Daily Links Archives: December, 2015

The Wall Street Journal writes, "Why Your Bank Is Going to Pay More for Your Savings Soon." It says, "Investors who keep an eye on their bank statements in the coming year are likely to get a preview of how the Federal Reserve's higher interest-rate target will impact bank earnings. Traditionally, banks benefited from rising interest rates because they held off on raising deposit rates while quickly lifting rates charged on many loans. In prior periods of rate increases by the Fed, deposit rates moved up by around 0.25 percentage point while the prime rate rose much more. This boosted their net interest margins and flowed directly through to the bottom line." The piece speculates, "Anyone counting on this to happen in this rate cycle, however, is probably in for a shock. New banking and money-market fund regulations have dramatically altered the demand for cash in ways that are likely to benefit the retail customers of banks—and weaken bank profits.... Holding off on raising interest paid on many deposits, however, will be more challenging. J.P. Morgan Chase has already increased the rates paid on some deposits. The key difference between this rate-rising cycle and those of the past is the new liquidity coverage ratio regulation. These rules require banks to hold so-called "high-quality liquid assets" that can easily be sold when depositors demand their cash. The amount of high-quality liquid assets required varies depending on the type of deposit." It continues, "Nonoperating deposits -- that is, deposits in excess of an institutional customer's typical payment patterns -- have the highest high-quality liquid-asset requirements. Deposits of customers deemed financial institutions require high-quality assets equal to 100% of their balances, while those of nonfinancial corporate customers get a 25% outflow assumption.... Big banks will be all too happy to see these leave for money market funds. Retail deposits are a different story. Banks need only hold high-quality liquid assets equal to five cents of every dollar of retail deposits.... This means that banks are likely not only to seek to keep the retail deposits they have but lure money away from money market funds. To do this, banks likely will have to raise their bids for retail cash at a faster clip than in the past." See also, American Banker's "What Money-Market Reform Means for Banks", which says, "Banks that are dependent on money funds for wholesale funding will be hardest hit because that funding would probably become more expensive. Banks that sponsor money funds could lose revenue, or may even have to sell the funds if they can't absorb the cost of the new regulations. But other banks may find institutional depositors who pulled cash from money funds knocking on their door."

HSBC filed with the SEC to create a new "E" share class for three of its money market funds. The filing says, "Effective immediately, each of the HSBC Prime Money Market Fund, HSBC U.S. Government Money Market Fund and HSBC U.S. Treasury Money Market Fund will offer Class E Shares. Class E Shares will be offered primarily for investment through portal providers, intermediaries (anyone facilitating the purchase of a Fund by its clients), and institutional direct clients, if they meet the investment minimums set forth in the Prospectus. Purchases and redemptions of Class E Shares may only be made via wire transfer." The new E shares will have Total Expenses of 0.29%, made up of 0.10% Management Fees, 0.10% Shareholder Servicing Fees, and 0.09% in "Other Operating Expenses." Morgan Stanley also recently filed a couple of Prospectus Supplements with the SEC to make changes to synch the closing of money funds to the NYSE's closing. The first, regarding "Pricing Fund Shares," for Active Assets Institutional Govt Securities Trust and the Active Assets Inst Money Trust, says, "The NAV per share of each Fund is determined once daily, at the NYSE close (normally 4:00 p.m. Eastern time), on each day that the NYSE is open. Shares will generally not be priced on any day that the NYSE is closed." The other filing is related to the pricing of the Active Assets funds. Also, MSIM filed with the SEC on "Pricing of Portfolio Shares" on the Morgan Stanley Institutional Liquidity Funds, saying, "Shares of the Portfolios may be purchased or sold (redeemed) at the NAV next determined after the Fund receives your order in good order and State Street Bank and Trust Company (the "Custodian") receives monies credited by a Federal Reserve Bank ("Federal Funds") prior to the close of the Fed wire. You begin earning dividends the same day your Institutional Class shares are purchased provided the Fund receives your purchase amount in Federal Funds that day as set forth above. Orders to purchase shares of a Portfolio must be received by the Fund prior to the following times: for the Prime Portfolio, Government Portfolio and Treasury Portfolio - 5:00 p.m. Eastern time; for the Government Securities Portfolio and Treasury Securities Portfolio - 3:00 p.m. Eastern time; and for the Tax-Exempt Portfolio - 2:00 p.m. Eastern time." In other news, a release entitled, "SIFMA Issues 2016 Municipal Issuance Survey," says, "While short-term issuance is expected to increase in 2016, with $43 billion in short-term notes expected to be financed, compared to the estimated $35 billion in 2015, long-term issuance is expected to decrease, with $389 billion in long-term bonds expected, compared with the estimated $393 billion in 2015."

ICI released a study entitled, "BrightScope/ICI Defined Contribution Plan Profile: A Close Look at 401(k) Plans," which shows trends in 401k plan investing. The study says, "This report in the BrightScope/ICI Defined Contribution Plan Profile series focuses on private-sector 401(k) plans in 2013.... With $4.7 trillion in assets at the end of the second quarter of 2015, 401(k) plans have become one of the largest components of U.S. retirement assets, accounting for nearly one-fifth of all retirement assets." On money funds, it states, "More than half of 401(k) plans (52.1%) offered money funds and about seven in 10 offered guaranteed investment contracts (GICs)." Among plans with over $1 billion in assets, 80.2% offered money funds, while 66.2% in plans between $500M and $1B had money funds. It says, "In 2013, nearly 45 percent of assets were held in equity funds, nearly 20 percent was held in balanced funds (with most of that being held in target date funds), and about 8 percent was held in bond funds. GICs and money funds accounted for 12 percent of assets.... GICs ([held] 9.7 percent of assets). Bond funds (mostly domestic) held 7.9 percent of assets and money funds held 2.5 percent." Given the $4.7 trillion total in 401k assets, money funds would represent about $117.5 billion of this total. (A footnote in the study adds, "Asset allocation in the BrightScope Defined Contribution Plan Database is broadly similar to the EBRI/ICI 401(k) database. At year-end 2013, the EBRI/ICI 401(k) database shows equity funds held 43.5 percent of assets, balanced funds held 22.6 percent, bond funds held 9.1 percent, money funds held 4.4 percent, GICs and other stable value funds held 7.0 percent, and company stock, other, and unknown assets accounted for the remaining 13.3 percent of assets.") On expenses, ICI says, "Money market mutual funds had the lowest expense ratio of any of the asset classes, with an asset-weighted average expense ratio of 0.18 percent of assets in 2013 for money market mutual funds in 401(k) plans.... Mutual fund expenses decreased between 2009 and 2013 in 401(k) plans.... Money market mutual funds experienced the largest percent decline in expenses, falling from 0.30 percent of assets in 2009 to 0.18 percent in 2013.... Some of the decline in money market mutual fund asset-weighted average expenses may be attributable to fee waivers, which increased substantially in money market funds due to the low interest rate environment following the market turmoil of 2008." In other news, The Wall Street Journal" writes, "J.P. Morgan to Increase Deposit Rates for Some Big Clients in January." It says, "J.P. Morgan Chase & Co. will raise deposit rates for some of its biggest clients in January, according to a person familiar with the matter, following the Federal Reserve’s decision to raise interest rates this month."

As expected, the Government Accounting Standards Board approved changes to LGIPs, abandoning their previous linkage to money funds' Rule 2a-7. They issued a statement entitled, "GASB Issues Guidance for External Investment Pools and Pool Participants Ahead of SEC Rule Change." (See our Nov. 30 News, "GASB Prepares to "De-Link" LGIP Rules from SEC's 2a-7 MMF Reforms.") The release states, "The Governmental Accounting Standards Board (GASB) today issued guidance addressing how certain state and local government external investment pools and participants in external investment pools may measure and report their investments in response to changes contained in a U.S. Securities and Exchange Commission rule due to take effect in April 2016. References to that rule were previously incorporated in GASB literature. GASB Statement No. 79, Certain External Investment Pools and Pool Participants, permits qualifying external investment pools to measure pool investments at amortized cost for financial reporting purposes. The Statement provides guidance that will allow many pools to continue to qualify for amortized cost accounting. For governments, these external investment pools function much like money market funds do in the private sector. Government investment funds pool the resources of participating governments and invest in short-term, high-quality securities permitted under state law. By pooling their cash together, governments benefit in a variety of ways, including from economies of scale and professional fund management. GASB Chair David Vaudt said, "The new guidance for qualifying external investment pools and participants in external investment pools will help them to avoid confusion when the regulatory rule changes become effective. Statement 79 will allow those pools the option of continuing to measure and report their investments at amortized cost." Existing standards provide that external investment pools may measure their investments at amortized cost for financial reporting purposes if they follow substantially all of the provisions of the SEC's Rule 2a7. Likewise, participants in those pools are able to report their investments in the pool at amortized cost per share. Reporting at amortized cost reflects the operations of external investment pools when they transact with participants at a stable net asset value per share. Not having the option to report under amortized cost would represent a significant change from current practice for both pools and pool participants." It continues, "Statement 79 replaces the reference in existing GASB literature to Rule 2a7 with criteria that are similar in many respects to those in Rule 2a7. Although the Board considers those criteria to be relevant, it also believes that external investment pool accounting and financial reporting standards should not be subject to regulatory changes that might be made in the future when those changes were not originally intended to be applied to those pools. The Statement also establishes additional note disclosure requirements for qualifying pools and for governments that participate in those pools. These required disclosures include information about limitations or restrictions on participant withdrawals."

ICI's latest "Money Market Fund Assets" shows assets rising in the week following the Federal Reserve's first interest rate hike in almost 10 years. (Money fund yields, as measured by our Crane 100 Money Fund Index, have increased from 0.06% to 0.11% over the past 7 days according to Money Fund Intelligence Daily.) The release says, "Total money market fund assets increased by $11.00 billion to $2.74 trillion for the six-day period ended Tuesday, December 22, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $3.23 billion and prime funds increased by $6.43 billion. Tax-exempt money market funds increased by $1.34 billion." The weekly update continues, "Assets of retail money market funds increased by $5.75 billion to $933.93 billion. Among retail funds, government money market fund assets increased by $2.11 billion to $343.84 billion, prime money market fund assets increased by $2.16 billion to $406.16 billion, and tax-exempt fund assets increased by $1.48 billion to $183.94 billion. Assets of institutional money market funds increased by $5.25 billion to $1.81 trillion. Among institutional funds, government money market fund assets increased by $1.12 billion to $876.25 billion, prime money market fund assets increased by $4.28 billion to $862.78 billion, and tax-exempt fund assets decreased by $140 million to $70.01 billion." ICI also 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." (Though it appears none of these occurred this week.) Year to date, MMF assets are up $10 billion, which should make 2015 the 4th year in a row where MMFs have increased fractionally. Institutional assets are down $13 billion, or 0.7%, while Retail assets are up $23 billion, or 2.5%, YTD. (Note too that $30 billion in Vanguard assets were reclassified from Institutional to Retail last week.) Month-to-date (from 11/26), assets are up $19 billion. In other news, Reuters reports, "U.S. Fed awards $178.33 bln reverse repos." It says, "The Federal Reserve on Wednesday awarded $178.33 billion of one-day fixed-rate reverse repurchase agreements to 63 bidders at an interest rate of 0.25 percent, the New York Fed said on its website. The reverse repurchase agreement program is seen as a critical policy tool for the Fed to drain money from the financial system in an effort to achieve its interest rate objectives. On Tuesday, the Fed allotted $185.35 billion in one-day reverse repos to 60 bidders, including Wall Street dealers, money market mutual funds and mortgage finance agencies, also at an interest rate of 0.25 percent. Tuesday's amount was the most since Oct. 30 when the U.S. central bank awarded $225.3 billion to 79 bidders at an interest rate of 0.05 percent."

BNY Mellon and Investor Analytics recently released a brochure entitled, "U.S. Money Market Funds: Portfolio Stress Testing, which highlights the two companies' enhanced portfolio stress testing capabilities. (The SEC's "Money Market Fund Reforms" contain a mandate on "enhanced stress testing" -- see page 552 for details.) The IA piece says, "BNY Mellon and Investor Analytics (IA) are pleased to offer an enhanced portfolio stress testing capability tailored to assist clients in meeting certain of the SEC's 2014 requirements, building on current portfolio stress testing capabilities. Investor Analytics (IA) offers a comprehensive stress testing service in support of the 2010 money market fund reforms, including: Floating NAV, Identification of entity concentration; Calculation of daily and weekly liquid assets; and Combined stress tests of interest rate increases, redemption increases and credit spread widenings." It continues, "In addition to the 2010 rules, Money Market Funds will now also need to test their ability to maintain weekly liquid asset level at 10%, and to minimize volatility in response to specified hypothetical events including: Increases in the level of short term interest rates; The downgrade or default of particular portfolio security positions, each representing various exposures in a fund's portfolio; and The widening of spreads in various sectors to which the fund's portfolio is exposed, each in combination with various increases in shareholder redemptions. The fund's adviser must report the results of the stress testing to the fund's board of directors." It explains Investor Analytics' approach. "Data Management: IA handles and stores all the security and pricing data for monthly and ad-hoc reporting needs. Liquidity and Principal Volatility: Calculation of daily and weekly liquid assets for each redemption stress by simulating the selling of securities to meet required redemptions. IA performs bottom-up security valuation based stresses: IA does not use duration/convexity approximations, which are inappropriate for large stresses. IA does not proxy with "Weighted Average Maturity (WAM) equivalent" proxy. IA updates its yield curve every day. Comprehensive Suite of Stress Tests: IA covers interest rate, credit spread, default and redemption stresses. IA covers credit stresses in two different ways: through spreads and through simulated defaults of groups of instruments. IA's stresses go through the point of "breaking the buck." Also, IA "Simulates how both the portfolio's liquidity profile and NAV are affected." Further, "Combined Stresses: The most likely scenario is not that only one of these stresses occurs, but that they all occur (to some degree), at the same time. IA shows exactly what combination of stresses will impact the portfolio to what degree. IA shows the portfolio's ability to minimize principal volatility and maintain liquidity. IA support groupings for enhanced stressing. Board-Quality Presentation of Results: IA's reports show summary and detail level. IA presents data in numeric and graphical formats. Color coded reports highlight areas of concern for quick identification of focus areas."

The New England Chapter of the Association for Financial Professionals is sponsoring a meeting in Boston on Jan. 20, 2016, called, "The New World of Cash/Navigating Roadblocks." Note that the meeting, which will be held at State Street Financial Center in Boston, takes place the day before and right next door to Crane's Money Fund University (which will be at the Hyatt Regency Boston). The meeting's first session (2-3:15pm), entitled, "The New World of Cash," will be moderated by Mark Kelly, Vice President, State Street Fund Connect, and features panelists Will Goldthwait, Vice President US Portfolio Strategist, State Street Global Advisors, and Philip Picariello, Senior Vice President, Head of Short-Term Investment Management, eSecLending. The description says, "In this session, speakers discuss the "New World of Cash" facing treasurers and cash managers today-persistently low interest rates, regulatory reform, and the shortage of high-quality short-term securities available in the market. They layout the challenges and then move on to how these challenges can be met head on by cash investors." Visit www.neafp.org <i:http://www.neafp.org to register. (Note: SSgA will also host a webinar entitled, "Cash Solutions for the New Reality, the same day from 1-2pm.) Also, Tuesday (12/22) is the last day to get the discounted hotel rate of $179 plus tax for Money Fund University. Crane's Money Fund University, our "basic training" event, will be held January 21-22, 2016, at the Hyatt Regency in Boston. MFU 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. (In order to secure the discounted conference rate of $179 plus tax, hotel reservations must be made through the conference website, the hotel site, or by calling 1-888-421-1442.)

The Weekend Wall Street Journal writes "Money-Fund Yields Are Rising After the Fed Move. It says, "The yields on money-market mutual funds already are starting to tick up in the wake of the Federal Reserve's boost to short-term interest rates on Wednesday. The average one-day yield for the 100 largest taxable money funds was 0.10% as of Thursday, up from 0.08% the prior day and 0.06% a week earlier, according to Crane Data LLC, a Westborough, Mass., firm that tracks money funds. Money funds buy very short-term government and corporate debt and aim to maintain a steady $1 share price. Investors in the funds "have been starving on zero yield for eight years now," said Peter Crane, president of Crane Data. It should take a little more than a month for higher rates to be fully reflected in fund yields, as it takes that long for the average money fund to turn over its portfolio, Mr. Crane said. But money-fund investors won't necessarily see an increase in yield matching the Fed's quarter-point boost in its short-term rate target.... [I]nvestors in some money funds may not see the full increase in market interest rates because of the continued unwinding of fee waivers that mutual-fund companies had put on their funds in the low-rate environment.... Across the industry, "my wild guess is that half of the first rate hike might flow through to investors," Mr. Crane said.... Money funds will decide on a fund-by-fund and day-by-day basis how much of the rate increase to pass through to investors, Mr. Crane said. The rate increase "may cause a flurry of interest" in money funds by some savers, and some fund companies may choose not to remove fee waivers right away because they won't want to be left behind in that initial investor interest, he said. That will depend on their customer base and competitive position, he added. That calculus won't apply if money funds have particularly low expenses and already have been able to restore their charges to the full usual levels." In other news, Bloomberg wrote Friday, "Day 1 After Fed Liftoff Shows Move Catapults Money Market Rates."

ICI's latest "Money Market Fund Assets" shows a significant drop in assets, the first in 4 weeks. (Quarterly corporate tax payments on the 15th were the likely cause.) Of note is a huge drop in Prime Institutional assets as ICI likely shifted a chunk of Inst assets to Retail. (ICI confirms that this includes the $30+ billion Vanguard Prime Inst MMF, which was changed to Vanguard Prime Admiral.) Their release says, "Total money market fund assets decreased by $20.31 billion to $2.73 trillion for the week ended Wednesday, December 16, the Investment Company Institute reported today. Among taxable money market funds, government funds (including agency and repo) decreased by $1.86 billion and prime funds decreased by $20.48 billion. Tax-exempt money market funds increased by $2.02 billion." It continues, "Assets of retail money market funds increased by $36.04 billion to $926.37 billion. Among retail funds, government money market fund assets increased by $2.44 billion to $340.72 billion, prime money market fund assets increased by $32.29 billion to $404.00 billion, and tax-exempt fund assets increased by $1.32 billion to $181.65 billion. Assets of institutional money market funds decreased by $56.36 billion to $1.81 trillion. Among institutional funds, government money market fund assets decreased by $4.30 billion to $875.84 billion, prime money market fund assets decreased by $52.77 billion to $861.42 billion, and tax-exempt fund assets increased by $710 million to $70.22 billion." ICI also 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." Year to date, MMF assets are up $1 billion. Institutional assets are up $15 billion, or 0.8%, while Retail assets are up $15 billion, or 1.6%, YTD. In other news, a press release entitled, "Brown Brothers Harriman Unveils First STP Interface to CME Clearing's Collateral Connect," says, "The BBH Cleared Derivatives Collateral Management platform (BBH-CDCM) enables participants to optimize the customer collateral selection process and efficiently process collateral transfers to and from CME Clearing. This solution expands BBH's established collateral management services for Futures Commission Merchants (FCMs), asset managers, and other market participants."

A press release entitled, "Goldman Sachs Asset Management Announce Strategic Partnership to Help Investment Managers Manage Cash Holdings," says, "HazelTree and Goldman Sachs Asset Management (GSAM) announced today a strategic partnership to assist hedge funds, fund administrators, managed account providers and family offices in improving their cash management. The partnership is in response to the changing regulatory environment for systemically important financial institutions (SIFIs), particularly Basel III guidelines on capital requirements and balance sheet composition." Stephen Casner, CEO of HazelTree, said, "This partnership with GSAM aims to provide a risk-managed, operationally efficient way for hedge funds to streamline their cash management through an unprecedented combination of visibility into excess cash balances across clients' various counterparties and automated movement of that cash for easier execution." Instead of manual cash transfers with each counterparty, typically the most common practice today, the partnership between HazelTree, a leading Treasury Management solution provider, and GSAM will provide hedge funds, fund administrators, managed account providers and family offices with automated, rules-based "sweep" access to solutions managed by GSAM. Clients will have a comprehensive view of all cash balances across their counterparties and can set target rules to optimize those cash balances and investments through the enhanced functionality." James McNamara, Global Head of Third Party Distribution at GSAM says, "GSAM has a long history of managing cash for hedge funds and other institutional investors, and we believe this new relationship with HazelTree will make cash management that much easier, as certain institutions are increasingly asked to find alternative investment options for their cash balances." In other news, `The Wall Street Journal wrote, "Winners and Losers When the Fed Raises Rates." It says, "Many Fedwatchers are convinced the central bank is just hours away from announcing the first increase to its benchmark federal-funds rate in nearly a decade. If that happens, there will be repercussions.... One of the winners is money market funds. WSJ's Daisy Maxey writes, "The Fed's 0.25% interest-rate increase will begin showing up in the yields of money-market mutual funds within days, welcome news for investors. Funds for individual investors that invest in both corporate and government debt currently yield just 0.01% on average, according to researcher iMoneyNet Inc. The higher rates should be fully reflected in just over a month, but investors in some money funds may not see the full increase, says Peter Crane, president of Crane Data LLC. Fund managers have temporarily trimmed fees to keep expenses from eating up the funds' paltry yields and taking a bite out of investors' principal. As interest rates rise, some part of the increase is likely to go toward increasing funds' fee charges, Mr. Crane says. Across the industry, "my wild guess is that half of the first rate hike might flow through to investors, but it could be more," he says."

Yesterday's Financial Times published, "Money market funds applaud rising rates." It says, "Rising yields on Treasury bills and other short-term debt securities mean good news for savers and money market funds as the era of near-zero returns draws to a close. A widely expected shift in policy by the US Federal Reserve on Wednesday will formally end seven years of ultra-low returns for investors who maintain holdings of cash or own money market funds. Prolonged low interest rates have stunted returns for money market mutual funds that invest in assets with a maturity of 12 months or less. The yield on Vanguard's prime money market fund, one of the largest available, doubled from 8 basis points in October to 16bp on Monday. "It will be great news for money market funds," said Debbie Cunningham, chief investment officer at Federated Investors. "It means the return from our portfolio composition back to the end shareholders is improving and that hasn't happened since 2008." The FT continues, "Short-term market rates are expected to continue rising once the central bank shifts its overnight Fed funds rate higher, with the market anticipating a new corridor set between 0.25 percent and 0.5 percent. Economists polled by the Financial Times this week expect the Fed will undertake two to four additional rate increases next year. "Money market funds are absolutely ecstatic. For the first time in a decade they are going to be in a rate-rising environment," said Joseph Abate, a rates strategist at Barclays. To cope with years of low returns, a number of money market funds have waived fees for investors.... The weighted average maturity of prime institutional money market funds stood at 28 days last week from 32 days at the beginning of October, according to Crane data."

Wells Fargo Money Market Funds released its monthly "Overview, Strategy, and Outlook" portfolio manager commentary. In a segment entitled, "All eyes on the Fed," they write, "After a year of listening to the Federal Reserve (Fed) say that it may be appropriate to begin the process of normalizing monetary policy by raising interest rates in 2015, here we are just a few short days ahead of the last Federal Open Market Committee (FOMC) meeting of the year. In terms of expectations, market participants certainly believe that we are on the verge of liftoff. And, unlike the buildup to the September FOMC meeting, at which the Fed left interest rates unchanged, the narrative surrounding the likelihood of liftoff occurring at the December meeting has shifted very slightly and very subtly." It continues, "`While the unemployment and inflation rates may not be quite at the levels the Fed is seeking, there are compelling reasons why liftoff prior to meeting those goals may be preferable. One reason is to acknowledge that we are no longer in a crisis situation, and so the appropriate level of interest rates is no longer zero. That doesn't mean accommodative policy will be removed immediately, because it won't be. Even after a 25 basis-point (bp; 100 bps equals 1.00%) hike, yields will still be extremely low by historical standards. More important, the Fed has repeatedly stated that it wants the future path of normalization to be gradual, and maybe even bordering on predictable. The last thing the Fed wants to happen is to start tightening too late, after inflation or the economy heats up, which may, in turn, require larger and more frequent rate increases." In other news, Wells Fargo Funds officially drops the name "Advantage" from its funds today (Dec. 15). (See our Sept 2 News, "Crane Adds Daily Liquid Assets, WLA; Wells Rebrands; Cap Adv on FNAV." A Wells Fargo spokesman told us at the time, "Because fund names are often abbreviated in database listings, longer fund names can make it difficult for investors to identify a specific fund. We believe this change will help alleviate confusion and will allow us to more clearly communicate our product names."

Fitch Ratings issued a press release, "New US GASB Rules Recognize Stable Investor Base of LGIPs." It explains, "US municipal accounting rules will soon permit certain externally managed local government investment pools (LGIPs) to qualify for reporting constant net asset values (NAV) without meeting the standards applied to US money market funds. The change better aligns accounting rules with characteristics of LGIPs and their investors, says Fitch Ratings. Under the current US Governmental Accounting Standard Board (GASB) requirements, certain LGIPs can report a constant NAV only when conforming to the SEC's Rule 2a-7, which is a set of qualification standards specific to US money market funds, not LGIPs. Though GASB originally embraced the SEC framework, on Dec. 7 the board reversed course and voted to delink LGIPs from money market fund regulation. While the new standard removes the direct reference to Rule 2a-7, GASB replicated many of Rule 2a-7's risk-limiting provisions. However, the rule excludes some of Rule 2a-7's recent structural amendments such as the switch to floating NAV reporting or the requirement to implement liquidity fees and redemptions gates during times of stress." It continues, "LGIPs (with total assets of approximately $250 billion according to iMoneyNet and JP Morgan) are less likely than prime money funds (with $3.1 trillion in assets according to the SEC) to experience a run or otherwise pose the types of systemic risks that compelled the SEC to amend Rule 2a-7.... While the SEC recently removed the required use of ratings in credit analysis for money fund managers, GASB largely maintained the requirement to provide for an easy-to-use and uniform standard of risk measurement. In addition, GASB will only require LGIPs to calculate their shadow NAV on a monthly basis, in contrast to the SEC's requirement of daily valuation. The high cost of money fund reform has forced small managers to restructure or leave the space altogether. However, GASB's new rules will likely allow small municipalities to continue managing LGIPs effectively." (See our Nov. 30 News, "GASB Prepares to "De-Link" LGIP Rules from SEC's 2a-7 MMF Reforms.") In other news, see The Wall Street Journal's "A Fed Move Would Create Some Winners".

ICI's latest "Money Market Fund Assets" shows yet another week of strong asset gains, the 3rd week in a row and the 10th week out of the past 12 that MMFs have increased. For 2015, asset flows are now positive, poised to finish the year in the black for the fourth straight year with the strongest annual growth since 2008. The release says, "Total money market fund assets increased by $12.73 billion to $2.75 trillion for the week ended Wednesday, December 9, the Investment Company Institute reported today. Among taxable money market funds, government funds (including agency and repo) increased by $6.34 billion and prime funds increased by $6.77 billion. Tax-exempt money market funds decreased by $380 million. Assets of retail money market funds decreased by $1.95 billion to $890.32 billion. Among retail funds, government money market fund assets increased by $1.33 billion to $338.28 billion, prime money market fund assets decreased by $3.54 billion to $371.72 billion, and tax-exempt fund assets increased by $270 million to $180.33 billion." It continues, "Assets of institutional money market funds increased by $14.68 billion to $1.86 trillion. Among institutional funds, government money market fund assets increased by $5.01 billion to $880.13 billion, prime money market fund assets increased by $10.31 billion to $914.18 billion, and tax-exempt fund assets decreased by $650 million to $69.51 billion." ICI also 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. For more information about the SEC's new money market fund rules, read our recent ICI Viewpoints." (Note that there were no Prime to Government fund shifts in the latest week.) Year to date, MMF assets are up $21 billion, or 0.8%. Institutional assets are up $42 billion, or 2.3%, while Retail assets are down $21, or 2.3%, YTD.

Wells Fargo Securities' Garret Sloan recently published a piece entitled, "Tier-2 Holdings Growing in 2a-7 Funds," which says, "In March we noted the relatively cheap market levels in short-term credit markets. The basis between 30-day tier-1 and tier-2 commercial paper had reached levels that started to entice even longer-duration credit investors. Wider spreads and higher yields also attracted a handful of money market funds to acquire tier-2 CP. Until that point, tier-2 CP had been largely absent from 2a-7 fund holdings despite the ability of unrated funds to allocate up to 3 percent of portfolio assets to tier-2 securities. March was a turning point in commercial paper markets not only because of the tier-1/tier-2 basis, but also because it represented a near-term peak in total tier-2 CP outstanding, rising to almost $120 billion. Since the March peak, the tier-1/tier-2 30-day commercial paper basis has tightened, and the total amount of Tier-2 CP outstanding has declined. Additionally, from a regulatory perspective, the SEC has finalized and adopted Dodd-Frank rule 939A for money market funds removing reference to agency credit ratings." Sloan adds, "Regardless of the prime money market fund outflow dynamics over the coming year, tier-2 commercial paper will likely take a more prominent place in 2a-7 portfolios. If that is the case, it will be based on the primary value proposition that many tier-2 issuers provide to the short-term market. These include (1) diversification, (2) yield differential, and (3) a history of ratings stability . Additionally, with the removal of NRSRO language from rule 2a-7, money market funds will no longer need to keep their 3 percent tier-2 buckets empty for fear of quickly filling up on a ratings announcement. In such cases, the determination to place securities in the tier-2 bucket will be largely internal."

State Street is preparing to liquidate its Institutional Tax-Free Money Fund. The filing says, "The State Street Institutional Investment Trust's Board of Trustees has approved a Plan of Liquidation and Termination of Sub-Trust (the "Plan") with respect to the Fund, pursuant to which the Fund is expected to be liquidated and terminated on or prior to December 15, 2015 (the "Liquidation Date"). Effective immediately the Fund may take steps to begin preparing for its liquidation, which may include departing from its principal investment strategy, such as holding a significant portion of its assets in cash, and not achieving its investment objective. During the period between the effective date of the Plan (December 8, 2015) and the Liquidation Date, the Fund will engage in business and activities solely for the purposes of winding up its business and affairs and making a distribution of its assets to shareholders, and may not pursue or achieve its investment objective. The Fund's investment adviser, SSGA Funds Management, Inc. (the "Adviser") will continue to voluntarily reduce all or a portion of its fees and/or reimburse expenses of the Fund to the extent necessary to avoid negative yield, or a yield below a specified level, which may vary from time to time in the Adviser's sole discretion, through the liquidation of the Fund.... Effective upon the close of business on December 8, 2015, the Fund will no longer accept orders from existing shareholders to purchase additional shares. Current shareholders of the Fund may, consistent with the requirements set forth in the Prospectus, redeem or exchange their shares into shares of the same class of other Funds in the State Street Institutional Investment Trust at any time prior to the Liquidation Date."

Late last week, Capital Advisors published, "How to Weather a Rising Interest Rate Environment." The piece says, "It has been more than a decade since the last interest rate tightening cycle. As we dust off this report written more than ten years ago for corporate treasurers on how to weather a rising rate cycle, we are struck by how little we needed to revise its content despite a vastly different cash investment landscape today.... Despite a few false starts, it appears that in a few weeks the time may finally be here for the Janet Yellen Fed to start increasing interest rates. While the short-term investment community aches to break the spell of the near zero interest rate policy (ZIRP), higher rates can be an unpleasant experience if not taken seriously.... All else being equal, higher rates result in immediate unrealized losses in existing holdings. Credits may see more losses than government securities because of inherently higher risks. This normally isn't a big concern if one intends to hold securities to maturity, assuming that the terms are short and credit quality is high. However, it may be problematic if one has to sell assets prior to maturity and turn unrealized losses into realized ones. These risks remain the same from one rate tightening cycle to the next.... With those familiar and new factors in mind, we are issuing our revised guidance for corporate treasury professionals on how to prepare for a rising interest rate environment. Following are several portfolio management techniques available to help diminish the risk presented by higher interest rates. In fact, when managing portfolio duration, yield curve positioning and security selection properly, rising interest rates can add value, particularly for short duration or held-to-maturity portfolios."

Barclays' Joseph Abate writes in his latest "US Money Markets," "As lift-off gets closer, all front-end interest rates have begun moving higher. In past tightening cycles, the 6m rate has typically risen faster than the 3m rate as there is more opportunity for the Fed to hike interest rates over a six-month window (at least in the early stages of a hiking cycle) As a result, the 3/6 basis has increased by an average of 13bp (and a median of 22bp) in the first three months of the past three tightening cycles. Since July, the basis has widened by 6bp.... Fed Chair Yellen's testimony this week strongly suggests the upcoming rate hike trajectory will be mild, so how much wider can the 3/6 basis move?" On "WAM shortening," he comments, "Our sense, however, is that the path of the 3/6 basis may depend more on the behavior of money fund investors than on the speed of the Fed's rate hikes. After years of "yield starvation" money fund managers have eagerly anticipated the Fed's lift-off this year by shortening up the maturities of their holdings. They shorten their maturities in order to capture as much of the increase in bank funding rates following a Fed rate hike as possible -- effectively timing the market. Indeed, since the start of the year, institutional prime funds have shortened the WAMs of their portfolio holdings to 29d from 45d in February.... Prime fund WAMs were even shorter ahead of the mid-September FOMC meeting as markets widely expected the Fed's lift-off would occur at that meeting. But when the Fed failed to raise rates in September, prime fund managers redeployed their cash into the short-term bank debt market -- although at only modestly longer maturities. In recent weeks, however, prime money fund portfolio WAMs have resumed shrinking as lift-off in December becomes more certain." Finally, Abate tells us, "There is a tight connection between the investment decisions of money fund managers and bank issuers as money funds hold a substantial portion of outstanding short-term unsecured bank debt in the form of CP, CDs, and wholesale time deposits. As fund managers are shortening maturities, two market effects are emerging. First, Treasury GC rates have been pinned to within a basis point of the Fed's RRP rate as cash that would ordinarily be invested in term unsecured bank paper has temporarily shifted into overnight Treasury repo. The repo "pile-up" has offset any of the cheapening expected from the substantial post-debt ceiling increase in bill issuance."

ICI's latest "Money Market Fund Assets" shows yet another week of asset gains and it reflects a huge shift of assets from Prime to Government money funds as the largest money market fund, Fidelity Cash Reserves at $115 billion, is reclassified. Money fund assets increased for the 9th week out of the past 11, and YTD assets are now positive for the first time in 2015. (Assets are up just $8 billion, or 0.3%, mirroring a pattern of flat to very modest gains the past 4 years in a row.) The release says, "Total money market fund assets increased by $17.82 billion to $2.74 trillion for the eight-day period ended Wednesday, December 2, the Investment Company Institute reported today. Among taxable money market funds, government funds (including agency and repo) increased by $140.27 billion and prime funds decreased by $126.32 billion. Tax-exempt money market funds increased by $3.87 billion. Assets of retail money market funds decreased by $1.12 billion to $892.23 billion. Among retail funds, government money market fund assets increased by $119.17 billion to $336.95 billion, prime money market fund assets decreased by $121.76 billion to $375.22 billion, and tax-exempt fund assets increased by $1.47 billion to $180.06 billion." It continues, "Assets of institutional money market funds increased by $18.94 billion to $1.85 trillion. Among institutional funds, government money market fund assets increased by $21.09 billion to $875.12 billion, prime money market fund assets decreased by $4.56 billion to $903.87 billion, and tax-exempt fund assets increased by $2.40 billion to $70.16 billion." ICI also 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. For more information about the SEC's new money market fund rules, read our recent ICI Viewpoints." Fidelity Cash Reserves became Fidelity Government Cash Reserves; Fidelity MMT: Retirement became Fidelity MMT: Govt MMP II; and American Century Premium became American Century US Govt MM Inv, all on Dec. 1. Look for more details and coverage on asset flows and the Prime to Govt shift in our December Money Fund Intelligence, which ships to subscribers Monday morning.

Wells Fargo Securities Strategist Garret Sloan writes in yesterday's, "Daily Short Stuff," "Month-end was relatively benign in terms of overnight lending markets. The Fed reverse repo facility saw just under $140 billion, while the inter-dealer repo market (GCF) saw Treasuries jump to the low 20 bps range on higher than normal volume the last day of the month. Treasury overnight GC volume jumped to $137 billion, up from $84 billion the day after Thanksgiving. Mortgages jumped even higher, touching just below 30 bps on Nov. 30th, again on slightly higher volume. This month-end the repo markets approached the calendar turn somewhat differently than October month-end, which likely has something to do with the holiday schedule. Overnight repo rates began climbing in the GCF market starting on the Tuesday before Thanksgiving and climbed every day through month-end.... In the triparty market, the price action was similar, though more muted. The MBS triparty repo index hit 12.8 basis points at month-end, up from 6 basis points prior to the Thanksgiving break. Agencies climbed from 5.7 basis points to 11.2 basis points and Treasuries climbed from 4.9 basis points to 8 basis points.... This morning GCF Treasury repo opened at 10.6 basis points, down from yesterday's average Treasury GCF rate of just over 18 basis points <b:>`_." In other news, the latest Independent Adviser for Vanguard Investors newsletter comments on rising money market fund yields. Editor Dan Wiener writes, "Money market yields continue to stir. Admiral Treasury Money Market picked itself up off the mat to score a 0.02% SEC yield on November 9 -- the first time it's been over 0.01% since January 11, 2013. It ended the month at 0.05%. But Vanguard's tax-exempt money funds all remain anchored just above zero." (Note: A number of Institutional money market funds now yield 0.20%, the first time we've seen these levels since the end of 2012. Watch for more yield coverage in the upcoming December issue of Money Fund Intelligence.)

Federated Investors' Global Money Market CIO Debbie Cunningham posted her December "Month in Cash" commentary, entitled, "Finally time to kick rates off the ground." She writes, "This year marks the 50th anniversary of the beloved TV special, "A Charlie Brown Christmas." But for cash managers, the more apt Peanuts reference is Lucy pulling that football at the last second when Charlie Brown runs to kick it. Federal Reserve Chair Janet Yellen has played her best Lucy impression by postponing an expected liftoff several times already this year. We -- and the majority of the market -- think the Fed will raise rates in its December policy-making meeting. A data-dependent Fed will likely find current economic numbers acceptable when it meets Dec. 15-16 even if inflation continues to be low. The labor market has been strong and even the softening in the residential housing has been offset somewhat by corporate sales. Of course, geopolitical violence could derail a hike if everyone responds to it by staying home to watch CNN instead of shopping or eating out. The Fed is concerned about negative externalities and is assessing all avenues, but most lead to a hike. If that does occur, some have raised concerns about whether rates on money market securities will follow suit given the extreme demand for these types of securities. We believe the Fed's monetary policy tool of the overnight reverse repo facility will not only continue to be effective at establishing a floor under short-term interest rates but also provide adequate supply for those with which it trades. The New York Fed holds over $2.5 trillion of Treasury securities on its balance sheet that it can make available for reverse-repo transactions with approved counterparties, of which we are one. This gives eligible participants a place to invest if traditional markets appear too expensive. We have already seen an increase in the London interbank offered rate (Libor) over the course of November in anticipation of the Fed move. But the flip side is you won't see the whole curve shift up by 25 basis points if the Fed moves to a 25-50 basis-point target range because it is already 75% of the way there.... It's important to realize that different money funds in the marketplace have different composition and so may adjust to the rate hikes at different speeds. The higher overnight positions in government funds may mean that these funds adjust more quickly. Municipals would be next because of their use of 7-day variable rate demand notes (VRDNs) -- within a week they should catch up to the direct market. Prime funds would be third, lagging around one-to-two months because they don't have as much in the overnight or 7-day spaces. In preparation, we continue to have shorter Weighted Average Maturity (WAM), down in the mid to high 30s for the most part, high percentages of floating rate securities and an ample amount of liquidity."

The Wall Street Journal posted an article, "Rule Changes on Money-Market Funds: What Investors Need to Know." It says, "If you have cash parked in a money-market mutual fund in a 401(k) or similar plan, you may want to start preparing for sweeping changes on the horizon.... The changes could affect millions of Americans, including those who invest on average 4% of their assets in money-market mutual funds in a 401(k) or similar plan." It continues, "The good news: The floating-NAV rule excludes government and retail money-market funds, which can still offer a stable NAV, says Samuel Henson, a vice president at Lockton Retirement Services in Kansas City, Mo.... Experts say many plan sponsors may decide to replace the money funds in their plans rather than try to educate people on the new rules. "It will be hard to explain that sometimes you can and sometimes you can't have your money," Mr. Henson says. "It's going to be hard to explain that sometimes there will be a fee and sometimes there won't be." Likely money-fund replacements include stable-value funds, guaranteed investment contracts, short-duration bonds and certificates of deposit, experts say.... If an employer decides to remove money-market funds from its retirement plan, participants will have to decide how best to invest the assets they once allocated to cash and cash equivalents. But if an employer decides to keep the money funds in its 401(k) lineup, plan participants need to ask themselves a few questions: How much extreme market turmoil might there be? The SEC money-market changes, says Mr. Henson, are a response to the 2008 financial crisis, when heavy investor withdrawals threatened the price stability of these funds. That could certainly happen again. "Money-market funds are often viewed as a safe haven, even more so in times of stress, so it's important for participants to realize there does exist a chance that they may temporarily be unable to access their money," says James Veneruso, a vice president with Callan Associates in Chicago. Which is better -- the possibility of paying a penalty for withdrawing funds or a lower yield? "While government money-market funds are largely exempt from liquidity gates and redemption fees, they may offer a lower yield than a retail fund," says Mr. Veneruso. "The decision investors should weigh is whether or not any extra yield on a retail fund is worth the potential headache that could come in the form of liquidity gates and or redemption fees." It adds, "What funds are best for long-term investment goals? Money-market funds are designed for capital preservation and short-term liquidity needs, says Josh Cohen, head of institutional defined contribution at Russell Investments. "Given that, should a long-term investor, such as a 401(k) plan participant, have any meaningful allocation to this low-returning asset class? If it's there for participants who want to avoid the markets for certain periods, is there evidence that participants can time that [strategy] correctly?"