Daily Links Archives: May, 2015

ICI's latest "Money Market Fund Assets" report says, "Total money market fund assets increased by $4.59 billion to $2.61 trillion for the week ended Wednesday, May 27, the Investment Company Institute reported today. Among taxable money market funds, Treasury funds (including agency and repo) decreased by $540 million and prime funds increased by $5.78 billion. Tax-exempt money market funds decreased by $650 million. Assets of retail money market funds increased by $570 million to $864.42 billion. Among retail funds, Treasury money market fund assets increased by $1.84 billion to $191.45 billion, prime money market fund assets decreased by $770 million to $493.94 billion, and tax-exempt fund assets decreased by $500 million to $179.02 billion. Assets of institutional money market funds increased by $4.02 billion to $1.75 trillion. Among institutional funds, Treasury money market fund assets decreased by $2.38 billion to $774.65 billion, prime money market fund assets increased by $6.55 billion to $908.73 billion, and tax-exempt fund assets decreased by $150 million to $66.41 billion. ICI reports money market fund assets to the Federal Reserve each week."

Federal Reserve Board Chair Janet Yellen spoke last Friday to the Providence Chamber of Commerce on "The Outlook for the Global Economy." She said, "Given this economic outlook and the attendant uncertainty, how is monetary policy likely to evolve over the next few years? Because of the substantial lags in the effects of monetary policy on the economy, we must make policy in a forward-looking manner. Delaying action to tighten monetary policy until employment and inflation are already back to our objectives would risk overheating the economy. For this reason, if the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target and begin the process of normalizing monetary policy. To support taking this step, however, I will need to see continued improvement in labor market conditions, and I will need to be reasonably confident that inflation will move back to 2 percent over the medium term. After we begin raising the federal funds rate, I anticipate that the pace of normalization is likely to be gradual. The various headwinds that are still restraining the economy, as I said, will likely take some time to fully abate, and the pace of that improvement is highly uncertain. If conditions develop as my colleagues and I expect, then the FOMC's objectives of maximum employment and price stability would best be achieved by proceeding cautiously, which I expect would mean that it will be several years before the federal funds rate would be back to its normal, longer-run level. Having said that, I should stress that the actual course of policy will be determined by incoming data and what that reveals about the economy. We have no intention of embarking on a preset course of increases in the federal funds rate after the initial increase. Rather, we will adjust monetary policy in response to developments in economic activity and inflation as they occur. If conditions improve more rapidly than expected, it may be appropriate to raise interest rates more quickly; conversely, the pace of normalization may be slower if conditions turn out to be less favorable." Also, the Fed conducted a floating-rate offering of term deposits through its Term Deposit Facility on May 21. "The operation offered 14-day term deposits with the rate set equal to the sum of the interest rate paid on excess reserves plus a fixed spread of 1 basis point."

Money Management Executive reported, "Karen Dunn Kelley, Top Women in Asset Management Awards Winner." It says, "Karen Dunn Kelley has spent the majority of her career at Invesco where she's risen to lead its fixed income business and global equities investment teams. She joined the firm in 1989 as a money market portfolio manager, and just three years later, was named chief money market and government officer. In April 2007, she was named CEO of Invesco's newly combined fixed income division. While her roles have evolved, Kelley's interest and passion for the fiduciary nature of the industry has been consistent. Some of her biggest contributions have focused on clarifying fiduciary issues related to money markets, as she's been a vocal proponent of ensuring that money market funds remain investment options for institutional and retail investors. Risk management has gained great importance today, she says. "When I started, ETFs didn't even exist. Risk wasn't the big buzzword it is now, for example, and the fiduciary nature of asset management wasn't nearly as much of a focus." Kelley says she's learned that as long as fund providers have a strong fiduciary process, then they'll get the right product into the right hands through the right channels. To best meet client needs, she says the industry must react to the regulatory environment without losing sight of fiduciary responsibilities. Since 2010, Kelley has been instrumental in developing and expanding the firm's Women's Network, where she works with Invesco senior leaders to identify opportunities to help advance women in their careers." In other news, Baird Advisors hired the muni bond team from BMO Asset Management. The press release says, "Baird Advisors, the institutional fixed income investment management division of Baird, announced that it has hired a nationally-recognized municipal investment team from BMO Global Asset Management. Municipal bond portfolio managers Duane McAllister, CFA, and Erik Schleicher and analyst Joseph Czechowicz will join Baird. The team has more than 25 years of experience managing municipal portfolios across the yield curve.... Baird expects to expand its municipal product offerings with additional municipal strategies.... McAllister has been the Co-Manager of the BMO Intermediate Tax-Free Mutual Fund, the BMO Ultra Short Tax-Free Mutual Fund and the BMO Short Tax-Free Mutual Fund. In addition to the mutual funds, Duane also manages separate accounts across all three of the tax-free strategies: Ultra Short, Short, and Intermediate Tax-Free.... Schleicher has been the co-manager of the BMO Short Tax-Free Fund and BMO Ultra-Short Tax-Free Fund and has managed separate accounts with a short-term objective. Previously, he served as a Fixed Income Analyst for the BMO Tax-Free Money Market Fund and the BMO Ultra Short Tax-Free Fund."

The Investment Company Institute recently updated a document entitled, "Frequently Asked Questions About Money Market Fund N-MFP Data." It explains, "The Securities and Exchange Commission's 2010 money market fund amendments require such funds to file detailed portfolio information with the agency monthly, on SEC Form N-MFP. The data in this monthly report comes from that form, which ICI members also send directly to ICI. The Institute has been tracking this data since firms began filing it in December 2010, and is now making a summary of the data publicly available in a monthly report, beginning in January 2014. The summary report is intended to provide aggregated insights into the holdings of taxable money market funds, which includes both prime and government money market funds.... Form N-MFP provides detailed information about the nature and maturity of money market funds' holdings of securities and repurchase agreements. ICI's data release provides aggregated data for funds holding roughly 94 percent of the assets in taxable money market funds, as well as insights on the: Types of securities in government and prime money market funds' portfolios; Home countries and regions of issuers of securities and repurchase agreements held in money market funds' portfolios (based on the home country of the issuer's parent company); Maturity of funds' portfolios, expressed as weighted average maturity (WAM) and weighted average life (WAL); Liquidity of funds' portfolios; and Maturity distribution of securities in money market funds' portfolios, by type of securities and by home country of issuers. The monthly press release that will accompany ICI's report will focus on daily and weekly liquidity, WAM and WAL, and the home regions of issuers of securities held by prime and government taxable money market funds. The release will include a link to additional tables for the rest of the data.... When significant trends emerge or when economic or political developments focus attention on money market funds and their holdings, ICI intends to offer its insights through its blog, ICI Viewpoints. In 2014, ICI published a series of ICI Viewpoints pieces examining the N-MFP data and explaining what insights it can yield about money market funds." (Note: Crane Data publishes a collection of Money Fund Portfolio Holdings each month too, and produces a summary of trends in a "Reports & Pivot Tables" version of our holdings info. Contact us if you'd like to see our latest cut. Note too that the SEC will be making changes to Form N-MFP beginning in April 2016, when new disclosure reforms go into effect.)

Money market fund assets were up last week, breaking back above the $2.6 trillion level, according to ICI in its latest weekly "Money Market Mutual Fund Assets" report. The release says, "Total money market fund assets increased by $20.61 billion to $2.61 trillion for the week ended Wednesday, May 20, the Investment Company Institute reported today. Among taxable money market funds, Treasury funds (including agency and repo) increased by $2.02 billion and prime funds increased by $16.91 billion. Tax-exempt money market funds increased by $1.68 billion. Assets of retail money market funds increased by $2.16 billion to $862.72 billion. Among retail funds, Treasury money market fund assets increased by $10 million to $189.61 billion, prime money market fund assets increased by $2.15 billion to $493.58 billion, and tax-exempt fund assets decreased by $10 million to $179.53 billion. Assets of institutional money market funds increased by $18.45 billion to $1.75 trillion. Among institutional funds, Treasury money market fund assets increased by $2.01 billion to $777.03 billion, prime money market fund assets increased by $14.76 billion to $903.31 billion, and tax-exempt fund assets increased by $1.69 billion to $66.56 billion." MMF assets are up $28 billion month-to-date, but down $123 billion, or 4.5%, year-to-date. In other news, a press release entitled, "SEC Proposes Rules to Modernize and Enhance Information Reported by Investment Companies and Investment Advisers," tells us, "The Securities and Exchange Commission [Wednesday] proposed rules, forms and amendments to modernize and enhance the reporting and disclosure of information by investment companies and investment advisers.... "These recommendations will vastly improve the type and format of the information that funds provide to the Commission and to investors," said SEC Chair Mary Jo White." The investment company proposals would enhance data reporting for mutual funds, ETFs and other registered investment companies. The proposals would require a new monthly portfolio reporting form (Form N-PORT) and a new annual reporting form (Form N-CEN) that would require census-type information.... The proposals would also require enhanced and standardized disclosures in financial statements, and would permit mutual funds and other investment companies to provide shareholder reports by making them accessible on a website. The proposals will be published on the Commission’s website and in the Federal Register. The comment period for the proposed rules will be 60 days after publication in the Federal Register." See too the SEC's "Fact Sheet" that accompanied the release. ICI commented on the proposal, saying, "We welcome the SEC's efforts to modernize and enhance the data it collects from investment companies and investment advisers. We look forward to reviewing the details of these proposals and will assist the SEC with our input through the public notice and comment process. Providing fund communications in ways that best meet shareholder needs and preferences has long been a priority for the industry. We therefore are very pleased that the SEC's proposal would permit funds to provide investors with shareholder reports on their websites rather than via paper mailings." Crane Data looks forward to standardized and more frequent Bond Fund Portfolio Holdings disclosures. Our new Bond Fund Intelligence XLS includes links to holdings, but building a database and listings of standardized holdings is near impossible with the various formats and reporting periods that exist today.

The Federal Reserve Bank of New York published a new "Statement Regarding Term Reverse Repurchase Agreements," which extended the Fed's Term repo programs at quarter-ends through Jan. 29, 2016. The statement says, "The Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York has been working internally and with market participants on operational aspects of tri-party reverse repurchase agreements (RRPs) to ensure that this tool will be ready to support the monetary policy objectives of the Federal Open Market Committee (FOMC). The Federal Reserve continues to enhance operational readiness and increase its understanding of the impact of RRPs through technical exercises. In further support of its objectives, the FOMC instructed the Desk to examine how term RRP operations might work as an additional supplementary tool to help control the federal funds rate. In support of this goal, on March 17, 2015, the FOMC approved a resolution authorizing the Desk to conduct a series of term RRP operations to span each quarter-end through January 29, 2016. For the June quarter-end, the Desk plans to offer at least $200 billion in term reverse repurchase agreement transactions that cross the quarter-end date. These operations will be conducted in addition to the authorized overnight RRPs, which remain subject to a separate overall size limit authorized by the FOMC [currently $300 billion]. A tentative schedule of the term operations spanning the June quarter-end follows below. This schedule will be updated on or around June 22 with additional information, including the amounts offered and the maximum offering rates." The first Operation/Settlement Date is June 25 with a Maturity Date of July 2. The next Operation/Settlement Date is June 29 with a Maturity Date of July 1. It continues, "Each of these operations will be conducted from 9:30 a.m. to 10:00 a.m. (ET), and each bidder will be limited to two bids per operation." In other news, the Federal Reserve also released the Minutes from the April 28-29 FOMC meeting. It says, "The Open Market Desk conducted two term RRP operations over the March quarter-end. The combination of term and ON RRP operations continued to provide a soft floor for money market rates over the intermeeting period, including around quarter-end. Based on experience around recent quarter-ends, the deputy manager discussed possible plans for June test RRP operations." It adds, "Many participants, however, thought it unlikely that the data available in June would provide sufficient confirmation that the conditions for raising the target range for the federal funds rate had been satisfied, although they generally did not rule out this possibility. Participants discussed the merits of providing an explicit indication, in post-meeting statements released prior to the commencement of policy firming, that the target range for the federal funds rate would likely be raised in the near term. However, most participants felt that the timing of the first increase in the target range for the federal funds rate would appropriately be determined on a meeting-by-meeting basis and would depend on the evolution of economic conditions and the outlook."

Asia Asset Management published a story, "China looks to tighten screws on MMFs." It says, "The China Securities Regulatory Commission (CSRC) is looking to further regularise the country's booming money market fund (MMF) sector by proposing greater risk control, liquidity and information disclosure measures, among other factors. The initiative comes as the country's MMF market has seen its total AUM explode from around 304 billion RMB (US$48.64 billion) in mid-2013 to 2.5 trillion RMB as of the end of April 2015. That upward trajectory coincided with Chinese e-commerce giant Alibaba Group pairing up with Tianhong Asset Management (Tianhong AM) to launch the online platform Yu'e Bao in 2013. In June of that year, Yu'e Bao launched its first online MMF, the Tianhong Zenglibao Monetary Fund. The product has helped the firm to increase its total AUM to around 580 billion RMB as of May 2015. Given the sector's momentum, the CSRC has proposed measures to prevent the market from derailing, outlining a number of new controls and regulations. These include broadening the funds' investment scope, strengthening risk control and liquidity management systems, and tightening information disclosure, stress testing, and supervisory requirements. Public consultation on the new rules is being carried out until June 14. Dai Hongkun, chief analyst at Shanghai Securities, told Asia Asset Management that the CSRC is aware of potential liquidity and credit risks relating to MMFs, despite recent high levels of growth. The proposed guidelines will help to mitigate the risk of systemic collapse in the event of large-scale redemptions, he believes. "China's MMF industry landscape remains highly centralised going forward and will continuously be dominated by a few of the largest players such as Tianhong and China Universal Asset Management. The economies of scale of their business means they can stave off competition from newcomers," he added. Asian Investor also carried the news in the article, "Securities Watchdog to Overhaul China MMF Rules." In other news, U.K.-based Standard Life Investments announced that it has renamed the Ignis Liquidity Funds, which it purchased it in March 2014, as the Standard Life Investments Liquidity Funds.

Fitch Ratings released "European MMF Quarterly – 1Q15," which is subtitled, "Yields Turn Negative in Euro MMFs; Rise in Sterling and US Dollar Funds." Fitch writes, "Euro MMF yields declined in 1Q15 and some funds started to pass on negative yields to investors. This practice is likely to become more widespread as the European Central Bank's quantitative easing program will likely keep euro short-term yields very low for a prolonged period. Sterling and US dollar denominated MMFs have had, in contrast, a modest yield uptick." Under the section, "Unsecured Financials at New Historical Lows," it says, "Money funds are adjusting their sector mix, reducing unsecured exposure to financial issuers in response to changing supply dynamics and the search for yield. Euro funds were able to find investment opportunities in non-financial corporates, while US dollar- and sterling-denominated funds reallocated towards government agencies and secured financial exposure, respectively.... European constant net asset value (CNAV) funds attracted new assets in 1Q15, including in euros, reaching total assets of EUR581bn. Asset flows have been more volatile at fund level over the past six months and particularly so in April for the first funds that turned negative. These funds were nonetheless able to service redemptions.... Maintaining high portfolio liquidity is particularly sensitive for euro funds in the current yield environment that may trigger large and sudden outflows." Under "Corporates Doubled in a Year," Fitch writes, "Collectively, corporate issuers continue to grow in euro funds, now at 14% on average, more than twice their level a year ago. This was at the expense of unsecured financials, which fell below 60% in the average portfolio asset mix for the first time. Yield and Supply Push Diversification: Overall issuer diversification expanded in 1Q15 with more than 150 issuers across rated funds at end-March compared with 120 a quarter earlier. Fund'’ search for yield and reduced bank supply are the key driving factors for this change. US Issuers Still Up: For the fourth quarter in a row, US exposure increased (up 6% yoy), driven by corporates and financials. It is now at the same level as UK issuers at 12%, behind France (32%) but above other core European countries. Lengthened Maturities: Portfolios' average weighted lives (WAL) lengthened in 1Q15, returning to November's high level of 59 days, as MMFs have increased longer-dated, higher-yielding assets.... Weighted average maturities (WAM) have been more stable, ending the quarter at 46 days. Increased Use of Repo: Repo exposure reached 6.1% at end 1Q15, which is the highest level seen in sterling-denominated MMFs since end-2012 highs of 8%." In other news, Seekingalpha.com posted commentary entitled, "Federated Investors Inc.: An Interest Rate Speculation Proxy." It says, "Due to the prevailing low interest rate environment, asset managers specializing in money market funds have not only seen outflows in assets under management (AUM), but have also been forced to waive fees in order for certain money market funds to maintain positive or zero net yields.... The implicit assumption of this article, which the reader should view with appropriate skepticism, is that, for the asset manager under consideration, a rise in short term interest rates will be a significant positive."

Barclays' money market strategist Joseph Abate latest "US Weekly Money Market Update" says, "In the Quarterly Refunding Announcement, the Treasury announced plans to increase its minimum daily cash balance to $150bn. This is about $100bn larger than last year's average balance and the average balance during 2009-2014. The Treasury plans to finance this extra cash cushion with increased bill issuance. Accompanying the announcement, the TBAC recommended the Treasury consider (re)introducing a 2m bill maturity -- at a weekly frequency. Front-end investors like the idea of a 2m bill. But, it is unclear if the 2m maturity is what short-term investors find most attractive -- or just the prospect of more supply in any bill maturity." Abate continues, "Demand for a 2m bill could be quite strong from money funds that have been scrambling to find sufficient supply amid dealer repo balance sheet reduction and declining bill issuance. Much of the focus of this potential demand has been on prime institutional funds with plans to limit the maximum maturity of their holdings to 60d, thereby preserving their ability to use historical accounting. But our sense is that demand might be stronger from government-only money funds as they have few investment alternatives and, given upcoming money fund reform, their balances could surge in the next 18m. One issue we expect the Treasury to wrestle with in the coming months as it considers a 2m bill tenor is the extent to which a new bill could crowd out demand for its 2y FRN.... Money fund demand for 2y FRNs has been weaker than expected at the launch of the program in January 2014. As of April, money funds held $52bn of these issues or 23.5% of the outstanding amount. Although we suspect that a 2m bill would have an even lower yield than the 2y FRN, government-only money funds may prefer the bill as it would consume less WAL.... While we expect the Treasury to auction 2m bills, we do not expect it will reach a decision this year. Instead, it will probably modestly increase auction sizes -- across all the weekly tenors -- to raise the extra cash needed for its daily buffer (assuming this average buffer is $150bn)."

Money market fund assets were down slightly this week, explains ICI in its latest weekly "Money Market Mutual Fund Assets" report. The release says, "Total money market fund assets decreased by $1.44 billion to $2.59 trillion for the week ended Wednesday, May 13, the Investment Company Institute reported today. Among taxable money market funds, Treasury funds (including agency and repo) increased by $4.44 billion and prime funds decreased by $3.86 billion. Tax-exempt money market funds decreased by $2.02 billion. Assets of retail money market funds decreased by $1.12 billion to $860.56 billion. Among retail funds, Treasury money market fund assets decreased by $720 million to $189.60 billion, prime money market fund assets increased by $690 million to $491.43 billion, and tax-exempt fund assets decreased by $1.09 billion to $179.53 billion. Assets of institutional money market funds decreased by $320 million to $1.73 trillion. Among institutional funds, Treasury money market fund assets increased by $5.16 billion to $775.02 billion, prime money market fund assets decreased by $4.56 billion to $888.55 billion, and tax-exempt fund assets decreased by $930 million to $64.88 billion <b:>`_." Year-to-date, money market fund assets are down $143 billion, or 5.2%. In other news, Reuters writes, "U.S. Commercial Paper Supply at Lowest Level Since February." It says, "The amount of U.S. commercial paper outstanding fell below $1 trillion to its lowest level since mid-February, suggesting weaker corporate demand to finance payrolls and inventories, Federal Reserve data showed on Thursday. Recent economic data showed domestic business activity has remained sluggish due to weak global demand. U.S. seasonally adjusted commercial paper outstanding fell $24.3 billion, its biggest weekly drop in 10 weeks, to $992.4 billion in the week ended May 13. Appetite from money market funds, which are major buyers of these ultra short-dated corporate IOUs, may have slipped on the week as their assets fell."

Bloomberg wrote, "`SEC's Gallagher to Resign as Commissioner After Four Years." The article says, "Daniel Gallagher is resigning his post as a Republican member of the U.S. Securities and Exchange Commission after four years, a time marked by partisan battles over the regulatory response to the 2008 financial crisis, according to three people familiar with the matter. The White House will now need to replace him as well as Luis Aguilar, the Democratic commissioner whose term expires next month. The departures herald a transformation at the agency, which has struggled to write dozens of new regulations arising from the 2010 Dodd-Frank Act. Gallagher, 42, plans to remain on the five-member commission until a successor is confirmed, a process that could take several months, the people said. The White House has already identified candidates to fill both his and Aguilar's seats. A securities lawyer and ex-agency staff member, Gallagher has been a critic of many of the rules required by Dodd-Frank. Known for his forceful dissents and speeches, he frequently rapped the Federal Reserve for trying to impose its oversight on firms traditionally regulated by the SEC. While Gallagher clashed with former Chairman Mary Schapiro on policy matters, he has a less-strained relationship with current SEC chief Mary Jo White. He was instrumental in negotiating a compromise overhauling rules for money-market mutual funds in July 2014, passed during White's tenure." It adds, "It's unclear when Aguilar will leave the agency. While his term expires in June, he also could remain until his successor is confirmed by the U.S. Senate. The candidates being reviewed by the White House to replace Aguilar include former SEC attorneys Keir Gumbs and Philip Khinda, according to the people, who asked not to be named because the matter wasn't public." In other news, a press release entitled, "Moody's withdraws the money market fund ratings of 3 Russell Investment Company Funds" says, "Moody's Investors Service, ("Moody's") has today withdrawn the ratings of three funds managed by Russell Investment Ireland Limited named: RIC Euro Liquidity Fund, rated Aa-mf; RIC Sterling Liquidity Fund, rated Aaa-mf; and US Dollar Liquidity Fund II, rated Aaa-mf <b:>`_."

The New York Fed posted a piece, "Financial Innovation: The Origins of the Tri-Party Repo Market," on its Liberty Street Economics blog. It says, "The conventional wisdom about financial innovation is that it is typically undertaken as a way to increase profits. However, financial innovation can also occur as a response to the need to reduce risk. Tri-party repo is an example of such innovation. While tri-party repo ultimately evolved in ways that created and amplified systemic risk (as we will describe in our next post), its origin was as a solution to inefficiencies and risks associated with the repo settlement arrangements prevailing at the time." In other news, the Wall Street Journal's Vipal Monga wrote in the CFO Journal, "Verizon Taps CP Market in Rare Move for M&A Financing." He writes, "Verizon Communications Inc. is taking a rare step by financing its $4.4 billion acquisition of AOL Inc. by issuing commercial paper. "Most companies have been trying to push out acquisition financing in the [long-term] bond market," said Chris Conetta, head of global commercial paper trading at Barclays PLC. "A lot of that [financing] has bypassed the commercial paper market." Verizon, which had $550 million of commercial paper outstanding at the end of March, has been ramping up issuance in that market in recent months. It only had $19 million outstanding at the end of December. A company spokesman said the company increased issuance "in the context of normal cash movements to fund our operations." Although a company spokesman declined to give rationale for tapping the CP market to finance part the deal (Verizon will also be using cash on hand), it's likely the telecommunications company feels that it can't go to the long-term bond markets for the time being." It continues, "The company has a relatively mediocre commercial paper rating as well, at A2/P2, below the highest AA rating.... Borrowing rates in the commercial paper market are very low, but they have been trending up. Companies rated A2/P2 can expect to pay 0.54% for securities maturing in 90 days, according to the Federal Reserve. That's up from 0.27% a year ago. "Rates are still ridiculously low," said Peter Crane, CEO of money-market fund tracker Crane Data LLC."

Bloomberg writes, "The $900 Billion Influx That's Wreaking Havoc in U.S. Bills." The article says, "For all the anxiety over the global selloff in bonds, the big worry in money markets is the havoc being created by a dearth of U.S. Treasury bills. The magnitude of the problem was on display last week, when not even the Treasury Department's surprise announcement to boost sales could do much to lift bill rates. Over the past two weeks, some of those rates have turned negative, reaching levels last seen during the financial crisis. With supply at multi-decade lows, investors are signaling alarm as regulations intended to shore up banks and prevent a run on money-market funds exacerbate the bill shortfall. JPMorgan Chase & Co. expects an extra $900 billion of demand for government securities during the next 18 months, putting pressure on a sizable chunk of the $1.4 trillion bill market. "You have all this money that wants to be in liquid, safe assets that is overwhelming the supply," said Alex Roever, the Chicago-based head of U.S. interest-rate strategy at JPMorgan. The consequences extend well beyond the fixed-income market as depressed rates in the $2.5 trillion money-market fund industry stand to deprive savers of income long after the Federal Reserve starts raising interest rates. The mismatch between supply and demand has been so acute that four-week bill rates fell to minus 0.0304 percent on April 29, the lowest on a closing basis since December 2008. Yields on three-month bills also turned negative. The Treasury responded by saying at its quarterly refunding announcement on May 6 it would increase issuance to meet growing demand." In other news, Tech in Asia wrote the article, "Xiaomi's Money Market Fund Rolls Out of Beta, to Take on Alibaba and Tencent." It says, "Like Baidu and Alibaba, Xiaomi is eyeing China's finance industry and seeing dollar signs. Today the company is officially launching a money-market fund called Huoqibao inside a new standalone app called "Xiaomi Finance". Like the Alibaba-affiliated Yu'ebao, Xiaomi's Huoqibao lets consumers save excess cash and earn interest from it.... The fund is managed by China's E Fund Management and currently offers an annual return rate of 4.26 percent. Compared to China's other internet giants, Xiaomi is slightly late to the money market game. As of late 2014, Yu'ebao had over 185 million users and a fund size of RMB 578.93 billion (about US$93 billion). Yu'ebao's deep integration with Alipay Wallet, which is also tied to Alibaba's mobile ecommerce properties like Tmall and Taobao, make it tough for new customers to miss. Tencent and Baidu also have mobile money-market funds of their own."

Attorney Stephen Keen of Perkins Coie published a comment entitled, "Why Intermediaries Can Stop Worrying About Money Fund Liquidity Fees -- Part One." Writes Keen, "I continue to hear about intermediaries fretting over whether and how to redesign their trading systems to accommodate the possibility of money market fund liquidity fees. This series of blogs will explain why this should be a problem only for the funds' transfer agents ("TAs"). An intermediary should never need to collect and remit a liquidity fee." Keen continues, "The Board's new ability to set liquidity fees has raised the specter of funds charging different fees and constantly changing their rates. Intermediaries are concerned that they must develop systems that can collect fees for different funds at different rates that may change on a moment's notice. The likelihood that funds may implement liquidity fees during a market meltdown heightens their concerns. While I am skeptical that directors would ever tweak fees in this fashion, the prospect of their doing so need not alarm anyone other than the TAs. The need for intermediaries to make major systems changes could be avoided if the TA collected all liquidity fees directly from redemption proceeds. Intermediaries' systems could then prorate the proceeds received from the TA by the dollar or share amount of each client's redemption. For example, assume an intermediary has three clients redeeming shares from funds that have imposed liquidity fees. Clients A and B each redeem $1 million from Fund X, and Clients B and C each redeem $1 million from Fund Y. Assume Fund X imposed a 1% fee and Fund Y imposed a 2% fee. This means the intermediary would receive $1,980,000 from Fund X and $1,960,000 from Fund Y. As each client redeemed equal amounts from each fund, the proceeds would be split evenly, with Clients A and B each receiving $990,000 from Fund X and Clients B and C each receiving $980,000 from Fund Y. Proration will produce the correct result, even if the intermediary does not know the percentage fee imposed by each fund. A proration algorithm could run all the time, insofar as it would allocate the correct amount of proceeds to each client even when the fund was not charging a liquidity fee. So, the intermediary would never need to modify its systems to implement a liquidity fee. What happens if other clients also purchase shares from the fund? There are at least three ways to address this question, which I will explore in the next two parts." Also, the SEC issued a release naming David Grim as Director of the Division of Investment Management, permanently replacing Norm Champ, who stepped down earlier this year.

After a rough April, money fund assets were back in black last week, according to ICI in its latest weekly "Money Market Mutual Fund Assets" report. The release says, "Total money market fund assets increased by $8.60 billion to $2.59 trillion for the week ended Wednesday, May 6, the Investment Company Institute reported today. Among taxable money market funds, Treasury funds (including agency and repo) increased by $5.30 billion and prime funds increased by $640 million. Tax-exempt money market funds increased by $2.65 billion. Assets of retail money market funds increased by $1.60 billion to $861.68 billion. Among retail funds, Treasury money market fund assets decreased by $200 million to $190.31 billion, prime money market fund assets increased by $730 million to $490.74 billion, and tax-exempt fund assets increased by $1.07 billion to $180.63 billion. Assets of institutional money market funds increased by $6.99 billion to $1.73 trillion. Among institutional funds, Treasury money market fund assets increased by $5.50 billion to $769.86 billion, prime money market fund assets decreased by $90 million to $893.11 billion, and tax-exempt fund assets increased by $1.59 billion to $65.81 billion." Year-to-date, MMF assets are down $143 billion, or 5.2%. In other news, Plan Sponsor magazine reports, "Money Market Reform Likely to Change Retirement Plan Investments." It says, "Money market fund reforms, which take effect in October 2016, will require retirement plan sponsors to review the money market funds in their lineups and possibly replace their funds, experts say. And this will affect nearly two-thirds of plans, as 63.5% have money market funds in their lineup, according to the 2014 PLANSPONSOR Defined Contribution Survey." It explains, "Institutional clients in endowments and pension plans are going to be greatly affected because of the floating NAV," says Jay Sommariva, vice president and senior fixed income portfolio manager at Fort Pitt Capital Group in Pittsburgh. "While on paper, retail clients in 401(k) plans will not be affected because the retail funds will maintain a constant $1 NAV -- just like in 2008, when the largest money market fund in the nation 'broke the buck' due to its holding of Lehman Brothers and some structured investment vehicles (SIVs) associated with distressed mortgages -- there is a chance assets in the retail funds can depreciate. They might also impose a redemption gate or a 2% penalty to take your money out. They have never been risk-free and should not be viewed as such."" The piece adds, "This is why Sommariva believes that advisers to 401(k) plans will recommend that the plans replace their retail money market funds with government money market funds, "which provide higher credit and liquidity standards" -- and will not have liquidity fees or redemption gates."

The U.S. Treasury released its "Minutes of the Meeting of the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association May 5." RBC Capital Markets strategist Michael Cloherty explained the minutes, "Treasury is introducing a new cash balance target, where they will always keep on hand enough cash to handle one week of outflows with a minimum target of $150bn. Note that those outflows are not just Treasury maturities/interest payments -- because the Tsy cannot prioritize payments, the Tsy will always target enough cash to make all government payments for a week. Tsy says the extra issuance needed to address this will be in bills: specifically the 1m and 3m maturities will get extra attention. This is because bills are very low as a historical percentage of outstanding debt, and that there is a massive increase in bill demand coming as 2a-7 reform drives cash from Prime money funds to Government money funds. Note that even with the Tsy issuing more, we don't think the additional supply will be enough to rebalance supply and demand at the front of the curve -- bills are likely to trade at extremely rich levels due to the structural increase in demand. The elephant in the room around the cash balance policy is the debt ceiling, as the Treasury will be unable to hit its cash balance target whenever it gets close to the ceiling. What this means is that the cash balance swings, and therefore the bill supply swings, will be much, much higher around debt ceiling episodes that they have been in recent years. Since we don't expect a large increase in the debt ceiling until 2017 at the earliest, this means more disruptive debt ceiling episodes. And it means that for the next few years there is virtually no tightening effect from the Fed allowing its maturity of Tsys to run off. Fed run-off would simply mean that an overnight reserve is being removed from the market, and replaced by 1m and 3m bills-- there is very little duration hitting the market from Tsy run-off. So dont expect a slower tightening path in 2016 due to run-off." Bloomberg also writes, "U.S. to Raise Treasury Bill Supply, Hold Bigger Cash Buffer." It says, "The U.S. will increase the supply of Treasury bills to meet growing demand and raise the amount of cash reserves the government holds to a minimum of $150 billion in case of a market disruption."

Federated Investors' CIO, Global Money Markets, Deborah Cunningham, writes on "New SEC Guidance Not Clear Enough" in her latest "Month in Cash" column. She says, "When a regulator releases a final ruling that runs hundreds of pages long, you'd expect some questions to arise. Last summer, the SEC presented the mutual fund industry with more than 800 pages of new rules on money funds that will go into effect in 2015 and 2016.... We have all been waiting for another voluminous document explaining the vaguer elements in the original ruling. Well, last month, we finally got it. Sort of. The SEC released 53 frequently asked questions (FAQ), yet they brought less clarity than hoped. While some of them are quite helpful, others are not. Even worse, some muddy things further. Among the useful: Two questions address 60-day funds, which are designed to have very little change in daily per-share valuation. The FAQ basically says that, even if a portfolio for all intents and purposes maintains a stable NAV, you can't claim that in an objective or sell it that way. You have to make sure that clients understand that these are floating NAV funds. The document also clarifies that the collateral used in the overnight reverse repo program (RRP) will be considered a government security." Cunningham continues, "Among the confusing: The role of intermediaries in regard to retail investors is now clouded. It had been thought that a fund is considered to be retail if it sells to "natural persons" <b:>`_. These are defined as those who have a social security number, as opposed to an institution. But the FAQ suggests that if a natural person is "controlled" by an institution, the fund must float its NAV. This is obviously at the heart of the distinction between retail and institutional funds. If the SEC is still debating that, it's a serious issue for the industry. There's also incomplete guidance on government funds. What happens if, by no fault of your own, the fund temporarily dips below the required 99.5% of investments in government securities, even though you are actively working to get it back into compliance? Also, the timing of some reporting to the SEC doesn't make sense. It's not that the SEC staff isn't trying; it's just that it seems to be mired in the process of interpreting the new rules. That presents problems for the money market fund industry that is working hard to conform to those. We expect future guidance, but in the meantime I want to emphasize that nothing we saw in the FAQ has altered our path. We still intend to merge some funds, add share classes, render some to be 60-day-and-under and reconfigure some to be private funds that fall outside the 2014 rulemaking. In short, there is nothing in the FAQ that has caused us to do an about-face."

Mutual fund publication Ignites reports, "Schwab Lays Out Money Fund Changes in Broad Strokes." The article says, "With a Friday announcement, Charles Schwab Investment Management became the latest in a string of money market fund sponsors to disclose product changes it's planning in response to SEC reforms introduced last July. The San Francisco–based firm said that it will continue to offer prime, municipal and government money funds for retail investors. Its lineup will also include prime institutional funds, which under the SEC's new rules must adopt a fluctuating net asset value, or let their price per share fluctuate from $1 per share. Like Invesco, Federated, JPMorgan and others, Schwab also stated that it will not implement redemption gates or liquidity fees for its government money market funds." It continues, "The firm's plan to offer prime institutional funds is somewhat surprising because most of its money fund assets are retail, says Peter Crane, CEO of Crane Data. Just 2.3% of the firm's assets, or $3.6 billion, are institutional. With $160.6 billion in money fund assets, the firm is the seventh-largest sponsor of the products, according to Crane Data. Schwab did not provide details in its announcement about upcoming changes to specific funds, and declined to comment beyond its release. While some other large money fund sponsors have laid out several specific elements of their plans, others have taken a more reticent approach to describing changes. The compliance date for the biggest changes is not until October 2016, which gives firms about a year and a half to make changes and disclose details." It adds, "[W]e still don't know if there's going to be big dollars switched into government [funds] like we saw with Fidelity," says Crane, referring to Schwab's announcement.... It doesn't look as if Schwab is following Fidelity's lead by converting its biggest prime funds to government funds, "but we're not sure about that yet," he says <b:>`_." In other news, law firm Paul Hastings LLP posted an article on the SEC FAQS called, "SEC Releases Frequently Asked Questions Related to Valuation Guidance and to Money Market Fund Reforms Adopted in July 2014." Finally, the New York Fed posted a commentary, "Interest-Bearing Securities When Interest Rates are Below Zero" on its Liberty Street Economics blog.

The National Law Review posted an article entitled, "SEC Answers Money Market Reform Questions." The piece says, "The SEC responded on April 22, 2015, to industry questions regarding its 2014 money market reform rules (Rules) through a frequently asked questions (FAQ) format. The 15-page release answers 53 questions on various topics. Set forth below are some of the more significant issues settled by the SEC." Under the header "Amortized Cost Questions," it says, "Floating Funds cannot use amortized cost to value a security if this value is not "approximately the same" as its fair value: Floating Funds can use amortized cost to value securities with a remaining maturity of 60 days or less, but not their shares, under the Rules. Consistent with the Rules release's valuation guidance, however, Floating Funds can only use the amortized cost value of a security when they can reasonably conclude that the amortized cost value is "approximately the same" as the fair value of the security (without the use of amortized cost). Floating Funds that invest only in securities with remaining maturities of 60 days or less must state that their share prices will fluctuate: Floating Funds that invest only in securities with remaining maturities of 60 days or less must use care in sales material and prospectus disclosure. They may not state that they seek to maintain a stable NAV as the SEC considers such a statement to be misleading. As has been pointed out by others, this position may make short term Floating Funds less attractive to investors. Amortized cost valuation guidance not applicable to stable NAV funds: The FAQ reminds the industry that stable NAV funds (i.e., Government and Retail Funds) may continue to value their entire portfolios using amortized cost; accordingly, the amortized cost valuation guidance provided in the Rules release is not applicable to these funds except when they are shadow pricing their securities or portfolio.... Amortized cost securities not required to be shadow priced daily: The SEC clarified in a companion FAQ that its guidance on amortized cost in the Rules release was not intended to force funds to shadow price amortized cost valued securities daily. Instead, the FAQ states that funds should have adequate policies and procedures in place that include a description of factors used in determining the fair value of the security and how these factors are reviewed and monitored each time a valuation decision is made."

The European Fund and Asset Management Association (EFAMA) released a statement on the EU Parliament's approval of money fund reform. (See yesterday's Crane Data News, "European Parliament Approves Money Fund Reform Plan; Not Done Yet.) The EFAMA release says, "MEPs in the European Parliament voted through the ECON Report by Neena Gill MEP on the Money Market Funds Regulation 'MMFR'. This report followed an original proposal by the European Commission in September 2013. The European asset management industry has a very important stake in this legislation. CNAV and VNAV MMFs manage close to E470B and E440B respectively. EFAMA, the European Fund and Asset Management Association, acknowledges the work accomplished to date by the Rapporteur, Neena Gill MEP, and Shadow MEPs. However, we consider the result at odds with the current policy focus of the European Commission's Capital Markets Union initiative. In an environment where alternatives to traditional bank lending and cross border investment are seen as vital to the future of Europe's economy, EFAMA is concerned the Report as adopted by the Parliament will, if implemented, seriously impact both 1) the ability for companies in Europe to manage their liquidity and 2) the short term funding that MMFs provide to the capital markets. While we welcome the Parliament's rejection of a capital buffer for CNAV MMFs, we remain very concerned about the status of the 'low volatility NAV' (LVNAV) MMF. The proposed regulatory framework for this new type of MMF has the potential of allowing as a viable alternative product to investors in European CNAV Prime MMFs. However, the stringent requirements placed upon it, in particular the so-called "sunset clause" which implies that LVNAV MMFs would cease to exist after 5 years, make this product unworkable for fund managers and unusable by investors of MMFs in the long term. Rather than introducing interim measures before a full prohibition of CNAV MMFs, we strongly encourage EU legislators to seek a permanent alternative solution to the current CNAV model that will allow investors to take advantage of the benefits MMFs provide. EFAMA also considers that some of the measures proposed and approved by the ECON Committee would result in serious operational challenges for VNAV MMFs and lower portfolio returns in particular because (i) MMFs would not be allowed to invest in units/shares of other MMFs, (ii) the diversification and liquidity rules have been tightened considerably, (iii) the possibilities to invest in OTC and ABCPs are strictly limited, and (iv) the use of mark-to-model valuation model is restricted. Peter De Proft said: "We are of the view that the Parliament text goes over and above the laudable aim of legislating for systemic risk. We therefore hope that the Trilogue, which will follow the adoption of a General Approach by the Council of Ministers, will lead to a text that will allow MMFs to continue providing an important source of short-term cash management for Europe's businesses and financing of the European economy." Funds Europe also covered the EU news in a story, "Money Market Fund Changes Criticized." In related news, the European Central Bank released a "Euro Money Market Study 2014."

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