Daily Links Archives: December, 2016

Bloomberg's "Money Market Reform Creates Arbitrage for Short-Term Investors" tells us, "Bond managers can earn more than half a percentage point of extra interest annualized by buying securities that money market funds are shunning now and by using derivatives to trim the risk, said Dan Dektar, chief investment officer at Amundi Smith Breeden LLC in Durham, North Carolina.... Rules that came into effect in October have dimmed demand for certain kinds of debt -- in particular, short-term debt known as commercial paper, a near $1 trillion market of securities issued by companies including banks. The regulations are designed to make the funds safer after a major manager went under during the financial crisis." The piece adds, "There are risks to such a trade, as it means exposure to the underlying credit, according to Wells Fargo Securities LLC strategist Boris Rjavinski.... In October, rules came into effect that require riskier money market funds to pass their paper losses on securities onto investors. Money market funds have historically allowed investors to buy and sell their shares at $1 apiece, which makes the funds seem safe and stable to customers. Under the new rule, if the funds are buying commercial paper and other non-government securities, they must record paper gains and losses daily on the securities they hold, and pass those gains or losses onto investors. That creates an incentive for investors in money market funds to gravitate to funds that buy only government debt."

The Federal Reserve Board published a paper entitled, "Monetary Policy Implementation and Private Repo Displacement: Evidence from the Overnight Reverse Repurchase Facility." Written by Alyssa Anderson and John Kandrac, its Abstract explains, "In recent years, the scale and scope of major central banks' intervention in financial markets has expanded in unprecedented ways. In this paper, we demonstrate how monetary policy implementation that relies on such intervention in financial markets can displace private transactions. Specifically, we examine the experience with the Federal Reserve's newest policy tool, known as the overnight reverse repurchase (ONRRP) facility, to understand its effects on the repo market. Using exogenous variation in the parameters of the ONRRP facility, we show that participation in the ONRRP comes from substitution out of private repo. However, we also demonstrate that cash lenders, when investing in the ONRRP, do not cease trading with any of their dealer counterparties, highlighting the importance of lending relationships in the repo market. Lastly, using a confidential data set of repo transactions, we find that the presence of the Fed as a borrower in the repo market increases the bargaining power of cash lenders, who are able to command higher rates in their remaining private repo transactions." The introduction says, "The rise of shadow banking over the last couple of decades has significantly changed the nature of financial intermediation in United States. In particular, entities beyond banks, including money market funds (MMFs) and securities dealers have become increasingly important financial intermediaries. Additionally, a rise in the importance of many types of collateral-backed funding has accompanied the expansion of the shadow banking sector.... For instance, the repo market is a primary source of short-term funding for dealers, and a large component of MMFs' investment portfolios. However, the expansion of nonbank financial intermediation evidently came with attendant risks to financial stability, which were revealed throughout the most recent financial crisis. For example, a run in the repo market contributed importantly to the severity of the crisis ... and, as the turmoil spread, eventually resulted in a temporary federal guarantee of the systemically important MMF industry."

Fidelity Investments released its latest "Money Markets" update, entitled, "Market Correctly Anticipated Fed Rate Move last week. Written by Michael Morin and Kerry Pope, it tells us, "At the end of November, the market's expectations were finally starting to reflect those of the Fed's forward guidance. Fed funds futures were pricing in a 100% probability of a 25 basis point (bp) December hike.... Traders were starting to price in two rate hikes in 2017, beginning as early as June. Fed minutes from an early November meeting were relatively dovish compared to statements from Fed governors in the post-election environment. At its December meeting, the FOMC met trader expectations and increased the target range for the fed funds rate by 25 basis points. Another key topic under discussion post-election is the new administration's ability to replace up to five members of the FOMC (out of 12 in total, though only 10 are serving now with two board seats empty). It's unclear which route the administration will choose to go, but the possibility of big changes with an impact on policy is real." The piece also says, "Money market funds were well positioned for a potential December rate hike," explaining, "Prime money market funds (MMFs) have maintained fairly short weighted-average maturities (WAMs) to help minimize variable-net-asset-value (VNAV) volatility and to address potential year-end outflows. The average institutional prime MMF WAM ended the month at 19 days, while retail prime MMFs remained at 29 days. With WAMs so short, prime MMFs have experienced little VNAV volatility and are positioned to reset quickly to benefit from a December rate hike. (Prime MMF VNAVs are currently averaging a price above par at $1.0002.) Reform-related flows have largely stabilized with prime MMF assets under management up about $3 billion in November to $374 billion.... With spreads widening between prime and government MMFs, assets in prime MMFs could increase in the year ahead. Prior to transitioning back into prime MMFs, we anticipate that institutional investors will seek to segment cash holdings, review VNAV operational and accounting procedures, and socialize VNAV tax implications. Additionally, institutional investors may review the size of their targeted prime MMF balances to ensure compliance with established concentration limits, as nearly all prime MMFs are considerably smaller post reform. As market rates become more attractive than bank administered rates, money market industry assets could break out of the $2.6 to $2.7 trillion range. Government MMFs have absorbed the influx of assets in an orderly manner, helped by increases in Treasury bill and tri-party repurchase agreements. However, the Fed's Reverse Repurchase Agreement (RRP) facility may be heavily utilized around year-end as market sources of supply become constrained.... As a result, several government MMFs may max out their $30 billion counterparty limit, which would force them to consider lower-yielding alternatives."

U.S. Bancorp Asset Management's First American Funds writes "The Dynamics of Quarter-End Investing for Money Market Funds," written by Director of Money Market Fund Management Jeffrey Plotnik, explains, "If you are a frequent investor in money market funds, you may have noticed that making large deposits over quarter-end periods can sometimes be a challenge. That challenge is a result of decreased supply from broker/dealers and issuers of overnight investment products, combined with increased demand from money market fund managers and short-term investors for those same investments. Those dynamics are the result of an increasingly stringent regulatory environment for many of the industry's issuers. Quarter ends are a key financial reporting date for banks, broker/dealers and issuers of overnight investment products. Reported financial statements represent an overview of a company's financial health at quarter end. Firms manage their balance sheets to enhance certain capital/leverage ratios and other key financial metrics that the regulators and the general public analyze to determine their financial strength. Ultimately, the exercise of quarter-end balance sheet management will limit the short-term investment options that money market fund managers utilize on a day-to-day basis. The quarter ends that are significant for money market fund investing are the last business days of March, June, September and December, with June and December being the most challenging." The piece adds, "Since December 17, 2015, daily supply challenges for money fund managers have been largely muted, due to a significant increase in the Fed's daily RRP operations. Working in tandem with an increase in the Interest Rate on Excess Reserves and the Fed Funds Rate, the Fed significantly increased the amount of overnight repo available to eligible counterparties through its RRP to equal the value of the Treasuries held in the System Open Market Account (SOMA). It is estimated this will equate to roughly $2 trillion of daily repo availability through the RRP. This removes much of the pressure of reinvesting maturities on quarter end, thereby leaving large unknown or late day cash flows as the fund manager's main concern."

Money fund assets plunged in the latest week, after dipping last week and rising for the 7 weeks prior. The latest "Money Market Fund Assets" report says, "Total money market fund assets decreased by $20.75 billion to $2.71 trillion for the week ended Wednesday, December 21, the Investment Company Institute reported today. Among taxable money market funds, government funds decreased by $21.12 billion and prime funds decreased by $210 million. Tax-exempt money market funds increased by $580 million." It continues, "Assets of retail money market funds increased by $2.83 billion to $982.39 billion. Among retail funds, government money market fund assets increased by $3.25 billion to $604.03 billion, prime money market fund assets decreased by $850 million to $251.74 billion, and tax-exempt fund assets increased by $440 million to $126.61 billion.... Assets of institutional money market funds decreased by $23.58 billion to $1.73 trillion. Among institutional funds, government money market fund assets decreased by $24.37 billion to $1.60 trillion, prime money market fund assets increased by $640 million to $123.13 billion, and tax-exempt fund assets increased by $150 million to $4.73 billion." Total money fund assets are down year-to-date by $47.0 billion, or 1.7%. Yields on money market funds rose in the latest week, according to Crane Data's Money Fund Intelligence Daily. Our Crane 100 Money Fund Index rose by 9 basis points to 0.42%, and our broader Crane Money Fund Average rose by 6 basis points to 0.24% (7-day net simple yields). Prime Institutional MMF yields rose by 10 bps to 0.46%, while Govt Inst MMF yields rose by 8 bps to 0.26% and Treas Inst MMF yields rose by 6 bps to 0.22%. Thus, spreads between Prime Inst money funds and Treasury Inst funds have grown to 24 basis points and spreads between Prime and Govt Inst MMFs have grown to 20 bps.

A press release entitled, "Moody's updates its Money Market Funds Methodology" explains, "Moody's Investors Service has today published an updated Money Market Funds methodology, which replaces the methodology "Money Market Funds" published in December 2015. This minor update provides additional clarification on the mapping between short term obligations and the long-term reference points that we use as inputs into the Credit Matrix and NAV stress models. In particular, it clarifies how we map non-traditional repurchase instruments and, in the absence of corresponding long-term ratings, commercial paper (CP) short-term ratings. It also explains how we consider CP that does not rank pari passu with long-term senior unsecured debt." The release adds, "MMF ratings are not credit rating and are considered Other Permissible Services (OPS). This press release is not intended to provide a summary of the methodology. For a full explanation of the methodology, please consult the updated report, now available on www.moodys.com and accessible at: http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1051766." Moody's revised "Methodology" document explains, "This methodology explains Moody's approach to rating money market funds (MMF). Moody's money market fund ratings are not credit ratings1; they are opinions of the investment quality of shares in mutual funds and similar investment vehicles which principally invest in short-term fixed income obligations. MMF ratings are expressed through a specific set of rating symbols and definitions to recognize their unique risks, allow for differentiation among funds, and distinguish our money market fund ratings from Moody's credit ratings."

This weekend's Wall Street Journal wrote, "U.S. Money Fund Reforms Come to Europe -- Will Volatility Follow?" The article said, "The European Union is set to impose restrictions on money funds, in a move that follows increased U.S. regulation that led to massive outflows from some funds there. Last week, the Council of the EU, a body representing the bloc’s governments, approved rules on locally domiciled money-market funds that will impose stricter liquidity requirements and limit redemptions, among other measures. Investors expect the new regulation to take effect in 2018 or 2019. The U.S. has already tightened its regulation of money funds, which invest in short-dated debt and are central to how banks, leveraged investors and companies both raise money and store their own cash…. Market participants say it's hard to predict what effects the new regulations will have on European money-market funds, which local banks use to finance 40% of their short-term financing needs. However, they expect less turmoil than after the U.S. changes." The piece quotes ` Fitch Ratings' <i:http://www.fitchratings.com>`_ Charlotte Quiniou, “There is a lot of uncertainty about how investors will react going forward." It adds, "The money-market fund industry manages roughly $2.7 trillion in the U.S. and E1.1 trillion ($1.15 trillion) in the Eurozone, according to the Investment Company Institute and the European Central Bank." (For more, see Crane Data's Nov. 17 News, "Europe Agrees to Money Fund Reforms: VNAVs, CNAVs and New LVNAVs," our June 16 News, "European Money Fund Reform Deal Poised to Pass; CNAVs to Be LVNAVs," our April 16 News, "European Compromise Moves MMF Reforms Closer; Sterling MFs Jump," and our March 2 News, "IMMFA on European Reforms; MFI Intl Review; European MF Symposium.")

ICI writes "The Taper Tantrum - Take II" in a new "Viewpoint," which discusses "What happens to bond funds when rates rise?" The piece says, "Long-term interest rates in the United States have been on the rise since summer 2016 -- slowly creeping up from July through October, and then jumping after the presidential election. Thus far, the response from bond mutual fund investors has been subdued. Nevertheless, various commentators -- from the vice chairman of the Federal Reserve Board to the multinational Financial Stability Board -- have expressed concerns that bond fund investors may rush to redeem shares to avoid portfolio losses stemming from unexpected increases in interest rates. In a new research report -- "What Happens When Rates Rise? A Forecast of Bond Mutual Fund Flows Under a 2013 Taper Tantrum Interest Rate Scenario" -- I weigh those concerns by applying the experience of the 2013 "Taper Tantrum" to examine potential outflows from such funds and the outflows' impact on the broader bond markets in such an interest rate scenario. The bottom line? Even a repeat of 2013's "Taper Tantrum" -- one of the sharpest increases in long-term interest rates in recent US monetary history -- wouldn't be expected to trigger destabilizing outflows from bond mutual funds or force "fire sales" of bonds by those funds. In fact, bond mutual funds would be expected to be net buyers of bonds in some categories." The article adds, "As a thought experiment, we forecast how bond mutual fund investors might react to a sharp, unexpected change in monetary policy.... Views are mixed, though, on how quickly and by how much the Fed may ramp up the federal funds rate going forward. Most observers expect the Fed to increase short-term interest rates slowly yet steadily over many months, to minimize the likelihood of harmful outcomes in financial markets and the real economy. But what if the Fed instead tightened monetary policy sharply and unexpectedly? Would bond fund investors react more strongly than in the past several months?"

Fund columnist Allan Sloan writes on the benefits of rising rates and Tax Exempt money funds in The Washington Post in piece entitled, "Here's one way the Fed's rate increase gives savers a boost." He says, "Don't look now, but the Federal Reserve has actually done something that will benefit the savers among us. To wit, money market mutual fund yields are going to rise a bit, thanks to the rate increase the Fed announced Wednesday. And here's a thought that might help make a small break for savers a bit bigger: If you've got a serious amount invested in regular money market funds -- I'll leave the definition of "serious" to you, because everyone's situation is different -- you might want to look at municipal money market funds, whose dividends are mostly or entirely tax-free." The article continues, "Why mention muni money funds? Because while both regular and muni money funds will soon benefit from the Fed rate increase that everyone knows about, muni fund yields have been quietly benefitting from something far less well known: Securities and Exchange Commission regulations that went into effect in October. Those regulations have driven many big institutional investors out of muni money funds, and have also driven out retail investors whose brokerage firms changed their “sweep accounts” to government funds from muni funds." The Post adds, "Assets in institutional muni funds have fallen more than 90 percent this year, to $4.6 billion as of Nov. 30 from $52 billion at year-end 2015, according to the Money Fund Intelligence newsletter. Peter Crane, who publishes the newsletter, said new rules require institutional muni funds to price shares to four digits rather than at the customary $1 a share, and institutions don't want to have to deal with that. Crane says that total muni money fund assets have fallen almost 50 percent this year -- to $130 billion as of Nov. 30 from $252 billion."

Money fund assets declined slightly after rising for 7 weeks in a row. ICI's new "Money Market Fund Assets" says, "Total money market fund assets decreased by $3.88 billion to $2.73 trillion for the week ended Wednesday, December 14, the Investment Company Institute reported today. Among taxable money market funds, government funds2 decreased by $2.42 billion and prime funds decreased by $1.46 billion. Tax-exempt money market funds were unchanged." It continues, "Assets of retail money market funds increased by $3.08 billion to $979.56 billion. Among retail funds, government money market fund assets increased by $2.37 billion to $600.78 billion, prime money market fund assets increased by $720 million to $252.59 billion, and tax-exempt fund assets were unchanged at $126.18 billion.... Assets of institutional money market funds decreased by $6.96 billion to $1.75 trillion. Among institutional funds, government money market fund assets decreased by $4.78 billion to $1.63 trillion, prime money market fund assets decreased by $2.17 billion to $122.49 billion, and tax-exempt fund assets were unchanged at $4.58 billion." Total money fund assets are down year-to-date by just $26.0 billion, or 1.0%.

The Wall Street Journal writes, "When the Fed Raises Rates, These Traders Make It Happen." The article explains, "Officials on the trading desk at the Federal Reserve Bank of New York, which implements changes in rate policy, have spent more than three years tinkering with their tool kit for lifting borrowing costs. Last December, when they raised the policy rate for the first time since 2006, their tools worked smoothly." It adds, "To raise rates, traders in the New York Fed markets division perform a series of maneuvers designed to lift the policy rate into the target range.... When the implementation day arrives, the Fed will pay higher rates on the money banks park in their accounts at the central bank, called reserves. Currently, the Fed pays 0.5% on reserves. After the next increase, it is likely to pay 0.75%. That afternoon, the Fed will lift the rate it pays on trades called reverse repurchase agreements, or reverse repos. In these, the central bank borrows from money-market funds and others in exchange for Treasurys. A countdown clock appears when FedTrade opens for repos at 12:45 p.m. EST, which changes to yellow and then to red as the operation completes, generally by 1:15 p.m. Currently, the Fed pays 0.25% on reverse repos. After the next increase, it is likely to pay 0.5%. As a result of these moves, the fed-funds rate is supposed to float between the 0.5% repo rate and the 0.75% rate on bank reserves."

Wells Fargo Money Market Funds' latest Portfolio Manager "Overview, strategy, and outlook," comments, "With money market reform-related conversions some seven to eight weeks in our rear-view mirror, the short-term markets seem to be settling in and adjusting to their "new normal." Following the great rotation out of prime funds and into government funds, prime funds continued to leak assets through most of November, though the pace ... significantly decreased, and even reversed, in the waning days of the month." It adds, "As asset levels have stabilized, managers have been able to extend average maturities of the funds from their historic lows and, by extension, to increase yields on their funds. As anticipated, the overall levels on prime instruments have not decreased in the wake of reform; while there does not appear to be an overabundance of supply, neither is there an overabundance of demand. But at the same time, the boost in funds' yields has been hastened by an overall increase in LIBOR (London Interbank Offered Rate) in the face of a prospective rate hike by the U.S. Federal Reserve (Fed). With industry net asset values (NAVs) demonstrating relative stability, investor behavior in the funds seems to be business as usual: while the funds are not currently attracting new assets in any meaningful size, daily transaction data suggest that those who stayed in the funds continue to use them as a cash management vehicle, and perhaps enjoy a higher yield than that of alternative funds."

BlackRock's Cash Academy added a piece entitled, "Managing Cash When Rates Rise." The new video, featuring Director and Portfolio Manager Eric Hiatt says, "Today I'll be discussing how cash investors can prepare and respond to a rising interest rate environment. First, let's remember that interest rates and the market prices of interest-bearing securities generally move in opposite directions. So as interest rates rise, market prices on securities will likely decrease. Fortunately, there are a number of strategies that cash investors can implement to reduce market risk during a period of rising rates. These include: actively managing duration and credit exposure; seeking securities with less exposure to interest rate risk; and deploying a segmentation strategy across cash investments.... Duration is a measure of how sensitive a bond or portfolio of bonds are to changes in interest rates. The longer the duration, the greater the sensitivity. Although cash portfolios are by their very nature usually constructed with a shorter average duration, during a rising rate environment, cash investors may want to consider shortening their portfolio duration even further to minimize the price impact.... Investors can also prepare their cash portfolios for rising rates by adding exposure to sectors or credits that are less sensitive to rising interest rates. These may include: Floating rate notes, or Securities with a higher income stream, such as A2/P2 Commercial Paper or corporate bonds with less than 3 years to maturity." The piece adds, "A2/P2 commercial paper, for instance, may provide a meaningful increase in income for only a marginal increase in potential spread volatility.... Many investors in recent years have embraced the idea of segmenting their cash investments based on cash flow and liquidity needs. Similar to the concept of "immunization" in a bond portfolio, which aims to match durations of assets and liabilities, cash segmentation can help minimize reinvestment risk and reduce the cost of generating liquidity -- in all rate environments. We believe investors can apply some or all of these concepts to build a more efficient cash portfolio and manage their cash through any environment, even through rising rates."

ICI's latest "Focus on Funds" video features a segment entitled, "SEC Changes Alter Picture for US Money Market Funds. The description says, "In the lead-up to implementation of new SEC rules governing money market funds, assets shifted from prime to government funds. Sean Collins, ICI senior director for industry research and financial analysis, tells viewers why in the December 9, 2016, edition of Focus on Funds." ICI's Director of Media Relations Stephanie Ortbals-Tibbs says, "On the heels of significant reform, how does the US money market fund industry look these days? I got some fresh data analysis from ICI's senior director for industry financial analysis, Sean Collins." Collins explains, "The most important thing we saw was that about $1 trillion flowed out of prime money market funds over the period from about November 2015 all the way up to the implementation date of October 14, 2016, and our sense is that probably all of that essentially went back into government money market funds. That's more or less what we had expected to happen. There's an almost one-for-one offset in flows from prime into government money market funds -- almost dollar for dollar. Government money market fund assets have grown very substantially. Prime money market funds have fallen very substantially. The same is true for tax-exempt money market funds -- they've seen their assets fall very substantially." He adds, "That's about the state of affairs at the moment -- it's kind of wait and see. There's not too much money moving either direction at the moment. In general, money market funds in total have been pretty stable for the last four years, at about $2.7 trillion, including through this entire transition period. We think that's representative of the fact that investors continue to like these products, demand them, and it's just the change in the slice of the pie from one type of instrument -- prime money market funds -- into government money market funds." Ortbals-Tibbs comments, "So, of course, we don't prognosticate. What we do know is that investors will probably continue to assess where they are in a particular category, but this is one of these categories where eventually we could continue to see money move around again as people continue to settle into this new regime." Collins responds, "Yeah, I think that could certainly happen. `It's possible that as people get more comfortable with floating NAVs [net asset values] for prime institutional money market funds, get comfortable with the possibility of fees and gates, you might see some money move back into prime money market funds from government. But I think that at the moment it's kind of wait and see -- people probably want to let the dust settle and get some experience, and then go from there."

Fitch Ratings published the brief, "Finalised EU MMF Reform Starts Implementation Clock - Liquidity Fees and Redemption Gates Create Uncertainty," which is subtitled, "Finalized EU MMF Reform Starts Implementation Clock Liquidity Fees and Redemption Gates Create Uncertainty." It summarizes, "An agreement has finally been reached on European money fund regulation between the EU, Parliament and Council after three years of debate.... Low-volatility net asset value (LVNAV) funds are a workable alternative to existing constant net asset value (CNAV) funds, notably as a previously proposed sunset clause has been removed and liquidity requirements have been adjusted. It will result in LVNAV co-existing with a new form of public debt CNAV funds, short-term variable NAV (VNAV) funds and standard VNAV money funds." The piece adds, "Public debt CNAV and LVNAV funds will be subject to liquidity fees and redemption gates, similar to US Prime MMFs, which suffered large outflows in the run-up to US reform implementation. It remains to be seen how European investors will react to such redemption limiting provisions. Some may turn to full VNAV funds but we expect the impact of the European reform to be smaller than in the US as investors accustomed to CNAV funds, which account for half of EU MMF assets, may be comfortable with LVNAV funds." Finally, they adds, "The regulation should come into effect by the end of 2018, given an 18-month implementation period after its enforcement, which is likely to be in 1H17. Fitch Ratings expects this period to be characterized by new fund launches and the adaptation of existing fund ranges into the new fund categories."

An update entitled, "Fitch: US Prime Money Fund Assets Consolidate Post-Reform" tell us, "Vanguard and Charles Schwab are set to exert greater influence as prime money fund investors after significant market share gains following the introduction of money market fund reforms, says Fitch Ratings. The two fund managers are likely to have greater say on market access and issuer terms among prime money fund managers, although the balance of power in the short-term markets overall has shifted away from prime money funds. As of end-October, Vanguard and Charles Schwab controlled 31% and 16% of prime money fund assets respectively, up from 11% and 5% a year earlier according to data from Crane. More than $1 trillion left prime money market funds - mostly into government funds - in the leadup to the introduction of new SEC rules on October 14." The statement continues, "Vanguard and Schwab's funds saw substantially less outflows than peers during this period. Other top 20 managers lost an average of 86% of prime assets to outflows, conversions or sales in the year leading up to end-October while Vanguard and Schwab saw declines of only 18% and 10%, respectively. Vanguard and Schwab's relative stability is likely due to their mostly retail client base and distribution models.... The combination of the overall contraction in the prime fund market with Vanguard and Schwab retaining the majority of their assets has led to substantially greater concentration in the sector. The top four managers - Vanguard, Schwab, Fidelity and BlackRock - now control 72% of prime assets versus only 49% pre-reform for the top four. Fitch believes that there will be winners and losers as the balance of power in short-term markets moves away from prime money funds to investors such as short-term bond funds, separate accounts, and corporates. Vanguard and Schwab fared the best among managers of prime money funds, with close to 50% market share. The two market leaders will be in a stronger position to influence terms and market access for short-term debt issuers like banks, corporates, and asset-backed commercial paper conduits that remain reliant on funding from money market funds. However, the shift may reverse later on if assets come back to other prime funds and rebalance the market."

The just-released Investment Company Institute's "2016 Annual Report" just briefly mentions money market mutual funds in a couple of places. An update from Marty Burns, ICI's Chief Industry Operations Officer, about "new regulations for money market funds, which came into effect in October," says, "This has been a huge, multiyear effort involving hundreds of people: member representatives on four working committees, staff from across the Institute in almost every discipline -- operations, research, legal, government affairs, communications -- and outside stakeholders, such as broker-dealers, service providers, and transfer agents. This reform is a fundamental change to how money markets are administered and processed. Very broad in scope, it forced changes to how shareholders can invest in money funds, the systems used to manage the business, and the interaction with business partners -- in essence, it affected every aspect of the money market industry. And our efforts have extended beyond October 14, the compliance date -- we're continuing to monitor the situation and look for areas where we can improve practices and find further efficiencies." The report also comments on, "Money Market Fund Reform Tax Issues: The Internal Revenue Service," explaining, "[The] (IRS) and the Treasury Department issued several important pieces of guidance regarding the tax implications of the SEC's money market fund rule for investors and funds. The guidance responds to several requests made by ICI. First, the IRS provided an alternative diversification requirement for variable insurance product funds that become government money market funds, alleviating concerns that such funds would not be able to satisfy existing tax requirements. Second, the IRS issued guidance addressing the tax treatment of adviser contributions made to money market funds in preparation for compliance with the new money market fund rule. Third, the IRS and Treasury finalized regulations on use of a simplified method of tax accounting, called the net asset value (NAV) method, by investors in floating NAV money market funds. The final regulations also include several other changes recommended by ICI, including extending the NAV method to investors in stable NAV funds that charge a liquidity fee and clarifying the use of the NAV method by regulated investment companies for excise tax purposes."

Though the SEC's Money Fund Reforms have been live for over a month and a half now, we continue to find money market fund filings that we missed in the flurry of changes ahead of the October 14 deadline. One we missed was the 495 million John Hancock Money Market Fund, which said in an earlier filing about its "Conversion to Government Money Market Fund," "On December 10, 2015, the Board of Trustees approved the conversion of the fund to a government money market fund as defined under Rule 2a-7 under the Investment Company Act of 1940, effective April 6, 2016 (the "Conversion Date"). In connection with this conversion, effective on the Conversion Date, the Principal Investment Strategies of the fund are amended and restated as follows: The fund operates as a "government money market fund" in accordance with Rule 2a-7 under the Investment Company Act of 1940 and is managed in the following manner: under normal market conditions, the fund invests at least 99.5% of its total assets in cash, U.S. Government securities and/or repurchase agreements that are fully collateralized by U.S. Government securities or cash....; the fund seeks to maintain a stable net asset value ("NAV") of $1.00 per share and its portfolio is valued using the amortized cost method as permitted by Rule 2a-7; the fund invests only in U.S. dollar-denominated securities; the fund buys securities that have remaining maturities of 397 days or less (as calculated pursuant to Rule 2a-7); the fund maintains a dollar-weighted average maturity of 60 days or less and a dollar-weighted average life to maturity of 120 days or less the fund must meet certain other criteria, including those relating to maturity, liquidity and credit quality as a government money market fund, the fund is not subject to liquidity fees or redemption gates, although the Board may elect to impose such fees or gates in the future."

The Wall Street Journal writes "Investors Tiptoed Back Into Prime Money-Market Funds, Then Left." It explains, "Investors put money back into prime money-market funds in the first three weeks of November, putting them on track for their first monthly inflow since February, but the final week of the month may have dashed those hopes. Investors put $353 million into prime money-market funds last month through Nov. 29, according to data provider iMoneyNet, stanching a yearlong hemorrhage. The additions held the promise of a turning point for prime funds that shed more than two-thirds of their assets over the past year, traders and analysts said, as the industry raced to adjust to new money-fund rules. The funds benefited from three consecutive inflows in the three weeks ended Nov. 22." The Journal says, "But money-fund tracker Crane Data showed a $1.4 billion decline in the final days of November, as money flowed out of institutional prime funds. The iMoneyNet data for the full period of November will not be released until next week. Prime money funds now hold about $375 billion, and the funds that survived are now offering higher yields than comparable short-term investments in funds dedicated to government debt, in a shift that analysts say may lead to further gains." Finally, it adds, "All told, investors have withdrawn $1.1 trillion from prime money funds since the last week of October 2015, according to Peter Crane, president of Crane Data. That was just before Fidelity Investments converted its $115 billion Cash Reserves fund, the world's largest money-market fund, to focusing on government debt."

Treasury Today writes "European MMF reform: change is on the horizon?" It says, "After much delay, European lawmakers have announced a breakthrough agreement regarding European money market reforms. The European Parliament have announced that there has been a breakthrough agreement between MEPs and the Slovak Presidency of the Council of the EU around the controversial topic of European money market reform. The agreement comes following lengthy and rancorous deliberation, more than three years since the European Commission published the original proposal." The article adds, "The headline news, as many expected, is that Low Volatility NAV (LVNAV) funds will be introduced in Europe. Sitting somewhere between CNAV Government funds priced to two decimal places and VNAV funds that use mark-to-market or mark-to-model pricing to four decimal places, LVNAV funds seek to provide many of the key attributes that compel corporates to use CNAV MMFs but with the extra safety sought from the EU lawmakers.... Will this have an impact on how asset managers operate these funds? According to Beccy Milchem, Head of Corporate Sales at Blackrock, it will, but not substantially." "We anticipate that we would likely run the LVNAV portfolios more conservatively than we run our Prime CNAV funds today, but we do not believe that we will need to change our investment or credit process," she tells Treasury Today. The piece adds, "It is important to note that despite this most recent announcement, the final text is yet to be completely finalised -- although what this text will contain is becoming clearer. And even once finalised change will not happen immediately. A transition period of around two years will be initiated with the regulations most likely coming into effect in late 2018 or early 2019."

A recent paper posted on the Federal Reserve Board's "FEDS Notes" research page, entitled, "Front-End Term Premiums in Federal Funds Futures Rates and Implied Probabilities of Future Rate Hikes," discusses "term premiums" and Fed funds rates. It explains, "A few recent market commentaries have proposed simple rules of thumb that describe term premiums in money market futures and forward rates in the current interest rate environment as a linear function of horizon with a slope of about minus 1 to minus 2 basis points per month. Such term premiums can have significant effect on inferences regarding the market-implied probability of future monetary policy actions at the next few FOMC meetings, but solid empirical evidence on term premiums at such horizons has been lacking. In this note, we examine empirical evidence on term premiums at the very front end, utilizing federal funds futures data as well as responses to the Desk's sell-side survey (Survey of Primary Dealers, or PD survey) and buy-side survey (Survey of Market Participants), and discuss plausible front-end term premium assumptions that one can use to extract probabilities of a rate hike at upcoming meetings from market quotes." Authors Don Kim and Hiroatsu Tanaka continue, "We find that, for horizons over the next two to three FOMC meetings, a simple assumption that term premiums are zero produces a good agreement between federal funds futures data and the Desk survey data on the distribution of the timing of the next rate hike, while an assumption of significantly negative term premiums suggested by some market commentaries produces futures-implied probabilities of near-term rate hikes that appear generally much higher compared with those from the surveys. In addition, Desk survey responses on the distribution of the federal funds rate at year-ends are also consistent with the assessment that term premiums are small in magnitude at two-to-three-meeting horizons while more sizable (negative) further out; however, even at somewhat longer horizons of about six months, estimated term premiums are generally smaller in magnitude than some of the numbers proposed in recent commentaries. Overall, it appears that term premiums are nonlinear with respect to horizons at the front end."