A press release from IMMFA, the London-​based Institutional Money Market Funds Association, entitled, "Disappointment in the ECON vote on amendments to the Money Market Fund Regulation," explains, "This morning the Economic and Monetary Affairs Committee (​ECON) of the European Parliament passed a set of proposed amendments to the Money Market Fund Regulation (​MMFR) which had originally been put forward by the European Commission in September 2013. The money market fund industry in Europe has approximately E1 trillion assets under management. If implemented, the changes suggested by the European Parliament would have wide-​ranging and long-​term ramifications for both the constant net asset value (​CNAV) and variable net asset value (​VNAV) sectors of the money market fund market. A great deal of effort has been expended over the last few years.... Bearing this combined effort in mind, it is regrettable that the ECON Committee has decided upon a set of proposals which would impinge on the usefulness of many of the money market funds products and as a result would negatively impact the funding supply which money market funds inject into the short term capital market. This in turn has implications for the many businesses and banks which fund themselves in this market. It is a positive development that the measures passed this morning recognized that the capital buffer originally suggested by the European Commission was not a viable proposal for an investment product. It is also worth noting that many of the good market practices which IMMFA funds already adopt voluntarily under the IMMFA Code of Practice, such as credit diversification, prescribed levels of liquidity and a high level of transparency, have been incorporated into the future regulation of money market funds in Europe. However the options presented to the CNAV industry are disappointing. The Retail CNAV and EU Public Debt CNAV options are limited in scope, and certainly under current market condition together account for less than 10% of the CNAV AUM.... The proposed LVNAV option could operate as a substitute CNAV product providing the funds invest only in extremely short duration debt instruments (<​90 days). However under a so-​called '​sunset clause' the authorisation of these funds would lapse 5 years after the Regulation comes into force.... The agreement by the Parliament is effectively stage 2 of a 4-​stage process. The proposed text from the ECON Committee will now be subject to plenary ratification by the full European Parliament -- this is expected to take place sometime in April. The next phase requires the Council of Ministers, made up of senior representatives from each of the 28 Member States, to agree their version of how the future regulation of money market funds should be effected. Once each of these 3 bodies (​the EC, the EP and the CoM) has their own version of the MMFR, the fourth and final stage, the Trilogue, takes place. The Council of Ministers still has the opportunity to express their vision of how money market funds regulation should be implemented, and this view along with those of the European Parliament and the European Commission will be considered in the Trilogue process. IMMFA remains committed to working with all parties involved in the regulatory debate and hopes that in the long run a pragmatic approach will prevail. Reuters reports in "EU Lawmakers Back Revamp of Money Market Funds," "Europe'​s money market funds will not have to hold costly capital to shield them from financial shocks following a vote by European Union lawmakers to soften proposed new rules for the trillion-​euro industry.... It has adopted a new approach similar to rules introduced in the United States, where the funds would have fees and "​gates" aimed at making it harder for investors to withdraw their cash in a crisis.... The new plans also create three new categories of CNAVs, one for holding only European Union government debt and another for just retail investors.... Under the version backed by lawmakers on Thursday, all money market funds, including variable net asset value funds, must meet minimum liquidity requirements and limit how much can be invested in any given asset. No money market fund would be allowed to receive external support at any time, including from their sponsors, making it clear what would happen in a crisis." In other news, ICI'​s latest weekly "Money Market Mutual Fund Assets" report says, "Total money market fund assets increased by $​10.​28 billion to $​2.​69 trillion for the week ended Wednesday, February 25."

Mutual fund publication, ignites, is holding a webinar Thursday on "How Firms are Revamping Money Fund Lineups." The webinar is available only (​and free) to Ignites subscribers and begins at 11:​00 am (​EST). To hear it, sign up here. The presenters include Crane Data'​s Peter Crane, Charles Schwab'​s Rick Holland, and the event will be moderated by Ignites' Beagan Wilcox. (​Watch for excerpts in coming days.) In other news, Fitch Ratings issued a report "Money Fund Reform to Alter ST Mkt Supply/​Demand Dynamics." It says, "Asset managers are repositioning their cash management platforms in response to money fund reform, but investors are likely to take time to adjust to new features mandated for prime money market funds, Fitch Ratings says. Yields on different liquidity products have converged in the low interest rate environment in the US, but spread differentials among these offerings will become more pronounced as rates rise and as short-​term markets evolve. Six months after the SEC voted on reforms, money fund managers are beginning to take steps to comply with the new rules and position to retain and attract clients. Fidelity, the largest US money fund manager, announced that it will convert more than a quarter of its prime fund assets into government funds recently, as investors indicated unease over new features mandated for prime funds. Federated, the fourth largest manager, also announced an overhaul of its business and a slew of new liquidity products. Other fund managers are working on similar moves, and new product offerings may include ultra-​short bond funds, private unregistered money funds, separately managed accounts, and money funds that maintain maturities under 60 days to preserve a stable net asset value (​NAV). The changes in the cash management industry are set to upend the supply and demand dynamics in the short-​term markets. The greatest benefit appears to accrue to government securities, which will likely see higher demand at the expense of corporate and bank debt as some prime money fund assets shift to government funds.... Wider spreads between yields of prime and government funds, as well as other products, may lead investors to reconsider their investment choices." It continues, "Higher demand for government securities would push down the returns on these investments, and in turn the yields of the money funds that buy them. This could widen the spread between prime and government money funds... As interest rates rise closer to historical levels, spreads between prime and government fund yields should expand.... We believe that wider spreads between prime and government funds will entice certain investors to reposition into prime funds or alternative products investing in non-​government securities. Investors will likely consider the spreads in the context of the risk profiles of the various new and traditional liquidity products to determine how best to deploy their cash."

The Wall Street Journal wrote yesterday, "J.​P. Morgan to Start Charging Big Clients Fees on Some Deposits." (​It also writes in its "Heard on the Street" column today, "J.​P. Morgan Shows Why It Pays to Turn Money Away.") The first article says, "J.​P. Morgan Chase & Co. is preparing to charge large institutional customers for some deposits, citing new rules that make holding money for the clients too costly, according to a memo reviewed by The Wall Street Journal and people familiar with the plan. The largest U.​S. bank by assets is aiming to reduce the affected deposits by up to $​100 billion by the end of 2015, according to a bank presentation Tuesday morning The move is the latest in a series of steps large global banks have been discussing in recent months to discourage certain deposits due to new regulations and low interest rates. J.​P. Morgan'​s steps are among the most detailed and widespread. Specifics are likely to be unveiled Tuesday by J.​P. Morgan executives at the bank'​s annual strategy outlook with investors, these people said. Among other points, the bank is expected to stress alternatives customers affected by the deposit moves can use for their excess cash. The plan won'​t affect the bank'​s retail customers, but some corporate clients and especially an array of financial firms, including hedge funds, private-​equity firms and foreign banks, will feel the impact, according to the memo. The bank is focusing on around $​200 billion of certain "​excess" deposits from financial institutions out of $​390 billion of total financial institutions deposits, according to the presentation. J.​P. Morgan is making the moves because certain deposits are less profitable to handle than they used to be. New federal rules essentially penalize banks for holding deposits viewed as prone to fleeing during a crisis or a stressed environment.... The Wall Street Journal reported in early December that J.​P. Morgan and several other banks, including Citigroup Inc., HSBC Holdings PLC, Deutsche Bank AG and Bank of America Corp., had spoken privately with clients in recent months that new regulations are making some deposits less profitable, in some cases telling clients they would charge fees or work to find alternatives for some of the deposits." The Journal'​s second piece comments, "​Heavy capital charges triggered by deposits that can only fund low-​yielding, safe assets are a recipe for slimmer margins and low returns. So it is no wonder J.​P. Morgan, which figures it can shave a half a percentage point off its capital surcharge with the move, wants to shed these deposits. For bank investors, this reinforces that Fed interest-​rate increases can'​t come too soon. Without them, margins are likely to remain under continued pressure. Unfortunately, the Fed'​s long-​awaited move on rates may take more time to play out than many investors are hoping for. Cash moved out of nonoperating deposits will most likely move into money-​market funds, short-​duration bond funds and individual securities."

Moody'​s released a report Monday, "Fidelity Moves to Protect Money Fund Investors from Liquidity Risk," which says, "In a move that caught the money market fund industry off-​guard, this month Fidelity announced that it would convert three of its prime money market funds (​MMFs), totaling $​127bn in assets, into government MMFs. The move, which affects Fidelity Cash Reserves fund, the industry'​s largest retail prime fund, is a proactive step to eliminate liquidity risk which is a new component of SEC money fund reforms. Fidelity'​s move to remove the risk of illiquidity from retail funds affected by the industry reforms will benefit the firm'​s reputation, and underscores the firm'​s commitment to its clients and its responsibility as a fiduciary." Mooody'​s continues, "Because retail prime funds were exempted from the switch to VNAV, many market participants did not expect fund managers to convert these funds to government funds. But the SEC reforms also allowed MMF boards to impose redemption fees and gates of up to 10 days in the event of a run on a retail prime fund should the percentage of a fund'​s weekly liquid assets fall below 30% of the fund'​s total assets. Rather than let investors bear the risk of having a cash-​substitute investment suddenly gated for up to 10 days, Fidelity opted to convert some of its prime funds to government funds, in which investors will not be subject to redemption restrictions. The firm'​s decision to convert the prime retail fund will lead to improved client retention, a credit positive for Fidelity. Fidelity’​s Cash Reserves fund is commonly used as the core "​sweep" vehicle in Fidelity brokerage accounts. In these core sweep accounts, cash balances are transferred to a Fidelity money fund -- historically, a higher-​yielding investment alternative than cash –- at the close of each business day. Redemption gates do not work well with this type of structure since an individual investor or a broker using a sweep account could experience a disruption in their ability to receive or deliver cash. This would leave Fidelity'​s brokerage clients exposed to the credit and liquidity risk of the fund for the duration of the gate, and would also leave the investor unable to use the cash for investment or other purposes. In removing this risk of illiquidity, Fidelity is helping to preserve its core brokerage franchise. Other MMF managers with substantial retail AUM may convert retail prime MMFs into retail government MMFs. This is particularly likely if those accounts are being used for daily cash functions such as sweep features in brokerage accounts. We estimate there is an additional $​100-​200 billion of retail AUM that could move from prime to government, in addition to Fidelity'​s $​112 billion." Also, the New York Fed released a "Statement Regarding Term Reverse Repurchase Agreements," which announced that the next Term RRP operation is Feb 26. The amount offered is $​50 billion, and the ON RRP offering rate on Feb 26 is +​5 basis points.

The Wall Street Journal published a story Friday, "How to Top Money Funds' Near-​0% Yields." It says, "These are tough times for investors in money-​market mutual funds—​and things could get worse. Money funds, which hold short-​term, low-​risk debt, are paying about 0.​01% a year, the result of the Federal Reserve'​s decision to keep interest rates near zero since late 2008. Last July, meanwhile, the Securities and Exchange Commission set new rules that are likely to make fund managers even more conservative, keeping a lid on yields, experts say. While many investors have been leaving money funds for short-​term bond funds, you shouldn'​t necessarily follow suit <​b:>​_. The bond funds, which invest in riskier assets, are paying about 0.​9% on average, according to research firm `​Morningstar.... Short-​term bond funds fluctuate more in market value. And their total return from price change and yield can beat money funds over time. Those funds returned an average 3% annually over the past 10 years, according to Morningstar, versus a 1.​4% return for money-​market funds. "Short-​term bond funds are for someone who wants to have a little more yield, but is willing to take on more risk," says Christopher Philips, a senior analyst in Vanguard Group'​s Investment Strategy Group. The company launched the Vanguard Ultra-​Short-​Term Bond Fund last week, but warned the fund shouldn'​t be an alternative to money-​market funds because it exposes investors to principal risk." In other news, Investment News ran a story, "Money Market Reforms Force Advisers to Rethink Risk," which says, "Financial advisers face choices -- and a new trade-​off between risk and reward -- as money market funds begin to implement changes following rules passed by the Securities and Exchange Commission last year. Fidelity Investments will ask shareholders in March to approve plans to convert three prime funds, including Fidelity Cash Reserves, into government funds.... BlackRock Inc. is considering doing the same for about $​3.​6 billion in retail prime funds later this year, according to spokeswoman Tara McDonnell. Other managers are widely expected to follow suit.... But the changes mean advisers will need to rethink their options, from government-​focused funds that may deliver rock-​bottom yields but continue to operate like the money market funds of old, to corporate and municipal-​debt funds that could restrict redemptions and see their share prices float, and ultrashort-​term bond funds that can take on more market risk but also deliver richer yields."

The Investment Company Institute released its "Money Market Fund Holdings" report for January, which tracks the aggregate daily and weekly liquid assets, regional exposure, and maturities (​WAM and WAL) for Prime and Government money market funds (​as of Jan. 31, 2015). ICI'​s "​Prime and Government Money Market Funds' Daily and Weekly Liquid Assets" table shows Prime Money Market Funds' Daily liquid assets at 25.​4% as of January 31, 2015, up from 21.​9% on Dec. 31, 2014. Daily liquid assets were made up of: "​All securities maturing within 1 day," which totaled 20.​8% (​vs. 17.​0% last month) and "​Other treasury securities," which added 4.​6% (​down from 4.​9% last month). Prime funds' Weekly liquid assets totaled 38.​7% (​vs. 39.​9% last month), which was made up of "​All securities maturing within 5 days" (​32.​2% vs. 32.​3% in December), Other treasury securities (​4.​4% vs. 4.​9% in December), and Other agency securities (​2.​1% vs. 2.​8% a month ago). (​For more on holdings, see Crane Data'​s Feb. 15 News, "February MMF Portfolio Holdings Show Spike in Time Deposits, Drop in Repo.") Government Money Market Funds' Daily liquid assets totaled 58.​1% as of Jan. 31 vs. 51.​7% in December. All securities maturing within 1 day totaled 26.​3% vs. 19.​2% last month. Other treasury securities added 31.​8% (​vs. 32.​6% in December). Weekly liquid assets totaled 78.​7% (​vs. 80.​6%), which was comprised of All securities maturing within 5 days (​37.​8% vs. 39.​9%), Other treasury securities (​29.​9% vs. 30.​2%), and Other agency securities (​11.​0% vs. 10.​6%). ICI'​s "​Prime and Government Money Market Funds' Holdings, by Region of Issuer" table shows Prime Money Market Funds with 41.​2% in the Americas (​vs. 51.​1% last month), 19.​5% in Asia Pacific (​vs. 20.​0%), 38.​9% in Europe (​vs. 28.​6%), and 0.​3% in Other and Supranational (​same as last month). Government Money Market Funds held 86.​5% in the Americas (​vs. 92.​4% last month), 0.​3% in Asia Pacific (​vs. 0.​4%), 13.​1% in Europe (​vs. 7.​2%), and 0.​1% in Supranational (​vs. 0.​1%). The table, "​Prime and Government Money Market Funds' WAMs and WALs" shows Prime MMFs WAMs at 44 days as of Jan. 31 vs. 43 days in December. WALs were at 79 days, down from 78 last month. Government MMFs' WAMs was at 43 days, same as last month, while WALs was at 79 days, up from 75 days. Also, ICI'​s latest weekly "Money Market Mutual Fund Assets" report says, "Total money market fund assets decreased by $​9.​03 billion to $​2.​68 trillion for the week ended Wednesday, February 18, the Investment Company Institute reported today. Among taxable money market funds, Treasury funds (​including agency and repo) decreased by $​4.​24 billion and prime funds decreased by $​6.​05 billion. Tax-​exempt money market funds increased by $​1.​27 billion."

The Federal Reserve released the Minutes of its January 27–​28 Federal Open Market Committee Meeting yesterday. The transcript says, "With regard to the appropriate setting of the cap for ON RRP operations at the beginning of normalization, the staff reported that testing to date suggested that ON RRP operations have generally been successful in establishing a floor on the level of the federal funds effective rate and other short-​term interest rates, as long as market participants judge that the aggregate cap is quite unlikely to bind. Against this backdrop, most meeting participants indicated that a sizable ON RRP cap would be appropriate to support policy implementation at the time of liftoff, and a couple of participants suggested that the aggregate cap might be suspended for a time. A couple of participants expressed continued concerns about the potential risks to financial stability associated with a large ON RRP facility and the possible effect of such a facility on patterns of financial intermediation. Moreover, some participants were concerned that a decision to allow a temporary increase in the maximum size of the ON RRP facility could be viewed by market participants as a signal that a large ON RRP facility would be maintained for a longer period than those participants deemed appropriate. While acknowledging these concerns, many participants believed that a temporarily elevated cap on the ON RRP operations at a time when the Committee saw conditions as appropriate to begin normalization would likely pose limited risks; another participant judged that an ON RRP program was, in any case, unlikely to materially increase the risks to financial stability. Some participants noted that a relatively high cap could be established and then reduced fairly soon after the initial policy firming if it was determined that it was not needed, and that such a reduction could help underscore the Committee'​s intent to use such a facility only to the extent necessary. A number of participants emphasized that the Committee should develop plans to ensure that such a facility is temporary and that it can be phased out once it is no longer needed to help control the federal funds rate." The minutes continue, "​A staff briefing outlined two proposals that the Committee could consider for further testing of term RRP operations. In the first of these proposals, the Desk would conduct a series of preannounced term RRP operations that would span the end of the first quarter. In the second proposal, the Desk would conduct small term RRP operations in February and early March, in addition to the quarter-​end option presented in the first proposal. In their discussion of term RRP testing, participants noted that the testing could provide further information about the substitutability between the ON and term RRP operations, including outside year-​end and quarter-​end periods.... [​T]​the Committee approved the following resolution on term RRP testing over the end of the first quarter of 2015: "During the period of March 19, 2015, to March 30, 2015, the Federal Open Market Committee (​FOMC) authorizes the Federal Reserve Bank of New York to conduct a series of term reverse repurchase operations involving U.​S. government securities." It adds, "​During the period of February 12, 2015, to March 10, 2015, the Federal Open Market Committee (​FOMC) authorizes the Federal Reserve Bank of New York to conduct a series of term reverse repurchase operations involving U.​S. government securities." For more on interest rates, read the Reuters account, "Fed officials worried about hiking rates too soon: minutes."

In his latest "Short End Notes," Citi Research'​s Andrew Hollenhorst writes, "Prime Fund Outflows May Widen LIBOR-​GC." Hollenhorst explains, "​Last week Fidelity announced that it will be converting three prime money funds, which hold credit product like certificates of deposit (​CDs) and commercial paper (​CP), into government funds which hold only government related securities.... We expect the decision to lead to significant flows (​approx. $​100 billion) into government securities and out of CDs, CP and non-​government repo.... Fidelity'​s announcement was surprising to market participants for at least three reasons. First, the final compliance date for institutional prime money funds to transition to floating NAV is not until October 2016, and many short-​term investors had expected cash to only start shifting much later this year or early in 2016.... Second, most had expected cash to slowly shift out of prime funds and into government funds as over time some corporates and individuals would decide they were uncomfortable keeping cash in a product subject to floating NAV and/​or gates and fees.... Asset manager led shifts are likely to result in more cash moving out of prime and into government since cash will move if money fund investors take no action, rather than investors needing to proactively reallocate. Finally, and probably most surprisingly, the $​112 billion Fidelity Cash Reserves Fund is characterized as retail rather than institutional. Most short-​term investors had expected outflows from institutional prime money funds since regulators view retail cash invested in prime funds as "​sticky" and are not requiring retail funds to float their NAVs. Rather than floating NAV, it seems the concern is over the redemption gates and liquidity fees that money funds will now be able to impose if liquid assets in the fund decline below a threshold." He adds, "​Based on average government money fund holdings we would expect about $​10 billion of Treasury demand, $​65 billion of new demand for short-​end agency paper, and $​30 billion of repo demand. However, sourcing $​65 billion in agency paper may be difficult in a year where we forecast close to zero net issuance and the funds may opt to place more cash in repo. Both of the larger funds are Fed reverse repo (​RRP) counterparties allowing them to access up to $​30 billion each in RRP and we expect to see usage of the facility increase once cash starts to shift. The increased demand for government securities may drive repo rates 1-​2bp lower while the decreased demand for bank paper could lead to marginally higher bank funding costs. Hence we view the announcement as supportive of our view that the LIBOR-​GC spread will widen."

Reuters published an article, "EU Should Look at Tax, Accounting to Snap Money Market Impasse - Irish Bank Official." It states, "Europe should follow the United States' lead in reforming money market funds to try to resolve a legislative impasse over how to make the trillion euro sector safer, a senior official at the Irish central bank said on Thursday.... One of the big hurdles to European proposals, which require certain money market funds either to move to a floating price or build up capital buffers, is that corporate treasurers like funds to have a fixed price because it means they don'​t have to track daily price movements for tax purposes and it is simpler to book in their accounts. Gareth Murphy, director of markets supervision at the Central Bank of Ireland, said the U.​S. Securities and Exchange Commission (​SEC) simplified the tax and accounting elements of its reforms, which were agreed last year. "The U.​S. SEC prioritized, ruthlessly, the fixing of those issues before they finalized their revised rule last year," Murphy said in an interview with Reuters. "If those operational issues could be dealt with I think that may go a long way towards addressing some of the concerns of corporate treasurers and money managers in relation to money market fund reforms." European lawmakers are split on how to make the sector, a key source of funding for banks, governments and companies, safer with left-​wing parliamentarians keen to impose a capital buffer on it and parties on the right fearful that such a measure would kill the sector off. Such divisions raise doubts that consensus can be reached before the European Parliament'​s economic affairs committee votes on a draft law for a second time this month, with a full parliamentary vote scheduled for March.... Murphy said differences between the U.​S. and European regimes could prompt funds currently based in Europe to move offshore. "​If we end up with this patchwork of different regimes for fundamentally the same activity, the goals of international regulatory coordination and global financial stability will have suffered a setback." Also, American Banker did a story called, "Money Fund Conversions Tighten Belt on Short-​Term Bank Funding." It reads, "Fidelity Investments and Federated Investors are walking clients through major changes in the $​2.​7 trillion money fund business as banks fear another blow to funding."

Money fund assets ended their slide this past week, increasing for the first time this year, says ICI in its latest weekly "Money Market Mutual Fund Assets" report. The release says, "Total money market fund assets increased by $​4.​28 billion to $​2.​69 trillion for the week ended Wednesday, February 11, the Investment Company Institute reported today. Among taxable money market funds, Treasury funds (​including agency and repo) decreased by $​7.​38 billion and prime funds increased by $​12.​44 billion. Tax-​exempt money market funds decreased by $​780 million." Money fund assets had dropped each of the first five weeks of 2015. "Assets of retail money market funds decreased by $​1.​01 billion to $​898.​47 billion. Among retail funds, Treasury money market fund assets increased by $​570 million to $​197.​62 billion, prime money market fund assets decreased by $​1.​18 billion to $​511.​76 billion, and tax-​exempt fund assets decreased by $​400 million to $​189.​09 billion. Assets of institutional money market funds increased by $​5.​29 billion to $​1.​79 trillion. Among institutional funds, Treasury money market fund assets decreased by $​7.​96 billion to $​778.​60 billion, prime money market fund assets increased by $​13.​62 billion to $​940.​29 billion, and tax-​exempt fund assets decreased by $​380 million to $​72.​37 billion." In other news, Euromoney writes, "Short Term Bank Funding Costs Hit By Fidelity Move." The article says, "Fidelity Investments has announced plans to convert up to $​125 billion-​worth of prime US money market funds (​MMFs) into government-​only funds -- a move that is a direct consequence of the new SEC regulations covering this business that were announced in July. The move is significant not only because of the numbers involved but because the asset manager is making the move 18 months before the SEC'​s deadline of October 2016. If other prime MMF managers decide to do the same, there could be worrying implications for the non-​government short-​term funding markets.... The liquidity mismatch between prime MMFs, which offer daily liquidity, and many of the assets in which they invest has been one of the more worrying consequences of the global hunt for yield. It was also the impetus behind the SEC'​s new rules.... One puzzling aspect of the move is why Fidelity has decided to act so early, deciding to change fund mandates rather than wait for signs of investors moving from prime and muni funds into government funds.... However, as with so much in the US market, the extent of the impact on bank funding costs will depend on the extent and timing of any rate rises. If rates do rise, then the returns on offer from prime institutional funds might become sufficient for investors to stick with them rather than switch to government funds, because the return for the risk of fees and gates will be worth it."

Vanguard issued a press release introducing its new Vanguard Ultra Short Term Bond Fund. The release says, "Vanguard today introduced Vanguard Ultra-​Short-​Term Bond Fund with two low-​cost share classes -- Investor Shares and Admiral Shares. The fund'​s Investor Shares have an estimated expense ratio of 0.​20% and require an initial minimum investment of $​3,​000. Admiral Shares have an estimated expense ratio of 0.​12% and require a minimum investment of $​50,​000. The new actively managed fund is now accepting investments during a subscription period that ends February 23, 2015. While the subscription period is in effect, the fund will invest in money market instruments as it accumulates adequate assets to construct a representative, diversified portfolio. Following the subscription period, the fund will invest in high-​quality bonds -- including money market, government, and investment-​grade corporate securities -- and will have an expected duration of approximately one year. "Vanguard Ultra-​Short-​Term Bond Fund is a low-​cost, broadly diversified fund designed for investors who, in this low-​interest rate environment, seek more income than a money market fund, but recognize the risks and are willing to accept the modest price volatility that will accompany the fund," said Vanguard Chief Investment Officer Tim Buckley." Upon filing the registration statement with the U.​S. Securities and Exchange Commission, Vanguard warned investors not to consider the fund a money market fund substitute.... The fund broadens Vanguard'​s taxable bond fund offerings, which now includes 11 active funds and 12 index funds." It continues, "Gregory S. Nassour, CFA and David Van Ommeren, both principals and senior portfolio managers, will co-​manage the fund.... In 2014, nearly $​75 billion flowed into Vanguard'​s U.​S.-​based fixed income products." Dan Wiener from the Independent Adviser for Vanguard Investors also announced the news, "​Here Comes Ultra-​Short-​Term Bond <​i:​http://​adviseronline.​investorplace.​com/>`​_." He writes, "This money-​market alternative for investors who can withstand a bit of volatility in their share price, should be well-​received by those who have substantial sums tied up in money funds paying 0.​01%. Vanguard'​s gone back-​and-​forth on whether the fund is, or isn'​t a money-​fund alternative but as they'​ve written, it should appeal to investors who'​d like to "​earn a better return than the near-​zero yield of a money market fund without losing the ability to access your money." No word on yield, obviously, but ... Expenses are standard Vanguard -- i.​e.: Low." Note: This fund won'​t be in our pending Bond Fund Intelligence, which should be sent out early next week, but we'​ll add it in the March issue of BFI.

A press release entitled, "State Street FundConnect and Clearwater Advisors Offer Cash Management Trading Capabilities to Corporate Clients," says, "State Street and Clearwater Advisors LLC, an investment advisory firm, today announced that Clearwater Advisors' corporate clients can obtain access to FundConnect, State Street'​s corporate treasury trading platform. Clearwater Advisors is a leading provider of fixed income investment management solutions. FundConnect is part of State Street'​s electronic trading solutions and allows clients to invest in a wide range of institutional money market funds from leading providers through a single, secure interface. State Street'​s FundConnect is one of the largest online money market trading portals according to Crane Data. "State Street'​s online money market fund trading platform, FundConnect, is one of the largest "​portals" available to large corporate investors and one of the most technologically advanced," said Peter Crane, president of Crane Data. "It has one of the most extensive fund lineups and one of the richest sets of features and functions among portal providers."" The release quotes Tim Dunn, president of Clearwater Advisors, "​We are excited that our global client base can access FundConnect. Together we can bring significant expertise, transparency and efficiency to investors for their trading and cash management needs from money market funds to separately managed accounts." Finally, it quotes Greg Fortuna, senior managing director and head of FundConnect, State Street Global Markets, "In an increasingly fast-​paced market, corporate investors need convenient and direct methods of optimizing investments. By gaining access to FundConnect, Clearwater Advisors' clients can achieve customized and efficient workflows, a consolidated view of their account balances and real-​time execution."

Fitch Ratings published a report entitled, "U.​S. Money Funds: Exposure to European Banks Continues Decline." The press release says, "U.​S. taxable money market funds (​MMFs) continued to shift their investments away from European banks toward the Federal Reserve'​s reverse repurchase (​RRP) facilities during 2014, according to a new Fitch Ratings report. By year-​end 2014, MMF exposure to the Fed'​s RRP facilities (​both overnight and term) exceeded allocations to European banks for the first time. Increasing risk aversion in the second half of 2014, together with a continuing decline in demand for dollar funding among European banks, drove the shifts in MMF investments last year. MMF exposure to European bank CDs, time deposits and repo fell by 11.​3% in 2014 to $​319.​2 billion as of Dec. 31. A drop in exposure to German banks primarily drove this change." Fitch also released a report, "Financials at Two-​Year Low in European Money Fund." This release says, "European money market funds (​MMFs) are reducing their exposure to financials, opportunistically reallocating towards non-​financial corporates, sovereigns and government agencies, Fitch says in its latest quarterly publication on European MMFs. In 4Q14, money funds reduced their allocation to financials to a two-​year low, as they adjusted to supply dynamics, seizing investment opportunities in corporate, sovereign and government agency assets. Financial exposures, both secured and unsecured, were reduced by 2% over 4Q14 and by 5% in 2014, to 73.​6% on average. This was most pronounced for euro and sterling funds. Euro short-​term issuance from corporates, such as Procter & Gamble, Unilever and Danaher, increased and was embraced by money funds. Sterling funds found opportunities in UK sovereign securities and government agencies.... Portfolio maturities have increased on average across European MMFs. The move was most notable for euro funds as the prospect of prolonged negative euro short-​term rates led to increased portfolio weighted average maturities (​WAM) to 44 days on average, which is 10 days longer than a year ago. The European Central Bank'​s quantitative easing programme could keep yields on euro MMFs ultra-​low for a prolonged period of time, which could turn negative from their current average level of 0.​1bp. Assets in constant net asset value (​CNAV) funds denominated in euro nevertheless remained fairly stable in 4Q14, and even grew 22% over 2014 as low-​risk, liquid alternatives are limited and MMF yields remain on average 17bp above the 7-​day LIBID."

Citi Research strategist Andrew Hollenhorst commented on the recent news of future changes to the Fed funds rate in his "Short-​End Notes." He writes, "[​Last] Monday, the Federal Reserve announced more details of the changes it plans to make to the calculation of the fed funds effective rate. The changes had been expected for some time and we expect implementation is approximately a year away. In our view the change in calculation will bias fed effective 1-​2bp higher. Separately, the Fed is introducing a new overnight bank funding rate (​OBFR) that we expect to average 1-​2bp below current fed effective." He asks, "Why might Fed Effective move higher? The brokered fed funds market is dominated by Federal Home Loan Banks (​FHLBs) that do not earn IOER lending cash to banks that do earn IOER. In Q4 2012 these transactions made up about 75% of an at that time $​60 billion market.... Given their apparent size in the brokered market, it seems plausible that a substantial fraction of FHLB transactions are brokered. If this is the case, adding more bilateral transactions means adding non-​FHLB transactions leading to a higher fed effective. Why might Fed Effective move lower? On the other hand, a case can be made that lower credit quality banks that borrow at higher rates are more likely to transact through brokers than bilaterally.... On balance, we think the arguments for higher fed effective are stronger than those for lower." Barclays money market strategist Joseph Abate also issued commentary on the NY Fed'​s future changes to the federal funds rate. He writes, "Earlier this week, the New York Federal Reserve announced plans to change the way the effective fed funds rate is calculated. Alongside the re-​calculation -- which will begin in about a year -- the Fed will introduce a new overnight bank funding rate. The current effective fed funds rate is based on trades executed through brokers. An expanded rate will include bilateral or bank-​to-​bank transactions. But it is not clear if or how much brokered and bank-​to-​bank fed funds trades differ. GSE preferences for one channel over the other are critical for determining any potential rate bias. The Fed'​s proposed overnight bank funding rate will capture a wider range of unsecured overnight bank financing transactions than fed funds. Ultimately, we think the change in coverage of the effective funds rate and the existence of any bias may be overwhelmed by the recent RRP expansion and the Fed'​s lift-​off later this year."

The Investment Company Institute released its latest weekly "Money Market Mutual Fund Assets," report, which shows money fund assets dropping for the 5th week in a row and falling below $​2.​7 trillion for the first time since mid-​December 2014. ICI'​s weekly says, "Total money market fund assets decreased by $​16.​35 billion to $​2.​69 trillion for the week ended Wednesday, February 4, the Investment Company Institute reported today. Among taxable money market funds, Treasury funds (​including agency and repo) decreased by $​1.​55 billion and prime funds decreased by $​15.​82 billion. Tax-​exempt money market funds increased by $​1.​03 billion." Year-​to-​date through 2/​4, money fund assets have declined by $​47B, or 1.​7%. ICI explains, "Assets of retail money market funds decreased by $​3.​41 billion to $​899.​48 billion. Among retail funds, Treasury money market fund assets decreased by $​710 million to $​197.​05 billion, prime money market fund assets decreased by $​2.​96 billion to $​512.​94 billion, and tax-​exempt fund assets increased by $​260 million to $​189.​49 billion. Assets of institutional money market funds decreased by $​12.​94 billion to $​1.​79 trillion. Among institutional funds, Treasury money market fund assets decreased by $​850 million to $​786.​56 billion, prime money market fund assets decreased by $​12.​86 billion to $​926.​67 billion, and tax-​exempt fund assets increased by $​770 million to $​72.​75 billion." In other news, today'​s Wall Street Journal features, "Money Markets May Keep the Squeeze on Banks." It says, "​For banks, the great compression may get worse before it gets better. After years of unremitting complaints that persistently low interest rates are squeezing profits out of the banking system, hopes are high that a change in U.​S. monetary policy later this year could finally provide some relief. Now a change under way in the money-​market fund industry has cast a shadow of doubt over this. Fidelity Investments announced plans last week to convert Fidelity Cash Reserves, the largest U.​S. prime money-​market fund, to a government-​only fund."

Federated'​s Debbie Cunningham, CIO, Global Money Markets, released her February "Month in Cash" column, called "The Scavenger Hunt for Yield." She writes, "We look forward to normal conditions, but wouldn'​t mind orderly ones, too. No, I am not talking about weather. Unpredictable conditions and too frequent "​storms of the century" seem here to stay. It'​s the normalization of interest rates to above zero that is on our, and most everyone'​s, minds. We as cash managers would like to see some orderliness, too. We search tirelessly for the highest yield, yet these days it can feel like a scavenger hunt. Sometimes it goes well. For instance, early in January we went out the curve for some 1-​year products, both fixed- and floating-​rate, that brought better returns, and we didn'​t have to rely on the Federal Reserve as much. Other days can be less fruitful in this land of historically low rates. The truth is, for all cash managers, the irregular movement of rates and uneven supply simply makes trading more difficult than it need be. You have good rates for a week or two, say 15 or 20 basis points, and then get zero for three or four days. It'​s been like this since 2011-​12. But the Fed'​s offering of term repo has helped and will help (​the last meeting of the Federal Open Market Committee included an announcement from the New York Fed of more term repo in upcoming months and at quarter-​end). The $​300 billion allotment for 2014'​s year-​end definitely helped to smooth what might have been a difficult trading period." Cunningham adds, "Of course, we would love to return to a time when the Fed was not the lender of "​first" resort and we could work primarily with our traditional partners. But we need rates to rise first.... [​O]​ur outlook still puts liftoff of the target fed funds rate somewhere around mid-​year, perhaps at the August or September FOMC meeting. We feel we are on the right track at this point for tightening.... I truly think that the Fed'​s mantra of data dependency is as much of a factor going forward as it ever has been. Although we seem to be going nicely in the U.​S., we are not isolationists. We are impacted by other issues and have to see how potent they are."

Insurance News Net did a piece entitled, "SEC Rules Affect Variable Annuities." The article says, "Issuers of variable annuities (​VAs) are being forced to revisit the types of money market mutual funds they offer within their VAs. This is because of changes to Securities and Exchange Commission (​SEC) rules that impose new requirements on money market mutual funds (​MMFs). In a note to clients, lawyers at Carlton Fields Jorden Burt, say VA issuers must consider what type of MMFs to make available in their VA offerings as a result of the SEC action. And, if necessary, depending on the VA, "​issuers are considering how to move various groups of existing owners out of one type of MMF and into another, for example, due to unavailability of retail MMFs to institutional investors, as well as how to avoid or implement gates and fees required" under the amendments, according to Chip Lunde, author of the Carlton Fields note. The issue is important because industry officials say most VA products offer MMFs as investment options. Lunde says he hasn'​t heard whether any issuers are considering discontinuing the use of MMFs in VAs. "One reason VA issuers are likely to keep MMFs in VAs is that MMFs are a convenient default option for certain transactions (​e.​g., during the free look period or in the event another fund liquidates and the contract owner doesn'​t give reallocation instructions)," Lunde said." The article continues, "He said insurance product funds considering offering an institutional MMF may need to consider several factors. These include whether a floating net asset value (​NAV) is compatible with the actuarial assumptions of issuers of insurance products for which the MMF serves as an investment option; and complications of administering any fees and gates at the insurance product level.... According to Lunde, some insurance product funds have considered offering an ultra-​short bond fund as an MMF alternative. "​However, using an ultra-​short bond fund may also involve unique considerations," Lunde said." Note: Fidelity is changing its VIP variable annuity money fund from "​prime" to government (​see Monday'​s News, "Fidelity Announces Major Changes to MMFs; Staying Stable, Going Govt.")

Friday, Federal Reserve Governor Daniel Tarullo delivered a speech entitled, "Advancing Macroprudential Policy Objectives," which discussed short-​term funding and systematic risk issues. Tarullo stated, "I have on past occasions described at some length my concerns with short-​term wholesale funding -- especially, though not exclusively, funding associated with assets thought to be cash equivalents. We are, of course, addressing these risks within prudentially regulated firms through various types of liquidity regulation and supervision, as well as changes in practice by the firms that clear tri-​party repo transactions. But, as demonstrated in the years preceding the crisis, short-​term wholesale funding can support a form of shadow banking outside the regulatory perimeter." Tarullo'​s speech continued, "Both the short-​term wholesale funding and asset management examples point to the broader objective for macroprudential policy of developing what we might term "​prudential market regulation" -- that is, a policy framework that builds on the traditional investor protection and market functioning aims of securities regulation by incorporating a system-​wide perspective. Like the reforms to banking regulation that followed the crisis, this new form of regulation might start by strengthening some of the firm- or fund-​specific measures associated with those traditional regulatory aims, but then move forward to take into account such considerations as system-​wide demands on liquidity during stress periods and correlated risks among asset managers that could exacerbate liquidity, redemption, and firesale pressures.... In her important speech last month, Securities and Exchange Commission (​SEC) Chair Mary Jo White provided a roadmap for beginning to develop just such a regulatory approach for the asset management industry." He added, "​In thinking about short-​term wholesale funding and some forms of asset management, we encounter a background circumstance that complicates the task of developing effective macroprudential tools. Demand for safe short-​term assets is both real and substantial, emanating from multiple sources, including sovereign nations that wish to self-​insure against exchange rate pressures; non-​financial corporations that have increased their cash holdings in the wake of the market disruptions associated with defaults by Enron and other companies; and institutional investors protecting themselves against redemption demands or other unexpected cash needs. While it is important to adopt measures that protect against runs and that counteract the illusion that cash equivalents are actually cash, it is equally important to realize that the demand for relatively safe, short-​term assets will not disappear. Indeed, there is some risk that, as regulation makes some forms of such assets more costly, this demand will simply turn elsewhere. Thus the ultimate effectiveness of what I have termed prudential market regulation will depend on policymakers taking into account in their regulatory approaches the sources of, and motivation for, demand for short-​term, liquid, and relatively safe assets beyond the debt of very creditworthy sovereigns."

Stradley Ronon'​s Joan Ohlbaum Swirsky and Amy Smith released a client alert entitled, "Buried Treasures or Hidden Landmines? What You May Have Overlooked in the 893-​Page Money Market Reform Adopting Release." The brief piece says, "​Since the SEC adopted money market fund reforms on July 23, 2014, practitioners have been digesting the 893-​page adopting release (​the Release). In this alert, we excerpt from the SEC'​s commentary in the Release and provide our observations to help guide funds' compliance efforts. The commentary does not carry the force of the text of the money market fund rule itself (​the Rule), but it may inform the SEC'​s examination staff and conceivably could be raised as authority in enforcement proceedings. Accordingly, the Release is both a treasure trove and a minefield for the practitioner, providing practical guidance but also overlaying additional compliance advice around the 37-​page Rule itself. Here we have included Release excerpts relating to some topics that have already been widely dissected by practitioners (​such as the SEC'​s unexpectedly placed valuation commentary for all funds and its advice on identifying "​retail" shareholders) and also excerpts on topics not yet widely addressed (​such as some stress testing and disclosure guidance). Page references are to the SEC'​s version of the Release on its website. For a summary of the reforms, see our Fund Alert, "What You Need to Know About Money Market Fund Reform." In summary, the SEC'​s rules will require institutional prime and institutional municipal money market funds to replace their current $​1.​00 stable share price with a floating net asset value (​NAV). The reforms also will authorize fund boards to impose a liquidity fee of up to 2 percent and/​or a redemption gate (​for no more than 10 business days in any 90-​day period) if weekly liquid assets in the fund fall below 30 percent of assets. A liquidity fee of 1 percent would be imposed if weekly liquid assets fall below 10 percent of assets, unless the fund board takes action to eliminate, reduce or increase the fee (​but not to more than 2 percent)."

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