Daily Links Archives: November, 2015

Crane Data has finalized the agenda and is preparing for its sixth annual Money Fund University "basic training" conference, which will be held at the Hyatt Regency Boston in Boston, Mass., January 21-22, 2016. Crane's Money Fund University is designed for those new to the money market fund industry or those in need of a concentrated refresher on the basics. The event also focuses on hot topics like money market reforms, money fund alternatives, offshore markets, and other recent industry trends. The affordable ($500) educational conference (see the agenda here) features a faculty of the money fund industry's top lawyers, strategists, and portfolio managers. Money Fund University offers attendees a 2-day course on money market mutual funds, educating attendees on the history of money funds, the Fed, interest rates, ratings, rankings, money market instruments such as commercial paper, CDs and repo, plus portfolio construction and credit analysis. At our Boston event, we will also take a look at how the SEC's new money market reforms, which go into effect in October 2016, are changing the money fund landscape. We'd like to thank our MFU sponsors to date -- BlackRock, Dreyfus/BNY Mellon CIS, J.P. Morgan Asset Management, Standard & Poor's Ratings Services, First American Funds and Dechert LLP -- for their support, and we look forward to seeing you in Boston in January. E-mail info@cranedata.com) for the latest brochure or visit www.moneyfunduniversity.com to register or for more details. Crane Data has also published the preliminary agenda and is now taking registrations for its big show, Money Fund Symposium, which will be held June 22-24, 2016, at the Philadelphia Marriott in Philadelphia, Pa.. Finally, mark your calendars for our 3rd annual European Money Fund Symposium, which is scheduled for Sept. 20-21, 2016 in London, and watch for details for our first Bond Fund Symposium event in March 2016.

JP Morgan filed to launch new Capital Shares classes for JP Morgan US Treasury Plus Money Market Fund and JP Morgan Federal Money Market Fund. The filing says, "JPMorgan U.S. Treasury Plus Money Market Fund, Capital.... The Fund seeks current income with liquidity and stability of principal. Purchase minimums For Capital Shares. To establish an account: $50,000,000.... Certain institutional investors may meet the minimum through the total amount of Capital Shares of the Fund for all such institutional investors with the financial intermediary." Note: JPMorgan already has "Capital" classes for all of its other Taxable portfolios -- JPMorgan 100% US Trs MM, JPMorgan Liquid Assets, JPMorgan Prime MM, and JPMorgan US Govt MM. In other news, Consumer Advocate Ralph Nader wrote, "An Open Letter To Chairwoman Yellen From the Savers of America." He says, "We are a group of humble savers in traditional bank savings and money market accounts who are frustrated because, like millions of other Americans over the past six years, we are getting near zero interest. We want to know why the Federal Reserve, funded and heavily run by the banks, is keeping interest rates so low that we receive virtually no income for our hard-earned savings while the Fed lets the big banks borrow money for virtually no interest. It doesn't seem fair to put the burden of your Federal Reserve's monetary policies on the backs of those Americans who are the least positioned to demand fair play.... But we never hear any mention of us -- the savers of trillions of dollars who have been forced to make do with having the banks and mutual funds essentially provide a lock-box for our money while they use it to make a profit for their firms and, in the case of the giant banks and large mutual funds, pay their executives exorbitant salaries." Yellen responded in a Nov. 23 letter, "My colleagues and I are very well aware that many savers are frustrated by the very low returns their savings earn -- and that this has caused hardship for some of them, particularly seniors on fixed incomes. These low returns, to be sure, are partly a reflection of the Federal Reserve's monetary policy. But, more fundamentally, the low returns are caused by the continuing aftermath of the financial crisis and the severe recession that followed it."

We learned from Strategic Insight's SimFundFiling that, "The State Street Institutional Money Market funds will increase the minimum initial investment for Premier Class shares from $25,000,000 to $500,000,000, and the State Street Institutional Liquid Reserves fund will increase the minimum initial investment for Class M shares from $250,000,000 to $750,000,000." State Street's Prospectus Supplement for the State Street Institutional Liquid Reserves Fund says, "The following information supplements and supersedes any information to the contrary relating to State Street Institutional Liquid Reserves Fund, a series of State Street Institutional Investment Trust (the "Fund"), contained in the Fund's Prospectus. Effective immediately, the following replaces the table in the Fund's Prospectus under the heading "Purchase and Sale of Fund Shares" on page 7 of the Prospectus.... The minimum initial investment in Class M shares of the Fund is $750,000,000, although the Adviser may waive the minimum in its discretion. Holdings of related customer accounts may be aggregated for purposes of determining the minimum investment amount. "Related customer accounts" may include, but are not limited to, accounts held by the same investment or retirement plan, financial institution, broker, dealer or intermediary. The Fund and the Adviser reserve the right to increase or decrease the minimum amount required to open or maintain an account. There is no minimum subsequent investment, except in relation to maintaining certain minimum account balances.... The Fund requires prior notification of subsequent investments in excess of $50,000,000." In other news, the Financial Times writes "Liquidity deteriorates for US Treasuries," which briefly mentions money funds towards the end. It says, "Money market funds that exchange cash with banks in return for high quality collateral such as Treasuries via a repurchase, or "repo", agreement are bracing for poorer market liquidity in the coming weeks. Banks say balance sheet pressures have forced them to pull back from the repo business. Debbie Cunningham, senior portfolio manager at Federated Investors said some banks have retreated from repo transactions with money market funds. "We are concerned," she said. "We saw it at quarter end and it will be even worse now."" The piece adds, "The Federal Reserve Bank of New York runs its own repo programme, allowing investors to trade with it either overnight or for a longer period, called "term repo". At the end of the third quarter the Fed expanded its programme to $450bn. Last week, it announced a term repo programme of $300bn beginning on December 18.... `Dealers estimate that a further $450bn to $750bn will need to be added in overnight trades, according to a survey run by the Fed in October."

First American Funds published a new money market "Portfolio Manager Commentary." CIO Jim Palmer, Director of MMF Management Jeffrey Plotnik, and Senior PM Mike Welle write, "Due to reforms largely targeting institutional prime funds, the most significant impacts and changes will likely occur in these funds. First American Prime Obligations Fund. During the first part of the quarter, most funds in the prime space started to shorten Weighted Average Life and Weighted Average Maturity in anticipation of a September Fed rate hike and a heightened sensitivity to pricing fluctuations. While investing for the First American Prime Obligations Fund, we utilized breakeven analysis that priced in two rate hikes before the end of the year and were able to capitalize on some yield-enhancing trades. Toward the end of the quarter, front-end yields on credit investments were still relatively attractive despite the lack of a Fed rate hike. While it remained a challenge to add value through liquidity investments (those maturing in one to seven days), investments maturing in April 2016 and before offered attractive opportunities and provided protection against multiple Fed rate increases. With the credit environment stable, investment opportunities arose out of a combination of money market reform, the bank regulatory environment and prospects of a Fed rate hike. We capitalized on these opportunities while keeping investments short of the six- to eight-month range in preparation for potential investor reaction to reform. First American Government Obligations Fund. As government funds expect potential inflows due to money market reform, we had less reservation about buying investment options across the curve. We capitalized on opportunities to purchase floating-rate securities maturing beyond the October 2016 reform implementation deadline to avoid reinvestment risk in a potentially supply-constrained environment. We also took advantage of fixed-rate investment options when economically advantageous.... First American Tax Free Obligations Fund. After trading higher during the second quarter due to seasonal factors, tax-exempt variable-rate demand notes returned to historical lows of just two bps. On average, the SIFMA Municipal Swap Index reset approximately five bps lower quarter-over-quarter.... In the coming quarters, we anticipate seeing yields trend higher in the prime space leading up to money fund reform and a potential Fed rate hike.... With our view the Fed will keep the current target range of 0.0% to 0.25% until first quarter of 2016, we will continue to seek opportunities that arise from market volatility based on economic data, Fed expectations and a shifting short-term market landscape as a result of encroaching money fund reform deadlines."

The Wall Street Journal published, "Fed Hike: Moving From 'When' to 'How'." It says, "The market has pretty much gotten the message: barring some unforeseen calamity or significant turn in the economy, the Federal Reserve will raise interest rates at its December meeting. That covers the "when." The folks at Bank of America/Merrill Lynch have started filling in the "how." How will the Fed raise rates, and how will the market respond to that? "When they increase rates," wrote analyst Mark Cabana, "we expect the Fed to raise the interest rate on excess reserves (IOER) to 50bp, move the overnight reverse repo (ON RRP) rate to 25bp, provide details on if or how they expect to use term tools in the normalization process, and continue reinvesting proceeds from their Treasury and agency debt and MBS holdings." In other words, the Fed will fall back on two tools it has at its disposal to set the upper and lower bands of its new range for interest rates." In other news, a press release, entitled, "Moody's Assigns Aaa-mf Rating to Two Money Market Funds Managed by Legal & General Investment Management Ltd," says, "Moody's Investors Services has today assigned a Aaa-mf rating to LGIM Sterling Liquidity Fund and LGIM US Dollar Liquidity Fund, two constant net asset value money market funds domiciled in Ireland managed by Legal & General Investment Management Ltd (LGIM). The ratings reflect Moody's view that the funds will have a very strong ability to meet the dual objectives of providing liquidity and preserving capital.... We expect the investments held in the sterling and US dollar funds' portfolios will be of high credit quality as evidenced by the portfolios' average weighted credit quality of Aa1.... While the US dollar fund's shareholder base is likely to exhibit some lumpiness as the fund grows, our expectation is that the fund will maintain a strong liquidity profile supported by high levels of overnight and near-term liquidity in the portfolios.... The current institutional investor base for these funds is primarily made up of pension funds, sovereign wealth funds, corporate treasurers as well as cash from internal LGIM funds."

Money market mutual fund assets were flat in the latest week, but they showed another large shift of assets from Prime funds into Government, the second in 3 weeks. ICI's latest "Money Market Fund Assets" report says, "Total money market fund assets1 decreased by $2.55 billion to $2.71 trillion for the week ended Wednesday, November 18, the Investment Company Institute reported today. Among taxable money market funds, government funds (including agency and repo) increased by $27.25 billion and prime funds decreased by $30.50 billion. Tax-exempt money market funds increased by $690 million." It continues, "Assets of retail money market funds increased by $2.58 billion to $893.89 billion. Among retail funds, government money market fund assets increased by $10.62 billion to $218.69 billion, prime money market fund assets decreased by $8.26 billion to $496.31 billion, and tax-exempt fund assets increased by $220 million to $178.89 billion.... Assets of institutional money market funds decreased by $5.13 billion to $1.82 trillion. Among institutional funds, government money market fund assets increased by $16.64 billion to $847.19 billion, prime money market fund assets decreased by $22.23 billion to $903.08 billion, and tax-exempt fund assets increased by $470 million to $67.63 billion." The latest weekly update adds, "Notes: In anticipation of the Securities and Exchange Commission's (SEC) new money market fund regulations, many advisers are changing their prime money market funds into government money market funds. As a result, there have been, and will continue to be, large shifts in assets from prime funds to government funds before the October 2016 deadline." The latest shift includes the $16+ billion Fidelity Cash Management Prime Fund, which liquidated and merged its assets into Fidelity Government MMF on Friday, Nov. 13. Two weeks ago, several Franklin MMFs officially switched to Government funds, and 2 weeks from now we should see the massive $115 billion Fidelity Cash Reserves convert (Dec. 1). Year-to-date, money market fund assets are down just $21 billion, or 0.8%.

The Federal Reserve released the Minutes from the October 27-28 FOMC meeting yesterday, which indicate that a rate hike may be coming in December. They state, "During their discussion of economic conditions and monetary policy, participants focused on a number of issues associated with the timing and pace of policy normalization. Some participants thought that the conditions for beginning the policy normalization process had already been met. Most participants anticipated that, based on their assessment of the current economic situation and their outlook for economic activity, the labor market, and inflation, these conditions could well be met by the time of the next meeting. Nonetheless, they emphasized that the actual decision would depend on the implications for the medium-term economic outlook of the data received over the upcoming intermeeting period.... A number of participants pointed to various reasons why the Committee should avoid a delay in policy firming. One concern was that such a delay, if the reasons were not well understood by market participants, could increase uncertainty in financial markets and unduly magnify the perceived importance of the beginning of the policy normalization process. Another concern mentioned was the increasing risk of a buildup of financial imbalances after a prolonged period of very low interest rates. It was also noted that a decision to defer policy firming could be interpreted as signaling lack of confidence in the strength of the U.S. economy or erode the Committee's credibility." They continue, "In its postmeeting statement, rather than framing its near-term policy path in terms of how long to maintain the current target range, the Committee decided to indicate that, in determining whether it would be appropriate to raise the target range at its next meeting, it would assess both realized and expected progress toward its objectives of maximum employment and 2 percent inflation. Members emphasized that this change was intended to convey the sense that, while no decision had been made, it may well become appropriate to initiate the normalization process at the next meeting, provided that unanticipated shocks do not adversely affect the economic outlook and that incoming data support the expectation that labor market conditions will continue to improve and that inflation will return to the Committee's 2 percent objective over the medium term." The Wall Street Journal wrote in, "Fed Tipping Toward December Rate Hike, Minutes Show," "Federal Reserve officials meeting last month anticipated it "could well be" time to raise short-term interest rates at a December policy meeting after keeping them pinned near zero for seven years. Fed officials thus decided to change the wording of their Oct. 28 policy statement to ensure their options were open for a move in December, according to minutes of the October meeting, released Wednesday with the regular three-week lag."

Moody's issued a release, "Maturities Remain Short in Anticipation of a December Rate Hike." It says, "Weighted average maturities remain tight, especially within US dollar money market funds (MMFs) and we expect managers to continue to maintain shorter portfolio WAMs as the likelihood of a December rate hike in the US increases. Sterling MMFs' assets under management (AUM) hit their second lowest level in twelve months in the third quarter of 2015, registering a fall of 3.8% to GBP93.1 billion. US prime funds recorded a 4% growth in AUM, on the other hand, driven by a reduced appetite for risky assets; euro-denominated funds also experienced AUM growth, albeit smaller, of 2.3% to EUR55.2 billion. "Uncertainty about the health of the global economy led to a sharp increase in market volatility in the third quarter. This has reduced investor appetite for risky assets and driven growth in US prime funds' AUM," said Robert Callagy, a Vice President -- Senior Credit Officer at Moody's." It continues, "For euro prime funds, investors have adapted to the new net negative yield environment affecting those funds since the middle of Q2," added Vanessa Robert, a Vice President -- Senior Credit Officer.... The credit profiles of European and offshore prime funds improved, while US prime funds remained stable in Q3. For US funds, exposure to Aaa-rated securities in US prime funds jumped to 22% of fund assets at the end of Q3 from 18% at the end of Q2 as usage of the Federal Reserve's reverse repo facility swelled at September month-end. Offsetting this, however, was a decrease in exposure to securities rated Aa1 and Aa2, which fell to 28% from 32% during the same period. Obligor concentration in US prime funds reached its highest point in a year, with the average top three obligor concentration (as % of AUM) at 17% at the end of September up from 16% at the end of Q2, a reflection of the scarcity of high quality short-dated assets." In other news, Federal Reserve Governor Jerome Powell spoke Tuesday on "Central Clearing in an Independent World." He says, "One area where market participants are actively searching for new business models is the repo market, where there are currently several private initiatives for greater central clearing.... The tri-party repo market is used to finance general collateral pools rather than specific securities, and trades in this portion of the market are settled on the books of the two clearing banks, Bank of New York Mellon and JP Morgan Chase. Money market mutual funds and securities lenders are among the most prominent cash providers in segment 4, while securities dealers are the primary borrowers of cash."

Citi Research money market strategist Andrew Hollenhorst features, "MMF Reform Shifts Cash Away from Banks," in his latest "Short-End Notes." He writes, "These [MMF reform] changes are expected to lead to significant flows out of prime money funds (and bank liabilities) and into government money funds that hold US agency and Treasury debt and repo agreements backed by this collateral. With about $900 billion in institutional prime money fund assets we would not be surprised to see half these assets, or $450 billion, migrate to the government space. So far there has been little apparent flow out of prime and into government possibly as corporates and other institutional investors weight their response to the planned changes. In our view, this may mean that more of the flows become concentrated in early to mid-2016 exacerbating demand pressure on government securities during this period. These institutional flows will be initiated by the end-user money fund clients who prefer to avoid floating NAV or fees and gates. In contrast, in the retail fund space fund families themselves have taken the decision to convert retail prime funds to government funds totaling about $200 billion in assets.... The largest of these prime to government fund conversions is that of Fidelity Cash Reserves with about $115 billion in assets. Fidelity was also an early mover and plans to have the fund fully converted by the end of this year. Examining how Fidelity has handled this transition is instructive for understanding the pattern other similar conversions are likely to follow.... Roughly speaking $40 billion has been shifted out of bank CDs and $10 billion out of CP. The $50 billion in cash has been invested in US agency debt. Treasury holdings are essentially unchanged showing MMF preference for the higher yielding agency paper. Not only have holdings of CP and CDs fallen, the average maturity of those holdings have also declined.... A similar pattern of reallocation is likely to play out across institutional funds as redemptions are expected in 2016." Also, Fitch Ratings writes, "Investors Accept Negative Euro MMF Yields; VW Exposure Cut." It says, "Fitch Ratings says that investors are accepting negative euro money market funds' yields, as they face the lack of low-risk alternatives and amid heightened risk aversion at a time of market stress, as was the case over the summer... Outflows from euro constant net asset value (CNAV) funds halted in 3Q15 despite their negative yields, which are in line with short-term euro market rates. These funds even saw modest inflows over the quarter following three months of outflows after funds' yields turned negative in April. This highlights investors' acceptance of negative yields, especially at a time of market stress, as was the case over the summer. Overall CNAV MMFs assets declined 2% to EUR526bn over the quarter. The trend was similar, albeit more volatile, in French variable NAV funds' assets (EUR313bn at end-September 2015), the second largest segment of European MMFs, which are almost exclusively euro-denominated." Finally, Smart Investor writes, "Maybank Successfully Establishes a USD500 million U.S. Commercial Paper Programme.” It says, "Malayan Banking Berhad ("Maybank") has successfully established a U.S. Commercial Paper Programme on 27 October 2015. Under the CP Programme, Maybank New York Branch may issue, from time to time, Notes up to a maximum aggregate amount outstanding at any time of USD500 million in nominal value."

In their latest "Fund Alert," Stradley Ronon's Joan Ohlbaum Swirsky and Jamie Gershkow write, "What You Need to Know About Money Market Reform - Ratings." They write, "The fifth time was a charm for the U.S. Securities and Exchange Commission (SEC), as on September 16, 2015, the SEC adopted amendments to remove the requirement that a money market fund limit its investments to those rated within the top two categories by rating agencies (or to unrated securities of comparable quality). The SEC initially had discussed the removal of ratings from the money market fund rule in a 2003 concept release and had proposed the changes in 2008, 2009, 20112 and, most recently, July 2014. In place of the ratings requirement, a fund's board of directors or its delegate (such as the investment adviser) must determine whether each security presents minimal credit risk. The minimal credit risk test has been imposed since 1983, when Rule 2a-7, the money market fund rule, was adopted, but the Credit Rating Amendments flesh out that requirement by specifying factors that must be included in the minimal credit risk analysis, to the extent appropriate." Swirsky and Gershkow continue, "Rule 2a-7, as amended by the Credit Rating Amendments, also eliminates the current distinction between first-tier and second-tier securities, which results in elimination of the current limits on securities rated in the second-tier short-term rating category." In other news, The Wall Street Journal published, "Money-Fund Flows Are a Risk Meter." It says, "When investors start piling into money-market funds, it is a remarkably accurate indicator that credit markets are getting dicey, according to new research conducted by a pair of finance professors. The study says the money-fund indicator can be just as accurate as more-wonky indicators of market risk, such as credit-default-swap spreads, which show the cost of insuring corporate debt against default. "Our results suggest that mutual-fund flows give an indication on investor risk tolerance and can serve as risk indicators or serve as a proxy for market credit risk," Hsin-Hui Chiu and Lu Zhu, professors at California State University Northridge and the University of Wisconsin-Eau Claire, respectively, say in a September paper, "Can Mutual Fund Flows Serve as Risk Indicators? An Empirical Analysis with CDS Spreads." It continues, "So what has the money-fund indicator been telling us lately? Basically, it is saying "watch out" because since mid-September investors have been shoveling billions of dollars into money funds."

On Monday, the Charles Schwab Family of Funds filed to remove the ability to "recapture" waived fees, we learned from mutual fund news source ignites.com. The Schwab Prospectus Supplement, which was filed on behalf of all 20 Schwab money market funds, says, "On November 8, 2015, the Boards of Trustees of the Trusts approved an agreement to terminate the ability of the investment adviser and/or its affiliates to recapture from the Funds, or otherwise seek reimbursement payments from the Funds for, any fees waived under the voluntary yield waiver. The investment adviser and/or its affiliates will continue to voluntarily waive fees for the Funds under the voluntary yield waiver to the extent necessary to maintain a positive net yield or non-negative net yield for the Funds, as applicable, but will no longer have the ability to recapture, or otherwise seek reimbursement payments from the Funds, for those fees or any fees previously waived under the voluntary yield waiver. Accordingly, effective as of November 9, 2015, all references to the ability to recapture or seek reimbursement payments by the investment adviser and/or its affiliates under the voluntary yield waiver are hereby removed." ignites piece, "Schwab Rules Out Money Fund Clawbacks, explains, "Charles Schwab is joining Vanguard in promising investors that it will not try to recoup the cost of money market fund waivers through clawbacks.... Previously, Schwab's fund literature had allowed it to recoup waivers, and firm officials had said in the past that clawbacks were a possibility." The article continues, "Vanguard, the fifth-biggest money fund provider, with $177 billion, has similarly sworn off waiver clawbacks, stipulating in its annual report released last month that the funds are not obligated to repay the fees back to Vanguard. (See our Oct. 21 News, "ICI, JPM on Sept. Portfolio Holdings; No Fee Recapture for Vanguard." See too our Nov. 10 News, "Schwab Files Variable NAV Money Fund; Invesco Announces Changes.") In other news, ICI's latest "Money Market Fund Assets" report shows money market mutual fund assets increasing for the 7th time in the last 8 weeks. ICI says, "Total money market fund assets increased by $12.11 billion to $2.71 trillion for the week ended Wednesday, November 11, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $6.73 billion and prime funds increased by $6.12 billion. Tax-exempt money market funds decreased by $740 million." ICI notes that it changed its designation for government funds from "Treasury" to "Government" funds. `Year-to-date, money market fund assets are down $19 billion, or 0.7%.

Bloomberg wrote, "Fed Proves Irrelevant in $2.6 Trillion Slice of U.S. Debt Market," which says, "The blowout U.S. jobs report for October means the Federal Reserve may be weeks away from raising interest rates. For U.S. savers earning next to nothing on $2.6 trillion of money-market mutual funds, the move will barely register. The reason is that there's an unprecedented shortfall in the safest assets, especially Treasury bills -- a mainstay of those funds and traditionally the government obligations that are most sensitive to changes in Fed policy. The shortage means some key money-market rates will probably remain near historic lows even if the central bank increases its benchmark from near zero next month. As a share of U.S. government debt, the amount of bills is the lowest since at least 1996, at about 10 percent, and the Treasury is just beginning to ramp up issuance of the securities after slashing it amid the debt-ceiling impasse. Meanwhile, regulators' efforts to curb risk after the financial crisis are stoking increased demand: Money-market industry rules set to take effect in October 2016 may lead investors and fund companies to shift as much as $650 billion into short-maturity government obligations, according to JPMorgan Chase & Co. "The demand for high-quality short-term government debt securities is insatiable and there is just not enough supply," said [PIMCO's] Jerome Schneider. "Even given the increased bill sales coming as the debt-limit issue has passed, it won't keep up with rising demand from regulatory forces. This will keep rates low." While the U.S. government stands to benefit as the imbalance holds down borrowing costs, it's proving the bane of savers. Average yields for the biggest money-market funds, which buy a sizable chunk of the $1.3 trillion Treasury bills market, haven't topped 0.1 percent since 2010, according to Crane Data LLC. In 2007, they were above 5 percent before the Fed started slashing rates to support the economy." It continues, "BlackRock Inc., Federated Investors Inc. and Fidelity Investments are among asset managers changing money-fund offerings in response to the shifting rules. They're converting prime funds to choices focused on government securities, including bills and agency offerings. Those funds will retain the stable $1 share value that's been a bedrock assumption of money markets. Adding to the supply-demand imbalance in bills, higher capital requirements have led some banks to place fees on deposits, pushing savers into short-term government securities. "There has been tens of billions that has flowed into the government money-market sector, but it's about to turn into hundreds of billions," said Peter Crane, president of Crane Data.... That pressure will "keep government and Treasury rates nailed to zero." It adds, "How big the RRP program gets will have a big impact on where bill rates go in the Fed liftoff," said Alex Roever, head of U.S. interest-rate strategy at JPMorgan. "That will matter to the bill market because the Fed RRP's are going to be a substitute, and likely a higher-yielding one, for short-term Treasury bills."

Last week, The Wall Street Journal published the slightly odd piece, "Foreign Banks Pay Up for U.S. Deposits." It says, "Foreign banks are paying up for U.S. deposits that many domestic lenders are taking pains to avoid. Mizuho Bank Ltd., Mitsubishi UFJ Financial Group, BNP Paribas SA and Banco Bilbao Vizcaya Argentaria SA are among European and Japanese banks outbidding their U.S. peers for large corporate deposits across the country, said treasurers and chief financial officers. In some cases the foreign banks are paying twice or three times as much, they said. The gap reflects a scramble by some overseas lenders to find new sources of U.S. funding. A change in Securities and Exchange Commission rules governing money-market funds has rolled back the market for short-term debt, known as commercial paper, that the banks have long sold to raise funds.... "There's a lot of incentive for foreign banks to raise funding in the U.S.," said Anthony Carfang, partner at Treasury Strategies Inc., a consulting firm. "The underlying theme is that every bank has to fund its loans with local deposits."" It continues, "Higher interest rates from foreign banks stand out at a time when many large domestic lenders are shying away from large corporate and financial-institution deposits. State Street Corp. and J.P. Morgan Chase & Co. have both said they would charge fees for certain unwanted deposits, saying that low interest rates and tighter banking rules make holding such sums unprofitable. Until recently, foreign banks have been able to raise funding in the debt markets. They have had a steady customer for their commercial paper in the $2.7 trillion U.S. money-market-fund industry. Funds such as `Fidelity Investments' $115 billion Cash Reserves Fund long purchased commercial paper, prizing the slightly higher yield it paid compared with U.S. Treasury debt. But rules taking effect next year will change that situation and encourage prime funds, money funds that invest in corporate securities, to shift toward buying government debt Fidelity's Cash Reserves Fund, the world's largest money fund, plans to convert its entire portfolio to U.S. government and agency debt by Dec. 1. The fund had been a large buyer of commercial paper issued by foreign banks. It has pared those holdings as it gets closer to its conversion deadline. Losing reliable funding from the commercial paper-market has prompted the banks to pivot to other sources, causing them to more aggressively seek corporate deposits as an alternative, said Treasury Strategies' Mr. Carfang." In other news, the Federal Reserve Bank of NY updated its, "Reverse Repo Counterparties List to reflect a recent Fidelity merger."

Fitch Ratings released report entitled, "U.S. Money Market Funds Quarterly: 3Q15," which features a section called, "Prime Funds' Transition to Government Progressing." It says, "Money fund managers have made significant progress transitioning prime funds into government funds following announcements of the strategic conversions in recent months. In response to the SEC's money fund reforms, over the past few months, managers highlighted more than 20 funds that will convert from prime to government, with an estimated $220 billion in assets under management. Prior to the conversion announcements, these funds held $58 billion in government securities; however, since then, they have transitioned $56 billion of their assets from prime to government with approximately $103 billion remaining to shift. The movement of such large positions is set to impact the short-term markets, benefiting government securities while reducing demand for bank and corporate debt." Fitch explains, "Some funds have transitioned faster than others.... In other cases, funds that presented themselves as prime funds have in fact invested primarily in government securities prior to their conversion announcements. In converting their portfolios to government securities, the funds have primarily bought agency debt while shedding mostly bank commercial paper and certificates of deposit. The Fed's reverse repo program (RRP), which is collateralized by Treasuries and is also considered a government-backed repo, was also heavily utilized by prime funds converting to government. Usage of the RRP typically increases significantly at quarter ends regardless of fund conversions, which may overstate the funds' progress transitioning to government securities." Fitch adds in a section entitled, "Fed RRP Facility Key to Reform Plans," "As described, the Fed's RRP facility features prominently in fund managers' reform-related strategies, a key component in decisions on fund mergers, prime to government conversions and launch of new funds. With the supply of short-term government securities low compared to demand, a dynamic expected to worsen as demand increases further due to money fund reform and banking regulations, the RRP is an important source of supply for government funds whose assets are set to grow. At the same time, the RRP is accessible only to certain very large money funds approved by the Fed, and the Fed has indicated it does not intend to add new counterparties. Therefore, maintaining access to the RRP is an important consideration when merging or converting funds to ensure that eligibility for the facility is not lost. For example, Federated has announced it will merge two prime funds not eligible as RRP counterparties into a third fund that has access to the facility, although there may be other reasons for any particular fund action. Access to the Fed's facility is particularly important for government funds, as it may confer a competitive yield advantage. Often short-dated Treasury and agency securities trade at lower rates than the RRP, so access to the facility can provide eligible funds with higher yields. From that perspective, access to the RRP is less important for prime funds that can buy a broader set of securities at higher yields."

Money market mutual fund assets dropped for the first time in seven weeks, according to ICI's latest weekly "Money Market Fund Assets" report. ICI's most recent weekly, which reflects the `reclassification of $26 billion worth of Prime funds to Government (ICI's "Treasury"), says, "Total money market fund assets decreased by $14.75 billion to $2.70 trillion for the week ended Wednesday, November 4, the Investment Company Institute reported today. Among taxable money market funds, Treasury funds (including agency and repo) increased by $18.34 billion and prime funds decreased by $34.68 billion. Tax-exempt money market funds increased by $1.59 billion." The weekly update explains, "Assets of retail money market funds decreased by $1.48 billion to $889.40 billion. Among retail funds, Treasury money market fund assets increased by $910 million to $207.92 billion, prime money market fund assets decreased by $3.25 billion to $501.96 billion, and tax-exempt fund assets increased by $870 million to $179.52 billion. Assets of institutional money market funds decreased by $13.27 billion to $1.81 trillion. Among institutional funds, Treasury money market fund assets increased by $17.43 billion to $823.98 billion, prime money market fund assets decreased by $31.43 billion to $921.73 billion, and tax-exempt fund assets increased by $720 million to $67.04 billion." The down week snapped 6 straight weeks of asset gains for money market funds. Year-to-date, money market fund assets are down $31 billion, or 1.1%. Our Money Fund Intelligence XLS, which ships to subscribers Friday morning, will reflect a similar shift of Prime assets to Government assets, as the first wave of funds "go government" due to pending money market reforms. We reclassified $23.8 billion in 3 Franklin money funds, including Franklin MMF (now Govt MMF) and Franklin Institutional Fiduciary Trust (IFT) Money Market Portfolio (now IFT US Govt MMP) and $2.3 billion in Dreyfus Inst Res Money (now Inst Pref Govt MMF), which changed on Nov. 1. (Crane Data will also be shifting some Fidelity funds this month, and the $115 billion `Fidelity Cash Reserves next month. See MFI and MFI XLS for details._) According to our Money Fund Intelligence, MMFs rose by $56.5 billion for the motnh of October, and assets have averaged asset increases of over $100B in Q4 the past 4 years. So we expect assets to rebound in coming weeks and inflows as we head into yearend.

Moody's Investors Service issued a press release, "Moody's withdraws the Aaa-mf money market fund ratings of two Fidelity money market funds." It says, "Moody's Investors Service has withdrawn the Aaa-mf money market fund ratings of two Fidelity funds, Fidelity Cash Management Funds -- Prime Fund and Fidelity Cash Management Funds -- Treasury Fund. Moody's has withdrawn the ratings for its own business reasons." The CMF Prime Fund is being merged into the Fidelity Government Money Market Fund as stated in a recent SEC filing. Fidelity announced this back in January; see our Feb. 2 News, "Fidelity Announces Major Changes to MMFs; Staying Stable, Going Govt." Further, the Fidelity Treasury Money Market (FLTXX) was merged into CMF Treasury Fund on June 19, 2015 as we reported in our April 14 News, "Fidelity Operational Update Details More Changes; Alpine Liquidates." In another release, "Moody's Assigns Aaa-mf Rating to Three Money Market Funds Managed by UBS Global Asset Management," the ratings agency says, "Moody's Investors Service has today assigned a Aaa-mf rating to UBS (Irl) Select Money Market Fund - EUR, UBS (Irl) Select Money Market Fund - GBP and UBS (Irl) Select Money Market Fund – USD, three constant net asset value money market funds domiciled in Ireland and managed by UBS Global Asset Management (UK) Limited, part of UBS Global Asset Management. The ratings reflect the funds' strong ability to meet the dual objectives of providing liquidity and preserving capital. This view is supported by the funds' high scores for each of the key rating factors, including credit quality, asset profile, liquidity and exposure to market risk." Finally, in other news, the Association for Financial Professionals posted an article, "Negative Rates in Europe: Impact On Cash, Liquidity," which says, "Negative benchmark rates in Europe, combined with the impact of 30-day liquidity coverage ratio rules for banks under Basel III and changes to money market fund (MMF) regulations, have created a trifecta of challenges to traditional cash and liquidity management." In other news, CFO writes "BofA Sells Money-Market Fund Unit".

Below, we link and excerpt from more coverage of BlackRock's takeover of BofA Funds money fund assets. (See yesterday's News, "BlackRock Taking Over BofA MMFs in One of Biggest Acquisitions Ever.") Reuters writes in "BlackRock to buy Bank of America's $87 billion money-market fund business," "Bank of America Corp, the No. 2 U.S. bank, has agreed to sell its $87 billion money-market fund business to BlackRock Inc in one of the cash-management industry's largest deals ever. The transaction comes as big banks have faced pressure to simplify their businesses since the global financial crisis and marks the largest in a series of deals reshuffling the cash-management industry before costly regulatory reforms take effect in 2016. Terms of the transaction were not disclosed. The agreement is expected to lift BlackRock's global cash-management business to $372 billion from about $285 billion, according to the New York-based company.... Mergers and acquisitions trimmed the money funds industry from 75 providers in the United States last summer to just 67 this year, according to Crane Data, an industry research service. Once the deal closes next year, BlackRock will leapfrog JPMorgan Chase & Co to become the second largest money fund family, behind Fidelity Investments, according to Peter Crane of the research service.... "Everybody has been talking about consolidation for years, but it really didn't happen until today," said Crane. "So many large players have resisted getting out of the business until now, but it's just a matter of the costs and uncertainty of money fund reforms proving to be overwhelming to some players." Crane said Bank of America's decision came after an evaluation of which businesses were essential. "At the same time asset managers are trying to get bigger, banks are trying to get smaller," he said. "This reflects regulatory pressure on both sides."" See too WSJ's "Bank of America to Sell $87 Billion Money-Market Fund Business to BlackRock" and Bloomberg's "BofA Sells $87 Billion Money-Market Funds Unit to BlackRock".

The US Treasury's Office of Financial Research released a new white paper called, "Regulatory Arbitrage in Repo Markets" by Benjamin Munyan. The abstract says, "Non-U.S. banks with relatively low capital ratios appear to temporarily remove an average of $170 billion from the U.S. market for tri-party repurchase agreements (repo) before each quarter-end in order to appear safer and less levered. This amount is more than double the $76 billion market-wide drop in tri-party repo during the turmoil of the 2008 financial crisis and represents about 10% of the entire tri-party repo market. Such window dressing-induced deleveraging spills over into agency bond markets and money market funds and affects market liquidity each quarter." A blog post, "Seasonality in Repo Markets Described in Latest Working Paper" by OFR's Acting Deputy Director of Research and Analysis Greg Feldberg provides an overview. He writes, "An OFR working paper published today documents that the amount of a key type of short-term borrowing by foreign-owned broker-dealers has declined by about 10 percent at the end of each quarter since July 2008 and rebounded at the beginning of each following quarter. The paper illustrates that this abrupt, seasonal rhythm in triparty repo borrowing is consistent with a pattern of "window-dressing" by the U.S. broker-dealer affiliates of foreign banks. They seek to reduce the size of their balance sheets at quarter end to reduce their capital requirements in particular, to comply with the leverage ratio. Window-dressing is a term commonly used to describe period-ending transactions that are reflected on a statement or report. The triparty repo market provides critical overnight funding to banks, broker-dealers, and other companies Since the financial crisis of 2007-09, regulators have sought a better understanding of risk taking in this market and worked to develop policies to mitigate vulnerabilities in it.... The author of today's paper used confidential regulatory data from the OFR and Federal Reserve. The paper concludes that dealers with foreign parent companies that borrow cash in the U.S. triparty repo market collectively reduce their borrowing by an average of $170 billion at each quarter end. In contrast, U.S. banks' broker-dealer affiliates do not make such reductions. These differences partly reflect different regulatory practices. Foreign regulators use a quarter-end measure of total exposures in calculating a bank's leverage ratio, which includes the activities of its U.S. broker-dealer affiliate. U.S. regulators use a quarter-average measure.... The paper finds that the decline in triparty repo borrowing by foreign-owned broker-dealers at quarter end is largely in transactions backed by government securities, leaving the remaining repo backed by more risky collateral. The findings of the paper suggest that the leverage ratio may have some unintended consequences on the repo market by encouraging firms to reduce their activity in repo backed by lower-risk collateral, such as government securities."

The SEC released its latest "Money Market Fund Statistics" report, which like ICI (see today's News) shows assets down for the month of September. However, yields continue to tick up. The report, produced by the SEC's Division of Investment Management, summarizes monthly Form N-MFP data and includes totals on assets, yields, liquidity, WAM, WAL, holdings, and other money market fund trends. In the SEC report, total money market fund assets stood at $3.024 trillion overall at the end of September, down $2.6 billion after rising $20.9 billion in August, according to the SEC's broad total (which includes many private and internal funds not reported to ICI, Crane Data or other reporting agencies). Of the $3.024 trillion in assets, $1.748 trillion was in Prime funds (down $1.4B from August 31), $1.022T was in Government/Treasury funds (up $2.7B), and $252.7 billion was in Tax-Exempt funds (down $3.9B). Total assets are down $57.0 billion year to date through September 30. Prime assets are down $24.1 billion year-to-date, while Government/Treasury MMF assets are down $15.4 billion year-to-date. Tax exempt assets are down $17.5 billion year-to-date. The number of money funds was 521, down 2 from last month and down 37 from a year ago. The Weighted Average Gross 7-Day Yield for Prime Funds on September 30 was 0.26% (up from 0.25% the previous month), 0.12% for Government/Treasury funds (unchanged), and 0.07% for Tax-Exempt funds (unchanged). The Weighted Average Net Prime Yield was 0.09% (up 1 basis point). The Weighted Average Prime Expense Ratio was 0.17% (unchanged). Gross yields for Prime MMFs are up 6 basis points YTD (to 0.26%); expense ratios for Prime MMFs are up 2 bps YTD (to 0.17%); and net yields for Prime MMFs are up 4 bps YTD (to 0.09%). Further, the Weighted Average Life, or WAL, was 67.7 days (down from 67.1 last month) for Prime funds, 82.8 days (up from 78.4 days last month) for Government/Treasury funds, and 34.0 days (up from 33.6 days) for Tax Exempt funds. The Weighted Average Maturity, or WAM, was 32.0 days (down from 32.3) for Prime funds, 38.0 days (down from 38.6) for Govt/Treasury funds, and 31.8 days (up from 32.2) for Tax-Exempt funds. Total Daily Liquidity for Prime funds was 24.3% in September (down from 27.7% last month). Total Weekly Liquidity was 42.2% (up from 41.0%). In the SEC's "Prime MMF Holdings of Bank Related Securities by Country" table, the Canada topped the list with $206.4 billion, followed by the US at $183.4 billion. Japan was third with $174.7 billion, followed by France with $116.5 billion. Sweden ($83.7B), Australia/New Zealand ($79.4B), UK ($63.7B), The Netherlands ($56.2B), Germany ($48.4B), and Switzerland ($43.8B) round out the top 10. The only gainers for the month were The Netherlands (up $2.9B), Other (up $778M), and China (up $529M). The biggest drops came from France (down $73.5B), Sweden (down $36.5B), UK (down 33.8B), US (down $32.3B), and Norway (down $29.0). For Prime MMF Holdings of Bank-Related Securities by Major Region, Europe had $425.6 billion (down $607.5B from last month), while its subset, the Eurozone, had $226.8 (down from $306.7B). The Americas had $392.8 billion (down from $428.2B), while Asia and Pacific had $279.0 billion (down from $288.6B). Of the $1.752 trillion in Prime MMF Portfolios as of September 30, $518.8B was in CDs (down from $573.4B), $567.6B was in Government (including direct and repo) (up from $366.2B), $318.2B was held in Non-Financial CP and Other Short term Securities (down from $461.5B), $231.5B was in Financial Company CP (down from $252.3B), and $98.3B was in ABCP (down from $99.4B). Also, the Proportion of Non-Government Securities in All Taxable Funds was 42.4% at month-end, down from 49.8%. All MMF Repo with Federal Reserve was $414.4 billion on September 30, up from $143.9B. Finally, the Trend in Longer Maturity Securities in Prime MMFs said 38.3% were in maturities of 60 days and over (up from 36.9%), while 8.8% were in maturities of 180 days and over (down from 9.6%).

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