Daily Links Archives: January, 2016

Treasury Today released an article entitled, "New rules for China's budding MMFs." It reads, "After a year of rip-roaring growth, change will soon be afoot in China's nascent money market fund (MMF) industry as new rules are introduced that promise to bring the regulation of MMFs closer in line with international standards. From February 2016, Chinese MMFs will be subject to a package of new requirements that should go some way to addressing concerns about risks that have been developing in the industry in the wake of the recent inflows. In a report published last week entitled "New Chinese Money Fund Rules Move Closer to International Standards," Fitch Ratings explained that the rules announced by the China Securities Regulatory Commission (CSRC) cover areas including investment scope, liquidity rules, NAV deviation and maturity limits. (See our Jan. 20 News, "Ignites: MMF Fee Waivers Drop in 2015; Fitch on MMF Reform in China.") The Treasury Today piece continues, "Last year we saw a huge growth in MMF investment in China, partly driven by institutional investors," says KL Cheah, Head of Global Liquidity Sales, Greater China, JPMorgan Chase Bank (China). "We are seeing a growing popularity in MMFs across the board as retail clients gain easier access to these investments, increasing popularity in MNCs using it as a cash management option and institutional funds flowing more readily into the product as well. This is happening at a time when we have regulatory development of the overall MMF industry in China that make it more investable and more comparable to the AAA rated funds market." Others industry experts agree on this assessment of the market. "We are seeing that more and more corporates that traditionally would have put their money in the bank are now beginning to accept MMFs as one of their investment options," says Li Huang [of] Fitch Ratings. Treasurers in China are beginning to warm to such investments for largely the same reasons as their international peers." It continues, "Further regulatory measures will therefore be required from the CSRC before the industry becomes fully in line with international standards. But even if such reforms are not forthcoming in the near future, a growing range of investment options aligned with MNC investment policies could still be on the cards in the near future. For all the growing popularity of MMFs amongst corporates as an alternative to bank deposits, the number of funds that meet investment policy criteria remain limited. As of the end of 2015, there were 263 MMFs in China with total assets of $4.6trn. Only five of these funds were AAA rated however.... "The regulation is moving in the right direction and the industry is in a growth phase," Cheah adds. "This is a trend that we see continuing.""

The US Treasury's Office of Financial Research released its "2015 Annual Report to Congress," which contains just a few brief mentions of money market mutual funds. The press release, entitled, "Office of Financial Research Issues 2015 Annual Report to Congress: Report Analyzes Threats, Describes Progress, and Presents 2016 Agenda" says, "Threats to financial stability arise when shocks expose vulnerabilities in the financial system. The report says threats to U.S. financial stability have edged higher since last year's report, but remain in the medium, or moderate, range; that assessment has not changed since the Federal Reserve incrementally increased short-term interest rates last month." We wrote about the OFR's previous Financial Stability Report in our Dec. 16 News," "Treasury OFR Releases Financial Stability Report; MMFs Minor Concern." The release adds, "I hope that, taken together, the two reports will help us communicate with a wide range of stakeholders while ensuring that we are transparent and accountable in our work and the ways we pursue it," said OFR Director `Richard Berner. The OFR develops tools to assess and monitor threats to financial stability, and evaluates the effectiveness of policy tools designed to improve the resilience of the U.S. financial system." We covered a previous report on "Liquidity Funds and Separately Managed Accounts" in our July 10 News, "OFR Sheds Light on Liquidity Funds, STIFs, Managed Accts in Form PF." One of the monitoring tools listed in the 80-page report is a "Money Market Fund Monitor," which, "Will examine individual funds and the industry as a whole on the basis of credit, interest rate, and liquidity risk. Each risk category will be analyzed based on portfolio statistics and holdings."

Barron's posted a blog piece, "Q4 Was Good For Vanguard, Tough for Pimco: S&P," that says, "The fourth quarter of 2015 saw investors add money to index and money market mutual funds, while pulling money from actively managed and bond funds, writes S&P Capital IQ's Todd Rosenbluth in a recent review of the sector. Vanguard Group was a clear winner, writes Rosenbluth, as the biggest fund provider only increased its lead over rivals, thanks to $54.1 billion in new money in the quarter. It saw $20 billion go into equity funds, $18 million in bond funds and $3 billion in money markets -- a rare trifecta in Q4. The Vanguard 500 Index Fund (VFINX) saw inflows of $1.2 billion and the Vanguard Total International Bond Index (VTIBX) added $3.2 billion." It adds, "Vanguard wasn't the only winner, however, with Goldman Sachs (GS) attracting $25 billion.... Goldman Sachs FS Money Market (FSMXX) had $7.9 billion and was an example of institutional fund with strong interest. However, investors pulled $977 million and $644 million, respectively, out of Goldman's equity and bond funds.... The fourth quarter wasn't so bright for Pimco: With $22 billion in outflows, it lagged the broader industry.... It wasn't all bad for the firm though, as the PIMCO Income Fund (PONAX), "which has a top-quartile multi-sector income bond fund, pulled in $2.5 billion last quarter." Rosenbluth also highlights JPMorgan's (JPM) funds, among others, noting its $1.9 billion in new money to its equity funds and $109 million to bond funds, including the JPMorgan Growth Advantage (VHIAX), although its money market funds saw outflows."

Wells Fargo Securities writes about last week's Crane's Money Fund University in the Jan. 25 issue of its "Daily Short Stuff" commentary. Co-author Vanessa Hubbard was one of the speakers at MFU, presenting with Bank Hapaolim Treasurer Marian Trano on "CDs, TDs, and Bank Debt." Wells writes, "Last week the Crane Money Fund University in Boston topped its previous record in terms of attendance. We are pleased with the attendance record, and believe that it shows a continued commitment to the space as money market fund advisors send junior analysts to bone up on the instruments available in the money markets. In his comments on the "State of the Money Fund Industry," Crane noted that the migration out of prime funds is not likely to be as dramatic as many expect it to be due to the yield advantage [prime funds] will have over government funds in a rising rate environment. Currently, the 7-day yield on the Crane prime institutional index is 21 basis points, versus 8 basis points on the government index and 5 basis points on the Treasury index. This spread will likely grow as we believe that many money fund advisors are still subsidizing their operations, and once all funds get back to full fees, the spreads will widen even further. Nevertheless, while Mr. Crane believes the outflows are likely to be lower than expected, money fund complexes continue to convert from prime to government. Crane noted that the total asset value announced for conversion is currently $264 billion, with more than $172 billion of that already converted. Mr. Crane noted that he believes there will be massive outflows from bank deposit products once money fund yields hit 100 basis points. The reasoning is that given the bank regulatory environment and the amount that banks are already holding in terms of "excess" deposits, it is unlikely that they will be as competitive with non-operating deposit rates as they have been in the past, which will likely create an even wider dispersion between fund yields and deposit yields. However, whether these deposits move into government or prime products is difficult to say. We could just as easily see the assets flow into government funds, and simply accept a lower yield than a prime fund. The regulatory stumbling blocks that we see amongst money market clients remain the same, specifically the liquidity issues associated with gates and fees, and the operational issues associated with the floating NAV. While most cite one or the other regulatory change as the main concern, it is rare amongst the clients we interact with that neither is an issue." In other news, the UK-based Investment Association, released 2015 year-end statistics. It says, "Money Market funds saw net retail sales of L591 million in 2015, their highest on record and up from L63 million in 2014." (The U.K. money fund market is tiny with just over $10 billion in assets as of Q3'15, according to ICI.)

The $139 million variable annuity money fund, Federated Prime Money Fund II has filed to convert from Prime to Government too. Federated Prime Money Fund II, A Portfolio of Federated Insurance Series filed a "Supplement to Prospectuses and SAI saying, "The Board of Trustees (the "Board") of the Federated Insurance Series (the "Trust") on behalf of its series, Federated Prime Money Fund II (the "Fund") approved a proposal to modify the Fund's fundamental concentration policy to eliminate the requirement that the Fund invest at least 25% of its assets in the financial services industry (the "Proposal"). A special meeting of shareholders of the Fund was held on November 20, 2015, and the Proposal was approved. The Fund will make other changes necessary to operate as a government money market fund, including but not limited to: (i) adopting a principal investment strategy (and a non-fundamental investment policy) to normally invest at least 99.5% of its total assets in cash, government securities and/or repurchase agreements that are collateralized by cash or government securities; and (ii) changing its name to "Federated Government Money Fund II." Once converted to a government money market fund, the Fund will continue to utilize amortized cost accounting and transact at a stable $1.00 net asset value. Government money market funds are exempt from certain requirements of the 2014 provisions of Rule 2a-7 under the Investment Company Act of 1940 that permit money market funds to impose a liquidity fee and/or temporary redemption gates. As a government money market fund, the Fund will not be required to impose liquidity fees and/or temporary redemption gates. The Board has also approved the designation of the existing share class (previously unnamed) as Service Shares and the addition of a new share class, Primary Shares. The Fund currently anticipates that these changes will be fully implemented by April 30, 2016." Under "Gradual Transition of the Portfolio," the filing adds, "The Fund's Adviser, Federated Investment Management Company, will begin to gradually implement changes to the Fund's portfolio in order to provide the most efficient transition. As a result, it is expected that the Fund gradually will allocate a larger percentage of its assets to government securities over time until it reaches its new 99.5% allocation on or about April 30, 2016, but may transition sooner, based on market circumstances or other factors as determined by Federated Investment Management Company.... [The] Fund's yield would decrease as more assets are invested in government securities without additional waivers by the Adviser, and certain of its affiliates. The Adviser and certain of its affiliates on their own initiative have agreed to waive certain amounts of their respective fees and/or reimburse expenses, as outlined in the prospectus."

ICI's latest "Money Market Fund Assets" report shows money fund assets flat in the latest week. The release says, "Total money market fund assets increased by $540 million to $2.74 trillion for the week ended Wednesday, January 20, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $2.33 billion and prime funds decreased by $900 million. Tax-exempt money market funds decreased by $890 million." It explains, "Assets of retail money market funds increased by $2.28 billion to $1.02 trillion. Among retail funds, government money market fund assets increased by $4.09 billion to $360.32 billion, prime money market fund assets decreased by $370 million to $469.07 billion, and tax-exempt fund assets decreased by $1.43 billion to $186.64 billion.... Assets of institutional money market funds decreased by $1.74 billion to $1.73 trillion. Among institutional funds, government money market fund assets decreased by $1.76 billion to $874.45 billion, prime money market fund assets decreased by $530 million to $784.01 billion, and tax-exempt fund assets increased by $540 million to $68.62 billion." In other news, a press release entitled, "STCM Named Best Electronic Trading Portal for MMFs," says, "FIS' SGN Short-Term Cash Management (STCM) portal has been recognized by Treasury Management International (TMI) in the publication's annual awards. The STCM portal was awarded Best Electronic Trading Portal for MMFs and was announced in December by TMI.... "Winning this award category proves FIS' commitment to helping cash managers gain a competitive advantage by delivering effective tools that help increase operational efficiencies, reduce costs and help mitigate trade and credit risk," commented Bob Santella, president of FIS' global trading business."

Reuters reports, "Vanguard Reopens Money Fund on Improved Market Conditions." The article says, "Vanguard said on Wednesday it will reopen its Treasury Money Market mutual fund to all investors, citing improved market conditions. The biggest U.S. mutual fund company, based in Valley Forge, Pennsylvania, closed the $9.1 billion fund in January 2009 in an effort to shield existing fund holders from high levels of cash flow that could potentially dilute its yield. The move to close the Treasury money fund followed the Federal Reserve's decision in December 2008 to lower short-term interest rates to near zero at the height of the global financial crisis. Last month, the U.S. central bank raised its target range on short-term rates to 0.25-0.50 percent from zero to 0.25 percent, citing an improving domestic labor market. Yields on most Treasury money funds are still running close to zero even after the Fed's first rate hike in nearly a decade, according to iMoneynet. Analysts said yields on money market funds will unlikely rise much for now as fund operators seek to recoup costs [sic] spent to operate the funds and to maintain their yields above zero. The reopening of Vanguard's Treasury money fund came more than six months after it reopened its $4.8 billion federal money market fund to all investors. Vanguard's Treasury money fund invests primarily in U.S. government debt, while its federal money funds invests mainly in short-term securities issued by federal agencies including Fannie Mae and Freddie Mac." Pensions & Investments also covered the news in "Vanguard reopens Treasury Money Market Fund." It says, "This is the second U.S. government money market fund that Vanguard investors can access. In June, the firm reopened its $4.8 billion Federal Money Market Fund to all investors. The Treasury Money Market Fund invests primarily in U.S. Treasuries, while the Federal Money Market Fund invests primarily in U.S. agency debt."

Transamerica filed with the SEC to convert its $141 million Transamerica Money Market Fund from Prime to Government. The filing says, "In response to recent amendments to Rule 2a-7 under the Investment Company Act of 1940 passed by the Securities and Exchange Commission, the Board of Trustees of Transamerica Funds has approved changes to the Fund's investment objective and principal investment strategies that will allow the Fund to operate as a "government money market fund". Under amended Rule 2a-7, a government money market fund is a money market fund that invests at least 99.5% of its total assets in U.S. government securities, cash, and/or repurchase agreement that are fully collateralized by U.S. government securities or cash. The Fund's operation as a government money market fund will result in shareholders having continued access to a money market fund which seeks to maintain a stable net asset value of $1.00 per share. As a government money market fund, the Fund may allow retail and institutional investors in the Fund. Additionally, the Fund will not be required to impose liquidity fees and/or redemption gates, and has no current intention to voluntarily impose such liquidity fees or redemption gates. However, the Board of Trustees reserves the right to impose liquidity fees and/or redemption gates in the future. Effective on or about May 1, 2016: The Fund's name will change to Transamerica Government Money Market." To date, Crane Data estimates that $263.8 billion has either already switched from Prime to Government, or has declared its intention to do so. Also, SEI liquidated the "H" shares of its SEI Prime Obligations Fund and merged them into their "A" shares. This filing says, "In a September 4, 2015 supplement to the Prospectus and SAI, the Fund provided notice that the conversion of Class H Shares of the Fund to Class A Shares of the Fund would be postponed until further notice. The conversion was originally approved at a meeting of the Board of Trustees of the Fund held on June 22-23, 2015. Recently, however, the Fund has determined to proceed with the conversion. Accordingly, effective on or about the close of business on November 30, 2015, all Class H Shares of the Fund will automatically convert to Class A Shares of the Fund. The share conversion should not have any effect on your investment in the Fund.” Finally, BMO Prime Money Market Fund changed its "I" shares to "Premier" shares. (See the filing here.)

The SEC recently released an updated and revised "2014 Money Market Fund Reform Frequently Asked Questions" document. The updated FAQs, with technical questions that only fund lawyers will probably appreciate, include 2 new questions on Form N-CR (4. and 5.), 2 new questions on Website Disclosure (11. and 12.), 1 new question on Money Market Fund Advertisements (13.), and one new question on Government Money Market Funds (44.). The Government MMF question asks, "Q. Does rule 35d-1 (the "Names Rule") apply to a money market fund that includes the term "government" in its name? A. Yes. If a money market fund includes the term "government" in its name, the requirements of both rule 2a 7(a)(16) and the Names Rule apply. Rule 2a 7(a)(16) defines a "government money market fund" to mean a money market fund that invests 99.5% or more of its total assets in cash, government securities, and/or repurchase agreements that are fully collateralized by cash or government securities. The Commission stated in the Adopting Release that a fund may not call itself or include in its name "government money market fund" or similar names unless the fund meets this definition. In addition, the Names Rule generally requires a fund to adopt a policy to invest (under normal circumstances) at least 80% of the value of its net assets in the particular type of investments suggested by the fund's name (e.g., for a money market fund that includes the term "government" in its name, the 80% test would include government securities and repurchase agreements that are collateralized by government securities). Although the 99.5% test under rule 2a 7 is more stringent in some respects than the 80% test under the Names Rule, the 99.5% test permits a broader range of investments than just "government securities" (for example, it includes cash).... To avoid potentially misleading investors, the staff believes that a money market fund that includes the term "government" in its name should disclose that it invests at least 99.5% of its total assets in cash, government securities, and/or repurchase agreements that are collateralized by cash or government securities, and that it has a policy to invest (under normal circumstances) at least 80% of its net assets in government securities and/or repurchase agreements that are collateralized by government securities. Similarly, the staff believes that a government money market fund that includes an additional descriptor in its name (e.g., "XYZ U.S. Treasury Government Money Market Fund") should adopt a policy to invest at least 80% of its net assets in the type of instruments suggested by its name (e.g., U.S. Treasury securities and/or repurchase agreements collateralized by U.S. Treasury securities) and also meet the 99.5% test." (See the "Redlined PDF showing changes to previous August 8, 2015, version of these MMF Reform FAQs" to see the new questions.)

ICI's latest "Money Market Fund Assets" report shows that money fund assets appear to have benefited from the recent stock market turmoil. The release says, "Total money market fund assets increased by $7.91 billion to $2.74 trillion for the week ended Wednesday, January 13, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $8.00 billion and prime funds increased by $3.06 billion. Tax-exempt money market funds decreased by $3.15 billion. Assets of retail money market funds decreased by $2.83 billion to $1.01 trillion. Among retail funds, government money market fund assets increased by $1.02 billion to $356.23 billion, prime money market fund assets decreased by $1.70 billion to $469.40 billion, and tax-exempt fund assets decreased by $2.15 billion to $188.08 billion. Assets of institutional money market funds increased by $10.74 billion to $1.73 trillion. Among institutional funds, government money market fund assets increased by $6.98 billion to $876.20 billion, prime money market fund assets increased by $4.76 billion to $784.54 billion, and tax-exempt fund assets decreased by $1.01 billion to $68.08 billion." Year-to-date in 2016, money fund assets are down $16 billion. (In 2015, money fund assets increased by $26.0 billion, or 1%, after 3 years of 0.5% growth.) In other news, Wells Fargo released its monthly, "Overview, Strategy, and Outlook" portfolio manager commentary, which says, "On December 16, 2008, as it began to realize the magnitude of the financial crisis, the Federal Open Market Committee, which is the monetary policymaking body of the Federal Reserve, established a target range for the federal funds rate of 0.00% to 0.25%, effectively lowering interest rates from 1% to 0%. Exactly seven years later, on December 16, 2015, the FOMC finally felt comfortable enough with the strength of the economy to raise interest rates, nudging its target range up to 0.25% to 0.50%. FOMC members had strongly hinted the move was coming, and after employment data released in November and December confirmed labor market strength, the market largely expected the increase. Of course the market immediately shifted its attention to the timing of the next interest-rate increase. Fed communications have seemed to promise both data dependency and a gradual pace to interest-rate hikes, so all eyes will be back on the data. At the very least, the FOMC seems unlikely to raise rates again at its January meeting, keeping interest rates at this new level, the second-lowest in U.S. history. Beyond that, it depends on the economy."

Reuters writes, "China stock investors seek haven in bond, money market funds." The article says, "China's recent stock market rout has further damped risk appetite of mainland investors, who have been seeking safe haven in bond and money market funds, and stepping up overseas investment amid yuan depreciation fears, latest data shows. Over the past week, outstanding margin loans slumped 7 percent as investors unwound 78.1 billion yuan ($11.87 billion) worth of leveraged bets, according to data from state-margin lender China Securities Finance Corp. Latest monthly fund data shows investors are shifting money out of stocks into money market and bond funds. In December, assets in money market funds jumped 27.6 percent from a month earlier to 4.4 trillion yuan, while bond funds expanded 21.6 percent in size." In other new, the U.S. Treasury's Office of Financial Research released the paper, "The US Bilateral Repo Market: Lessons for a New Survey." It reads, "We provide aggregate statistics on U.S. dealers' bilateral repurchase agreements and economically equivalent securities lending activities The data were collected from the U.S.-affiliated securities dealers of nine bank holding companies under a voluntary pilot program run by the Office of Financial Research (OFR) and the Federal Reserve System with input from the Securities and Exchange Commission. We found that the majority of this activity involves the delivery or receipt of U.S. Treasuries, with equities a distant second. The most common maturity is one day. Finally, rates are widely dispersed across asset classes." Under "Lessons Learned," it says, "In addition to collecting valuable quantitative information on bilateral activity in the U.S. securities financing market, the pilot was successful in identifying specific challenges of collecting this type of market data, including these three: (1) Limited scope of the pilot data collection, (2) Lack of data standards, (3) Separate data systems."

Pensions & Investments posted an article earlier this week entitled, "DC plans expected to exit prime money market funds." It explains, "Consultants expect many defined contribution plans to move away from prime money market funds in the face of a looming October deadline for new SEC regulations that might create complications for sponsors. They say the key issue for DC plans is the Securities and Exchange Commission rule requiring providers of prime money market funds to create redemption gates -- or limits -- on withdrawals by participants and to establish fees on withdrawals to prevent a run on the funds. "It would be hard to explain to participants why they can't access their money" if a redemption gate were imposed, said Philip Suess, a Chicago-based partner at investment consulting firm Mercer LLC. "Sponsors have to determine their ability to live with redemption gates." Among Mercer's DC clients, "it was very quiet" after the SEC issued its rules in July 2014 until the fourth quarter of 2015, he said. "We've now reached the point where sponsors are paying attention. They are realizing that it takes time to implement changes." Among Mercer's DC clients that have made a decision, "a lot" have moved to government money market funds, which won't be affected by the new rules, he said. "We haven't seen a lot of interest in ultrashort bond funds or stable value," said Mr. Suess, adding that a client staying with a prime money market account "is the exception." It continues, "The fees and gates are too complicated for participants," said Martha Tejera, president of Tejera & Associates, a DC investment and plan-design consulting firm in Seattle. "Prime money market funds will disappear from 401(k) plans." But the piece adds, "In a survey of 70 DC sponsors offering some form of money market fund, Callan Associates Inc. found that 58.7% of plan executives were still unsure about what they would do. The survey said 17.4% of plan executives won't change anything because they don't offer a prime money market fund, while 13% said the SEC rules affecting prime money market funds are acceptable. Also, 6.5% said they would switch to a stable value option from a prime money market fund, and 4.3% would move to a government money market fund from the prime money market fund. (These responses are part of a broader survey that Callan will publish later this month.)" In other DC plan news, Pimco released a report, "Money Market Reform and DC Plans: Time is Almost Up." It says, "Sponsors of defined contribution (DC) plans have less than a year to prepare for sweeping reforms that will make money market funds (MMFs) a far less attractive option for plan participants. Plan sponsors using these popular options should assess how the SEC reforms, along with evolving technical factors and macroeconomic forces, are likely to affect different types of MMFs."

Yesterday's Wall Street Journal wrote, "Pensions, Mutual Funds Turn Back to Cash." It states, "U.S. public pension plans and mutual funds are sheltering more of their holdings in cash than they have in years, a sign of growing stress in financial markets. The ultra-defensive stance reflects investors' skittishness about global economic growth and uncertain prospects for further gains in assets. Pension funds have the added need to cut more checks as Americans retire in greater numbers, while mutual funds want cash to cover the risk that investors spooked by volatile markets will pull out more of their money. Large public retirement systems and open-end U.S. mutual funds have yanked nearly $200 billion from the market since mid-2014, according to a Wall Street Journal analysis of the most recent data available from Wilshire Trust Universe Comparison Service, Morningstar Inc. and the federal government. That leaves pension funds with the highest cash levels as a percentage of assets since 2004. For mutual funds, the percentage of assets held in cash was the highest for the end of any quarter since at least 2007.... Large public pension funds' average cash allocation jumped to 5.4% through Sept. 30, compared with 3.4% in mid-2014, according to Wilshire. The average cash level in mutual funds tracked by Morningstar, a fund-research firm, has risen for seven consecutive quarters to an estimated 8.75% at the end of September. One pension fund, the South Dakota Retirement System, increased its cash holdings to 20.8% of assets through June 30 of last year, from 12.8% in 2014 and 3.7% in 2013." The WSJ piece adds, "Some fund managers also attribute rising cash levels to fears that market volatility -- and changes to the market itself -- will make it more difficult to sell bonds to meet redemption requests. Banks have retrenched from the bond markets in the aftermath of the financial crisis, leaving fewer buyers when mutual funds need to turn their holdings into cash. A year ago, Western Asset Management Co. began mandating that its bond funds hold higher minimum levels of assets such as cash or short-term bonds that are easy to sell in case it needs to meet heavy redemptions."

Fitch Ratings released a 1-page summary of Prime to Government money fund changes entitled, "Prime Money Funds' Transition to Government Almost Complete." It reads, "Money fund managers' transition of prime funds into government funds is almost complete. In response to the SEC's money fund reforms, over the past few months, fund managers designated more than 30 funds that will convert from prime to government assets, with an estimated $259 billion in assets under management. Prior to the conversion announcements, these funds held $66 billion in government securities; however, since then, fund managers have transitioned $152 billion of their assets from prime to government, with approximately $41 billion remaining to shift. The movement of such large positions is set to impact the short-term markets, benefiting government securities while reducing demand for bank and corporate debt." It continues, "Fourteen funds have now completely transitioned from prime to government, including a few of the largest funds that intended to convert to government, such as the $116 billion Fidelity Cash Reserves and the $25 billion Franklin Templeton Money Market Portfolio. Conversion announcements have tapered off recently for the large money fund managers, but small managers continue exiting the prime market. This reflects the higher cost of reform implementation for prime funds compared to government funds, which is particularly onerous for fund managers that lack scale to absorb the outlays. The impact of fund transitions on the market is evident in funds' shifting demand for prime and government securities. Government assets in taxable money funds increased from $1.18 trillion in February 2015, before the transitions began, to $1.47 trillion in November. The proportion of government assets in taxable funds rose 8.4% over this period, from 47.8% to 56.2%. At quarter ends, government securities have represented an even larger portion of fund assets, at 58.0% as of September, as dealers contract borrowings and funds shift to the Fed's reverse repo facility instead. This trend may accelerate, particularly as the Fed increased the capacity of the facility from $300 billion to approximately $2 trillion to accommodate monetary policy goals." The report includes a chart that shows how far along the formerly prime and remaining about-to-become government funds are in the conversion process.

ICI's latest "Money Market Fund Assets" report shows that money fund assets dropped sharply in the first week of the year after jumping in the last week of 2015. The ICI data also shows a gigantic drop in Institutional assets and jump in Retail assets, which we assume is a major reclassification. (ICI says the switch includes the $​65.5 billion Fidelity Institutional Money Market Portfolio, which stopped accepting Institutional money this month.) The release says, "Total money market fund assets decreased by $24.39 billion to $2.73 trillion for the week ended Wednesday, January 6, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $3.00 billion and prime funds decreased by $32.30 billion. Tax-exempt money market funds increased by $4.91 billion." It continues, "Assets of retail money market funds increased by $77.43 billion to $1.02 trillion. Among retail funds, government money market fund assets increased by $9.17 billion to $355.21 billion, prime money market fund assets increased by $62.46 billion to $471.09 billion, and tax-exempt fund assets increased by $5.80 billion to $190.22 billion. Assets of institutional money market funds decreased by $101.82 billion to $1.72 trillion. Among institutional funds, government money market fund assets decreased by $6.17 billion to $868.60 billion, prime money market fund assets decreased by $94.76 billion to $780.40 billion, and tax-exempt fund assets decreased by $890 million to $69.09 billion." ICI's Footnote adds, "In anticipation of the Securities and Exchange Commission's (SEC) new money market fund regulations, many advisers are changing their prime money market funds into government money market funds. As a result, there have been, and will continue to be, large shifts in assets from prime funds to government funds before the October 2016 deadline." In other news, a press release entitled "Long-Tenured Vanguard Municipal Bond Fund Manager To Retire In February 2016," tells us, "Vanguard today announced that Pamela Wisehaupt Tynan, a long-tenured municipal bond fund manager in Vanguard's Fixed Income Group, will retire at the end of February 2016. Ms. Tynan has managed the $17.3 billion Vanguard Tax-Exempt Money Market Fund and the $12.4 billion Vanguard Short-Term Tax-Exempt Fund since 1988 and 1996, respectively.... Upon Ms. Tynan's retirement in February, Justin Schwartz will assume portfolio management responsibility for Vanguard Tax-Exempt Money Market Fund and Vanguard Short-Term Tax-Exempt Fund.

The Federal Reserve released its Minutes of the Federal Open Market Committee, December 15-16, 2015, the meeting at which the Fed raised interest rates for the first time in 9 years. They state, "After assessing the outlook for economic activity, the labor market, and inflation and weighing the uncertainties associated with the outlook, members agreed to raise the target range for the federal funds rate to 1/4 to 1/2 percent at this meeting. A number of members commented that it was appropriate to begin policy normalization in response to the substantial progress in the labor market toward achieving the Committee's objective of maximum employment and their reasonable confidence that inflation would move to 2 percent over the medium term. Members agreed that the post-meeting statement should report that the Committee's decision reflected both the economic outlook and the time it takes for policy actions to affect future economic outcomes. If the Committee waited to begin removing accommodation until it was closer to achieving its dual-mandate objectives, it might need to tighten policy abruptly, which could risk disrupting economic activity. Members observed that after this initial increase in the federal funds rate, the stance of monetary policy would remain accommodative. However, some members said that their decision to raise the target range was a close call, particularly given the uncertainty about inflation dynamics, and emphasized the need to monitor the progress of inflation closely." It continues, "Members also discussed their expectations for the size and timing of adjustments in the target range for the federal funds rate going forward. Based on their current forecasts for economic activity, the labor market, and inflation, as well as their expectation that the neutral short-term real interest rate will rise slowly over the next few years, members expected economic conditions would evolve in a manner that would warrant only gradual increases in the federal funds rate. However, they also recognized that the appropriate path for the federal funds rate would depend on the economic outlook as informed by incoming data." It adds, "Effective December 17, 2015, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1/4 to 1/2 percent, including: (1) overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 0.25 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day; and (2) term reverse repurchase operations to the extent approved in the resolution on term RRP operations approved by the Committee at its March 17-18, 2015, meeting."

The Federal Reserve Bank of New York announced some changes to its "Reverse Repo Counterparties List" to reflect recent money market fund conversions by BlackRock and others. (See the end of our Jan. 6 News, "Invesco's Katz Retiring, Wong Moves Up; Rate Path; BlackRock Shifts.") The counterparty changes include: "BlackRock Advisors, LLC, changed Master Institutional Portfolio to Master Government Institutional Portfolio and Master Premier Institutional Portfolio to Master Premier Government Institutional Portfolio, effective January 4, 2016." Also, there were some Fidelity name changes: "Fidelity Newbury Street Trust: Treasury Fund changed its name to Fidelity Newbury Street Trust: Fidelity Treasury Money Market Fund, effective December 30, 2015." Here is a link to the full Reverse Repo Counterparties List." In related news, the NY Fed awarded $169.6 billion in reverse repo on Tuesday, January 5. In the story, "US Fed Awards $169.62 Bln Reverse Repos," Reuters writes, "The Federal Reserve on Tuesday awarded $169.62 billion of one-day fixed-rate reverse repurchase agreements to 55 bidders at an interest rate of 0.25 percent, the New York Fed said on its website. The reverse repurchase agreement program is seen as a critical policy tool for the Fed to drain money from the financial system in an effort to achieve its interest rate objectives. On Monday, the Fed allotted $199.67 billion in one-day reverse repos to 66 bidders, including Wall Street dealers, money market mutual funds and mortgage finance agencies, also at an interest rate of 0.25 percent." This is down from a record high of $474.6 billion on December 31. Of the RRP spike, website Seeking Alpha writes, "Money Market Distortions At Year-End." It says, "On December 31, overnight reverse repo transactions with the Fed spiked to a record $475 billion.... Originally capped at a maximum of $300 billion, the RR facility has been expanded to a maximum of $2 trillion after the rate hike of December 16, which seemingly underscores its primary function as a tool to remove excess liquidity.... Something slightly curious happened at the end of the fourth quarter though. Apart from overnight reverse repo transactions reaching a record high, the federal funds rate apparently nosedived from 35 basis points to just 12 basis points on December 31, way below the Fed's target range, while the general collateral repo rate concurrently spiked to a multi-year high."

JP Morgan Securities released a special commentary entitled, "The New Year Means New Questions for US Money Market Rates." It says, "The FOMC's decision to hike rates on December 16 launched the first stage of an interest rate discovery process for the US money markets. With the hike taking place so late in the calendar year, many money market participants had already begun to commit funds over year-end, leaving behind relatively thin markets where yields achieved may not be reflective of longer-term behavior. Stage two of the rate discovery process begins today as funds parked over year-end begin to roll-off, and will need to be redeployed. Over the next few weeks, we expect to get a more robust understanding about the levels and relationships between the various money market rates. In general, we think the relative relationships between the rates on various instruments and IOER - ON RRP band will tend to hold, although levels may drift a few basis points from initial, post-liftoff levels. These are the factors we are monitoring most closely in the coming days: Where will the Fed funds effective rate set? FFE sets in arrears, meaning the rate posted today reflects the previous trading day's activity. Therefore, the 20bp posted today reflects trading on the last day of the year. We suspect FFE set at this low level because GSEs (and perhaps a few banks) were unable to access higher yielding options with their cash. With a practically unlimited supply of ON RRP available at 25bp and IOER at 50bp, the 20bp print on FFE suggests that cash was structurally unable to tap other options.... We suspect that this mismatch between buyers and sellers in the Funds market was a year-end phenomenon, and the market will return to something near an IOER less 12-14 range in the coming days.... What will happen with Fed RRP demand? The Fed's ON RRP had a record take-up of $475bn on 12/31, a testament to both the high levels of cash in the financial system and the lack of higher yielding alternatives available to non-banks. Aggregate dealer balance sheet available to the overnight market fell going into year-end, and yields on bills maturing in 13-weeks or less remained persistently below 20bp.... We expect use of the Fed RRP facility to remain higher than pre-liftoff levels, particularly if yields on short dated bills and agency discount notes remain low. If this proves to be the case, the ON RRP will likely attract persistently high interest from government money market funds. Today, demand for On RRP fell to just under $200bn, confirming the year-end surge was calendar related. What will happen with Treasury bill yields? With the Fed providing higher yielding alternatives for MMF and foreign central banks, demand for bills should ease somewhat. But with net bill supply set to drop about $36bn the first two weeks of the year, higher yields may be slow to develop. Looking ahead for the next few weeks, we expect yields on 13-week and shorter bills to remain sub-IOER, while yields on longer bills will continue take their cue from OIS markets."

A press release sent out last week entitled, "SEC Issues Annual Staff Reports on Credit Rating Agencies," says, "The Securities and Exchange Commission today issued its two annual staff reports on credit rating agencies registered as nationally recognized statistical rating organizations (NRSROs). The reports show that NRSROs have made operational improvements and have enhanced process accountability, controls and governance, and that smaller NRSROs have made competitive inroads in certain rating categories ." "These reports demonstrate the SEC's vigilant oversight of the credit rating industry," said Chair Mary Jo White. "The staff's continued efforts are yielding valuable results as we are seeing improvements in the overall compliance cultures at many of the credit rating agencies." The report that the release cites, "Annual Report on Nationally Recognized Statistical Rating Organizations," includes a section on money market reforms as it relates to credit ratings. Page 5 of the 35-page report says, "Final Rule: Removal of Certain References to Credit Ratings and Amendment to the Issuer Diversification Requirement in the Money Market Fund Rule, Release No. IC-31828 (Sept. 16, 2015), 80 FR 58124 (Sept. 25, 2015). The Commission adopted amendments to address provisions that reference credit ratings in Rule 2a-7 and Form N-MFP, under the Investment Company Act of 1940. Specifically, the amendments to Rule 2a-7 replace references to credit ratings in the rule with alternative standards designed to maintain a similar level of credit quality as under the rule prior to the amendments. The amendments to Form N-MFP require that a fund disclose any credit rating that the fund's board considered in determining the credit quality of a portfolio security. The amendments were adopted pursuant to Section 939A of the Dodd-Frank Act, and finalize the re-proposed rule described below." It continues, "Re-Proposed Rule: Removal of Certain References to Credit Ratings and Amendment to the Issuer Diversification Requirement in the Money Market Fund Rule, Release No. IC-31184 (July 23, 2014), 79 FR 47985 (Aug. 14, 2014). The Commission re-proposed amendments to address provisions that reference credit ratings in Rule 2a-7 and Form N-MFP, under the Investment Company Act of 1940. Specifically, the proposed amendments to Rule 2a-7 would replace references to credit ratings in the rule with alternative standards designed to maintain a similar level of credit quality as under the rule prior to the amendments. The proposed amendments to Form N-MFP would require that a fund disclose any credit rating that the fund's board considered in determining the credit quality of a portfolio security. The amendments were proposed pursuant to Section 939A of the Dodd-Frank Act." (For more, see our Sept. 18, 2015 News, "SEC Removes References to Credit Ratings in Final Money Fund Rules," and our July 24, 2014 News, "SEC Adopts MMF Reforms; Chair White on Rule's Fundamental Changes.")