuters published "SEC Adopts Long-Awaited Reforms for Money Market Funds". Further, the AP wrote a piece called "S.E.C. Votes to End Fixed Share Price for Some Money Funds"; while Investors Business Daily ran the story, "SEC Reforms Money Market Funds, Unveils Floating NAV"." Money managers and industry organizations also chimed in. Federated Investors released a statement saying, "While Federated is disappointed that the SEC voted to adopt a floating NAV for institutional prime and institutional municipal money-market funds, Federated remains committed to providing a variety of liquidity-management solutions to our clients, including those that meet the needs of our institutional prime and institutional municipal customers. Federated will review the details contained in the SEC's voluminous rulemaking to assess their implications as we consider next steps." BlackRock said in a statement, "BlackRock supports the SECs efforts to improve the resiliency of U.S. money market funds during times of stress and appreciates the thoughtful, deliberate and consultative process the Agency has undertaken to achieve this result." Fidelity issued a statement and posted a video update from Nancy Prior, president of the fixed income division. She says, "We are well-prepared for the new rules. Where needed, we will make changes to our product offerings and fund operations to comply with these rules." ICI weighed in, too, saying, "While we may question some aspects of the rule as adopted, we strongly believe that the SEC has the long regulatory experience and deep technical expertise required to strike the proper balance, making money market funds more resilient in times of financial stress while preserving the utility and value of these funds for investors." The US Chamber of Commerce expressed disappointment with the new rules, writing, "A floating NAV does not address run risk and would severely if not irreparably harm the viability of the product, taking away a key cash management product and a primary source of funding for the commercial paper market."

USA Today featured an article recently called, "You Don't Want Surprises from Your Money Fund." It's a basic overview of money funds with commentary on potential SEC reforms by columnist John Waggoner. Writes Waggoner, "Why are they so popular? In large part, because they're convenient. Many money funds let you write checks on them, just as you would a bank checking account. If you decide to sell shares of stock, you can park your proceeds in a money fund until you decide what to do with them. And if you're a big institution, buying shares of a money fund can be more convenient than, say, purchasing money market securities on the open market." It goes on, "What, then, is so ominous about a money fund? The funds invest in short-term, high-quality IOUs, such as Treasury bills, which are short-term loans to the government, and jumbo bank CDs, which are short-term loans to the nation's largest banks. No one is particularly worried about those investments. But some funds -- known as "prime" funds -- invest in an array of other short-term loans that are normally safe. The key word here is "normally." The day after Lehman Bros. declared bankruptcy, the Reserve Fund, a large, prominent money fund, announced that it couldn't keep its share price at $1 -- it had, in Wall Street parlance, "broken the buck." The reason it had broken the buck was because it held a fair amount of short-term Lehman Bros. IOUs, called commercial paper. Those IOUs were problematic, at best. And once word had gotten out, institutional investors sold shares like they were annoyed scorpions." The piece continues, "The SEC has proposed a floating share price for institutional funds, if only to disabuse investors of the notion that money funds are risk-free. The rules wouldn't apply to retail funds, or those that simply invest in U.S. government securities. An alternative would be restrictions on withdrawing money from money funds in times of crisis -- probably a more onerous requirement, since the time you need money most is during a financial crisis. The SEC is expected to vote on the proposal on July 23, and it's by no means a lock, given the powerful mutual fund industry's vehement opposition to it. If the SEC does adapt any of the proposals, here's what you need to keep in mind: Money funds aren't insured, and they never have been. The potential loss from a money fund is small -- the Reserve Fund's share price fell to 97 cents, a 3% loss -- but it does exist. If you can't stand the possibility of a loss, invest in a federally insured bank account, and mind the limits on Federal Deposit Insurance Corp. coverage. Banks fail, too. Some day, short-term interest rates will rise again, and money market funds will look more appealing than they currently do." See also, Bloomberg's "Money Funds Get New Restrictions Aimed at Preventing Runs".

An article in today's Financial Times, "Fund Managers on Alert Over Money Market Shake-Up," says, "Fund managers are jostling to keep hold of $900bn of assets that could be shaken loose by new US rules on money markets funds due to be unveiled this week. Firms are planning new products, systems and marketing efforts to stop the money being moved to bank accounts, while at least one, Federated Investors, is considering suing the Securities and Exchange Commission to halt the regulations." (See Crane Data's July 18 news story, "Federated Letter (Again) Urges SEC Not to Impose Onerous Regulations.") The FT article continues, "Under the SEC proposal, to be published on Wednesday, certain funds would have to switch to a floating share price instead of the current fixed $1 a share cost. That will make them less like bank accounts, because investors will see their balance fluctuate. The rule is expected to be applied to funds holding about $900bn of the industry’s $2.6tn in assets, and could prompt customers to consider moving money to banks, industry executives say, or keeping it in unaffected money market funds, separate accounts, or alternative higher-yielding fixed income funds." The article adds, "In legal letters to the SEC, Federated has warned that the regulator will be acting outside its authority by imposing a floating share price. The company's chief executive, Christopher Donahue, said in 2012 that it would sue the SEC if it went ahead with the proposal." It goes on, "The company will make a decision based on what are expected to be hundreds of pages of detailed rulemaking published on Wednesday. A Federated spokesman refused to comment on a potential challenge, but said: 'We hope that good policy prevails.'" The FT piece adds, "Other big money market fund providers include Fidelity and Vanguard. They are hoping for a two-year window to upgrade systems to cope with the new rules and to educate customers about choices available. Many have launched or filed for approval for new funds, such as ultra-short duration bond funds, exchange traded funds or other cash-like products. The US Chamber of Commerce launched a last ditch bid to delay the ruling on Monday, saying it needed time to comment on proposed tax changes -- aimed at making the transition to a floating share price easier -- which are also imminent."

University of Pennsylvania Law School professor Jill Fisch published a paper last month called "The Broken Buck Stops Here: Embracing Sponsor Support in Money Market Fund Reform." In the Abstract for the 61-page paper, she writes, "Since the 2008 financial crisis, in which the Reserve Primary Fund 'broke the buck,' money market funds (MMFs) have been the subject of ongoing policy debate. Many commentators view MMFs as a key contributor to the crisis, in part because widespread redemption demands during the days following the Lehman bankruptcy led to a freeze in the credit markets. The response has been to deem MMFs a component of the nefarious shadow banking industry and to target them for regulatory reform." She adds, "More fundamentally, pending reform proposals could substantially reduce the utility of MMFs for many investors, which could, in turn, dramatically reduce the availability of short term credit. The complexity of regulating MMFs has been exacerbated by a turf war among regulators. The Securities and Exchange Commission has battled with bank regulators both about the need for additional reforms and about the structure and timing of any such reforms. Importantly, the involvement of bank regulators has shaped the terms of the debate. To justify their demands for greater regulation, bank regulators have framed the narrative of MMF fragility using banking rhetoric. This rhetoric masks critical differences between banks and MMFs, specifically the fact that, unlike banks, MMF sponsors have assets and operations that are separate from the assets of the MMF itself. Because of this structural difference, sponsor support is not a negative for MMFs but a stability-enhancing feature. The difference between MMFs and banks provides the basis for a simple yet unprecedented regulatory solution: requiring sponsors of MMFs explicitly to guarantee a $1 share price. Taking sponsor support out of the shadows provides a mechanism for enhancing MMF stability that embraces rather than ignoring the advantage that MMFs offer over banks through asset partitioning." The author posits in the Introduction, "Specifically, this Article proposes that regulators require MMF sponsors to stand behind their MMFs by committing to maintain the stable $1 net asset value. In a time of crisis, sponsors could provide such support by buying distressed assets from the fund, reducing management fees or subsidizing the fund with other business revenues. Sponsors could also privately insure their obligation. Mandatory sponsor support offers several advantages over existing reform proposals. It would both prevent MMFs from breaking the buck and enable market discipline to limit a sponsor's incentive to take excessive risks with MMF portfolio assets. Required sponsor support would also eliminate market uncertainty about the extent to which a sponsor would voluntarily support its fund in a time of crisis -- uncertainty that contributed to the turmoil surrounding the events at the Reserve Primary Fund. Sponsor support would substitute sponsor financial stability for the need for investors to monitor the quality of MMF assets directly. Most importantly, sponsor support would address MMF fragility while allowing MMFs to continue to meet investor demand for a liquid stable value cash management option."

Money fund assets broke a 3-week streak of increases in the latest week. ICI's "Money Market Fund Assets" report says, "Total money market fund assets decreased by $10.22 billion to $2.57 trillion for the week ended Wednesday, July 16, the Investment Company Institute reported today. Among taxable money market funds, Treasury funds (including agency and repo) decreased by $670 million [to $905.5 billion, or 35.3% of all assets] and prime funds decreased by $8.87 billion [to $1.402 trillion, or 54.6% of assets]. Tax-exempt money market funds decreased by $680 million. Assets of retail money market funds decreased by $1.42 billion to $893.46 billion. Among retail funds, Treasury money market fund assets decreased by $250 million to $197.65 billion, prime money market fund assets decreased by $750 million to $509.68 billion [19.9% of the total], and tax-exempt fund assets decreased by $420 million to $186.13 billion. Assets of institutional money market funds decreased by $8.80 billion to $1.67 trillion. Among institutional funds, Treasury money market fund assets decreased by $420 million to $707.85 billion, prime money market fund assets decreased by $8.12 billion to $892.01 billion [34.8% of assets], and tax-exempt fund assets decreased by $260 million to $72.00 billion." `Year-to-date, money fund assets have declined by $153 billion, or 5.6%. In other news, The New York Times wrote yesterday, "Some Top Money Managers Push for Fed to Start Raising Interest Rates". The article explains, "The Fed is out of step with Wall Street, say some of the country's wealthiest investors. If there was one thing that hedge fund managers kept coming back to time and time again at the CNBC Delivering Alpha conference on Wednesday, it was that the Federal Reserve should start thinking about raising rates. That was the message from the financier Stanley F. Druckenmiller, who said the time had passed for the Fed to keep interest rates near record low levels to revive the economy.... [H]e said the Fed should begin raising rates, even if it meant a bear market in stocks in the short-term to avoid the kind of excesses that led to the financial crisis from recurring."

A Reuters article, "U.S. Senators Urge Treasury to Fix Money Fund Tax Concerns", says "A bipartisan group of U.S. senators is pressuring the Treasury Department to relieve money market fund investors from tax rules that will kick in if the Securities and Exchange Commission decides to force some funds to float their share price. In a series of three letters dated July 15 and seen by Reuters, Democratic Senators Bob Menendez of New Jersey and Mark Warner of Virginia and Republicans Pat Toomey of Pennsylvania and Mike Crapo of Idaho said the Treasury needs to issue quickly guidance because it will help inform both the public and the SEC." The article excerpts a comment from Toomey's letter. "Money market mutual fund investors must be given an opportunity to review and comment on the proposed solution to the tax compliance burden, and the SEC and Department of Treasury should have the benefit of those comments,' Toomey wrote in his letter. The pressure from the four senators comes at a crucial time for the SEC, which is close to finishing new reforms for money market funds." The article continues, "The primary tax concern for money funds has to do with rules that would be triggered requiring investors to track gains and losses. Today, all money funds have a stable $1 per share NAV. That makes things simple for tax purposes because a stable price does not generate gains or losses. But if the share price floats, investors will need to track tiny gains and losses. In addition, floating shares of money funds could also separately trigger "wash sale" tax rules, which bar an investor from recognizing losses from the sale of securities if the investor purchased substantially identical shares within 30 days before or after such sale.” The article goes on, quoting two senators. "'Investors could still be deterred from investing in or using money market mutual funds for cash management if they must calculate and track the small capital gains and losses resulting from frequent transactions in a fund,' wrote Menendez and Warner." (See also, Bond Buyer's "Senators Raise Tax Issues On MMF Proposals; SEC to Weigh Rules July 23".) In other news, SEC Commissioner Michael Piwowar, delivered some pointed comments Tuesday about the Financial Stability Oversight Council. "The prudential regulators on the Council have been proceeding as if they themselves are the ones who know securities markets and investment products best. The most obvious example is the Council's much-discussed hubris in releasing proposed recommendations regarding money market mutual fund reform. It would be comedic, if not in such a serious context, that it did so while publicly acknowledging that the SEC "is best positioned" to implement such reforms."

The New York Times writes "'Litmus Test' for Regulators Over Money Market Funds". It says, "All eyes are now on the Securities and Exchange Commission, which sits at the center of the battle over money market funds. The S.E.C. has the job of actually devising the overhaul for the funds, and its chairwoman, Mary Jo White, is also a member of the oversight council. The S.E.C. plans to announce and vote on its new rules for money market funds at a meeting on July 23, according to a person briefed on its plans. But the oversight council [FSOC] may be disappointed by much of what it sees." Also, the Association for Financial Professionals writes "Treasurers Weigh Options as Final MMF Vote Looms". It says, "The majority of corporate treasurers and CFOs who responded to the 2014 AFP Liquidity Survey, underwritten by RBS Citizens, indicated that their organizations would significantly alter their investment policies if money market funds receive an overhaul. They may need to start making those changes as early as next week. The Securities and Exchange Commission (SEC) is reportedly set for a final vote on money market fund rule changes as early as July 23, according to several news sources." In other news, Federal Reserve Board of Governors Chair Janet Yellen delivered her semiannual Monetary Policy Report before Congress. Said Yellen, "[W]e have maintained the target range for the federal funds rate at 0 to 1/4 percent and have continued to rely on large-scale asset purchases and forward guidance about the future path of the federal funds rate to provide the appropriate level of support for the economy.... The Committee's decisions about the path of the federal funds rate remain dependent on our assessment of incoming information and the implications for the economic outlook. If the labor market continues to improve more quickly than anticipated by the Committee, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target likely would occur sooner and be more rapid than currently envisioned."

The Treasury Department's Office of Financial Research Director Richard Berner gave a keynote speech last week entitled, "The Financial Industry in a Post-Crisis World Symposium." Berner spoke extensively about understanding and mitigating the risks in shadow banking. "To date, our focus has been on the risks and vulnerabilities associated with short-term wholesale funding markets, including repo and other securities financing transactions. The [financial] crisis clearly exposed key sources of contagion in wholesale funding markets, including investor runs and associated fire sales of assets. At the OFR, we've concentrated on filling gaps in three areas. First, we're working to implement and expand the funding map recommended by our advisory committee to understand vulnerabilities across the financial system. We use the map to trace (and to simulate) the paths of risk and the durability of funding through specific financial institutions during crises. We also use it to identify gaps in data needed for financial stability monitoring. Second, while much attention and research has focused on the demand for, or uses of, short-term funding, our research also includes investigating the supply or sources of those funds, especially the factors that drive preferences and portfolio allocations from money and other managed funds and institutional cash pools. Third, we seek to fill the major gaps in U.S. repo data, particularly bilateral repo, and in data on securities lending." He added, "Filling these data gaps is critical to understanding the size and leverage implicit in wholesale funding activity across the financial system, and thus in assessing the risks. In addition, more complete data on securities financing transactions should facilitate analysis of policy tools, such as minimum haircuts, that are aimed at reducing excessive reliance on short-term wholesale funding and the procyclicality it often promotes under stress. Such tools are conceptually appealing, but we need more work to evaluate them." Regarding money market funds, Berner said, "I noted earlier that the focus on the sources of short-term wholesale funding inevitably turns to money market funds. As you know, the Securities and Exchange Commission made important changes to the regulation of money market funds in 2010, and is now considering further options. As the Financial Stability Oversight Council noted in its 2014 Annual Report, however, any changes in money market fund regulation should be matched by similar regulatory changes for funds that perform similar functions under other legal frameworks. That is because other sources of short-term wholesale funding are important and growing, and may also pose risks through liquidity transformation."

Bank of America Merrill Lynch's Rates Strategist Brian Smedley wrote a piece Friday entitled, "Fed exit framework begins to take shape." Echoing comments he made at last month's Money Fund Symposium, he writes, "The June FOMC minutes provided a window into the FOMC's views on some critical questions related to the framework for managing short term rates during the eventual normalization of policy. This report discusses our thoughts on the likely evolution of the Fed's policy rate framework and market implications.... The discussion of rate management tools at the June FOMC meeting, while preliminary and set to continue at upcoming meetings, represents the clearest indication to date of the Fed's preferred framework for policy normalization. Of particular note, "most participants thought that the federal funds rate should continue to play a role in the Committee's operating framework and communications during normalization." Participants also discussed possibilities for "changing the calculation of the effective federal funds rate." Most participants "agreed that adjustments in the rate of interest on excess reserves (IOER) should play a central role during the normalization process." For its part, the O/N reverse repo facility "could play a useful supporting role by helping to firm the floor under money market rates." The appropriate spread between IOER and the O/N RRP rate was discussed, with many participants judging that a relatively wide spread -- perhaps near or above the current level of 20bp -- would be appropriate. The emerging Fed consensus around exit mechanics described above is consistent with our own views, but differs from the views of many in the market. Since testing of the RRP facility began in September 2013, many market participants have come to expect the Fed to replace the fed funds target with the RRP rate, and for the latter to be harmonized with IOER. This (revolutionary) approach was advocated in a paper published in January 2014 by the Peterson Institute for International Economics. In May we noted that a "compelling reason to maintain a wide spread between the RRP rate and IOER is to encourage trading in the fed funds market." We also wrote that "the path of least resistance seems to be maintaining the status quo." The fed funds rate will likely continue to be the FOMC's primary tool for communicating the stance of policy, though the difficulty in managing the fed effective with precision warrants the continuation of a 25bp target range. Since an increase in the fed funds target range on its own would be essentially meaningless, commensurate increases in IOER and the RRP rate will be necessary to achieve "liftoff." An appealing approach, in our view, would be for the Board of Governors to set IOER at the upper end of the fed funds target range, and for the FOMC to set the RRP rate at the lower end. This will help to ensure the primary role of banks in the implementation of monetary policy and maintain liquidity in overnight markets." See also, Gulfnews.com's "SEC considers exit fees and gates for money market funds", which says, "US regulators are close to agreeing long-delayed new rules for the $2.6 trillion (Dh9.54 trillion) money market fund industry to help avert a repeat of the "runs" some funds suffered during the financial crisis. The Securities and Exchange Commission is expected to vote this month on a proposal to force prime institutional money market funds (MMFs) used by large institutions to abandon their fixed $1 share prices and transact at a floating net asset value."

Fitch Ratings issued a release on July 9 entitled, "US Fund Managers Position Ahead of Reform; Dislocation Likely. "Money fund reform as currently proposed could lead to some dislocation in the industry, including outflows from US institutional prime money funds that cater to corporate treasurers and are particularly targeted by the SEC for reform, according to Fitch Ratings. In response, some fund managers are repositioning product offerings to capture potential outflows and take advantage of changes to how investors might approach cash management." It continues: "Potential operational difficulties stemming from the proposed reforms could also overwhelm smaller corporate investors who may sharply reduce MMFs as a cash management tool. The reform proposal would impose additional costs on investors by requiring them to upgrade systems to reflect structural changes in money funds. In addition, the proposal's accounting and tax considerations could prove a significant burden if not resolved. Money market fund flows are stable as investors wait for the final rules; Fitch expects any outflows to be gradual given the proposed long implementation period." Fitch adds, "Fund managers are taking divergent approaches to the upcoming regulatory reform, with some being proactive while others adopting a more measured stance. Some managers have instituted significant client outreach and launched alternative liquidity products, including short-term bond funds, new government money funds, and floating net asset value money funds. Managers have also encouraged clients to move cash into separately managed accounts to capture some of the potential outflows from institutional prime money funds. For example, Invesco announced last week the launch of the Conservative Income Fund, a new ultra-short bond fund that, like money funds, is focused on the short-term market but can take more credit and interest rate risk. On the other hand, some fund managers are relying on a likely long implementation period for reforms (1-3 years) to react once rules are finalized. Some money managers have told Fitch they are not launching any new products until after they have had time to review the final proposal." In other news, the latest "ICI Reports Money Market Fund Assets" says, "Total money market fund assets increased by $5.37 billion to $2.58 trillion for the week ended Wednesday, July 9, the Investment Company Institute reported today. Among taxable money market funds, Treasury funds (including agency and repo) decreased by $3.38 billion and prime funds increased by $8.88 billion. Tax-exempt money market funds decreased by $130 million."

The Wall Street Journal writes "SEC Poised to Finalize Money-Fund Rules in Coming Weeks". It says, "U.S. securities regulators are poised to finalize long-awaited rules intended to prevent a repeat of the 2008 financial crisis, when an investor stampede out of money-market mutual funds threatened to freeze corporate lending, according to people familiar with the process. The Securities and Exchange Commission is expected to vote on a plan as early as this month that would require certain money funds catering to large, institutional investors to abandon their fixed $1 share price and float in value like other mutual funds, these people said. The plan also would allow money funds to temporarily block investors from withdrawing their money in times of stress or require a fee to redeem shares. Such so-called redemption limits come over the objections of other regulators, including members of the Financial Stability Oversight Council, who have said such restrictions could spur, rather than curb, investor stampedes." Note: Less than a month ago, the Journal wrote "SEC Divided on Money-Market Fund Rules", which said it would be some time before we see new rules. Bloomberg also writes "Prime Money Funds to Float $1 Share Price Under SEC Plan", which says, "The proposal, which was issued last year, is likely to be voted on by the five-member commission on July 23, the person said. The plan would require prime institutional funds to float the value of their share price, traditionally set at a stable $1, which makes them a popular place to park cash. It also would require funds to impose a one-percent fee on redemptions and permit them to temporarily suspend withdrawals when liquidity drops well below required levels."

Asia Asset Management published an article on July 8 called, "Money Market Funds Drive Growth in China's Asset Management Business." The article states, "Money market funds continue to play a key role in the growth of mainland China's asset management industry during the first half of the year, which financial pundits partly attributed to a lack of innovative investment products available on the market. Citing figures from financial web site howbuy.com, Shanghai Morning Post reported that Beijing-based Tianhong Asset Management, which paired up with e-commerce giant Alibaba Group to launch the online fund platform Yu'e Bao, trumped conventional asset managers with total AUM of 586.1 billion RMB (US$93.88 billion) as of the end of June. The assets overseen by Tianhong considerably dwarfed its nearest rival, China Asset Management Corporation, by 270 billion RMB. Tianhong's ballooning AUM has mainly been driven by its partnership with Alibaba, through which it launched its first online MMF, the Tianhong Zenglibao Monetary Fund, in June 2013."

The Treasury Department's Office of Financial Research has released a draft paper, written by Zoltan Pozsar, entitled, "Shadow Banking: The Money View." It's Abstract says, "This paper presents an accounting framework for measuring the sources and uses of short-term funding in the global financial ecosystem. We introduce a dynamic map of global funding flows to show how dealer banks emerged as intermediaries between two types of asset managers: cash pools searching for safety via collateralized cash investments and levered portfolio managers searching for yield via funded securities portfolios and derivatives. We argue that the monetary aggregates (M0, M1, M2, etc.) and the Financial Accounts of the United States (formerly the Flow of Funds) do not adequately reflect the institutional realities of the modern financial ecosystem, and should be updated to allow policymakers to better analyze and monitor the shadow banking system and its potential contributions to financial instability. The monetary aggregates, used mainly to inform the aggregate demand management aspects of monetary policy, do not include the instruments that asset managers use as money, particularly repos. Asset managers' money demand is not driven by transaction needs in the real economy but in the financial economy: in this sense, repo-based money dealing activities in the shadow banking system are about the provision of working capital for asset managers, much like real bills provided working capital for merchants and manufacturers in Bagehot's world over 150 years ago. These developments should be systematically captured in a new set of Flow of Collateral, Flow of Risk and Flow of Eurodollar satellite accounts to supplement the Financial Accounts. The accounting framework presented with this paper also explains how the Federal Reserve's reverse repo facility helps reduce interconnections within the financial system and how they could evolve into minimum liquidity requirements for shadow banks and a tool to control market-based credit cycles. The global macro drivers behind the secular rise of cash pools and leveraged portfolio managers in the asset management complex are identical with the real economy drivers behind the idea of secular stagnation. As such, one way to interpret shadow banking is as the financial economy reflection of real economy imbalances caused by excess global savings, slowing potential growth, and the rising share of corporate profits relative to wages in national income."

The Bank for International Settlements issued a press release on its 84th Annual Report in which it calls for new monetary policy. "A new policy compass is needed to help the global economy step out of the shadow of the Great Financial Crisis," writes the Bank for International Settlements in its latest Report . In its main economic review for the year, the BIS calls for "adjustments to the current policy mix and to policy frameworks with the aim of restoring sustainable and balanced economic growth." The report states: "Despite an aggressive and broad-based search for yield, with volatility and credit spreads sinking towards historical lows, and unusually accommodative monetary conditions, investment remains weak <b:>`_.... The only source of lasting prosperity is a stronger supply side. It is essential to move away from debt as the main engine of growth." On money markets, it comments briefly on page 83: "At one extreme, a reversion of money market rates to historical averages would push debt service burdens to levels close to the historical maxima seen on the eve of the crisis. But debt service burdens would also grow at the other extreme, if interest rates remained at the current low levels." On page 115, it adds: "Similarly, a hidden form of leverage relates to the implicit reassurances of capital preservation made by money market funds. The AMC (asset management company) responsible for those funds might feel compelled to cover shortfalls due to bad portfolio performance. Explicit or implicit backing of a segregated fund's borrowing by the umbrella organization managing the fund may also put the AMC balance sheet at risk." The BIS adds: "In crisis-hit countries, there is a need to put more emphasis on balance sheet repair and structural reforms and relatively less on monetary and fiscal stimulus. In no small measure, the report says the causes of the post-crisis malaise are those of the crisis itself -- they lie in a collective failure to get to grips with the financial cycle."

The latest "ICI Reports Money Market Fund Assets" report says, "Total money market fund assets1 increased by $13.09 billion to $2.57 trillion for the week ended Wednesday, July 2, the Investment Company Institute reported today. Among taxable money market funds, Treasury funds (including agency and repo) increased by $3.54 billion and prime funds increased by $6.05 billion. Tax-exempt money market funds increased by $3.51 billion. Assets of retail money market funds increased by $280 million to $892.86 billion. Among retail funds, Treasury money market fund assets decreased by $340 million to $196.84 billion, prime money market fund assets decreased by $370 million to $510.12 billion, and tax-exempt fund assets increased by $980 million to $185.89 billion. Assets of institutional money market funds increased by $12.81 billion to $1.68 trillion. Among institutional funds, Treasury money market fund assets increased by $3.87 billion to $711.83 billion, prime money market fund assets increased by $6.41 billion to $891.68 billion, and tax-exempt fund assets increased by $2.53 billion to $73.04 billion."

J.P. Morgan Securities' latest "Short-Term Market Research Note" is a piece entitled, "Fed RRP: Why the Surge?" "Yesterday (June 30, 2014), the Fed's overnight reverse repo facility (RRP) program allotted a record $340B to 97 approved program counterparties. There is a history of quarter-end surges in use of the RRP program, although this is by far the largest. All else equal, an increase in overnight RRP balances reduces reserves on the Fed's balance sheet by an equal amount. The converse holds true for decreases in overnight RRP balances," states the update, written by Alex Roever, Teresa Ho, and John Iborg. It continues: "[The] Drop in bank reserves means banks are leaving fewer deposits at the Fed.... Across the financial system, demand for very liquid overnight assets surges around quarter-ends. This is a well established phenomenon that predates the financial crisis. Historically, this practice increases demand for bank deposits and close substitutes including money market instruments. Recent changes in bank capital and liquidity rules (Basel III) make banks' use of wholesale funding sources like repo and overnight time deposits more costly. These added costs limit banks' ability to scale balance sheets to meet quarter-end surges in demand." It concludes: "Since the advent of the Fed's overnight RRP facility in September 2013, excess demand can flow through money market funds (MMFs) and other approved counterparties to the Fed. As a result of banks' desire to limit balance sheet size around quarter-end, more money is finding its way into the RRP facility as an alternative. Counterparties are substituting RRP for their overnight repo and time deposit holdings at quarter-end. This pattern of increased RRP usage at quarter-ends should continue for the foreseeable future. As bank regulations continue to be implemented, banks' use of balance sheets will continue to be more limited. In the future, to limit these quarter-end surges, the Fed may impose a cap on overall facility usage. We think this is a controversial solution, because it doesn’t address the root issue of there being very high demand for short-term liquid assets at quarter-ends, and it actually aggravates the issue by limiting supply relative to demand. A possible result of imposing a cap could be to push overnight rates below the RRP." (See also the New York Fed's "Temporary Open Market Operations" page, which shows these statistics.)

A press release entitled, "Invesco US Launches Conservative Income Fund," tells us, "Invesco US announced today the launch of the Invesco Conservative Income Fund, an ultra-short bond fund seeking to provide investors the potential for greater rates of return and yield than cash equivalent securities, yet with a lower risk profile than typical diversified short-term bond funds. The fund's investment objective is to provide capital preservation and current income while maintaining liquidity, and will invest in a diversified portfolio of short duration, investment grade money market and other fixed-income securities. However, the fund is not a money market fund and its net asset value is expected to fluctuate. "This fund can provide institutional and high-net-worth investors a compelling complement to their cash allocation with potentially lower interest rate risk exposure," said Laurie Brignac, senior portfolio manager and co-head of Invesco's North America Global Liquidity management team. Combining the strengths of Invesco Fixed Income's Global Liquidity team with the insight of the entire Invesco Fixed Income platform, the fund will use a top-down analysis of macroeconomic trends combined with a bottom-up fundamental analysis of market subsectors and individual issuers to continuously identify investable information advantages throughout a market cycle." The fund's symbol is ICIFX and its CUSIP is 46134M103. It has a minimum initial investment of $1 million and there is no reported yield yet. (The fund went live yesterday, 7/1/14.)

Last week's Bloomberg article, "Bullard Predicts Fed Rate Increase in First Quarter of 2015," says "Federal Reserve Bank of St. Louis President James Bullard predicted the central bank will raise interest rates starting in the first quarter of 2015, sooner than most of his colleagues think, as unemployment falls and inflation quickens. Asked about his forecast for the timing of the first interest-rate increase since 2006, he said: "I've left mine at the end of the first quarter of next year. The Fed is closer to its goal than many people appreciate." Bullard said in an interview with Fox Business Network, "We're really pretty close to normal." The article continues: "In quarterly forecasts released June 18, Fed officials said they expected the benchmark rate will be 1.13 percent at the end of 2015 and 2.5 percent a year later, higher than they previously forecast. The forecasts, represented as dots on a chart, don't give the quarter in which the first increase is expected to occur." Bullard provided some additional commentary speaking at the Council on Foreign Relations in New York City on June 26. He told the audience: "Many have argued that FOMC policy over the past five years has been to keep real interest rates low, and that these low real yields have impaired the returns of those saving for retirement or in retirement. In my opinion, Fed policy generally and quantitative easing in particular have influenced the real yield earned by savers. The question is then whether the Fed helped or hurt the situation by pushing real yields lower during the past five years. This hinges on whether credit markets have been functioning smoothly during the period when quantitative easing has been a popular policy. If credit markets were working perfectly or nearly perfectly, then the Fed intervention to push real yields lower than normal was unwarranted and the low real yields were indeed punishing savers. My University of Chicago economics instincts give some credence to this view. At the same time, it seems odd to argue that credit markets were working perfectly or nearly perfectly over the past five years, in the aftermath of one of the largest financial crises the country has ever experienced, and one that was largely driven by mortgage debt run awry. The policy of the FOMC has been that, on balance, low real yields will help repair the damage from the crisis more quickly, and I have largely sided with the Committee in this judgment. As time passes, however, it becomes more and more difficult to argue that credit markets remain in a state of disrepair, and thus harder and harder to justify continued low real rates."

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