Daily Links Archives: April, 2016

The Financial Times published, "US money market fund reform: an explainer." It says, "What do the rules require and what are regulators trying to do? Since April 14, the websites of a number of money market funds have looked different. Requirements for increased disclosure has led to more data being published for investors. Over the next six months, funds will continue to prepare for October 14, when full implementation of the rules is required. At that point, prime funds will be required to publish [rather, transact on] net asset values based on the current value of the assets they hold. That is a big departure for an industry that historically has touted its ability to preserve the value of its investments at $1 a share, and will mean a fund's price will fluctuate along with market conditions. Also from October, if the fund's assets that can be liquidated within one week fall below 30 per cent the fund can impose a fee of up to 2 per cent on redemptions. If that falls below 10 per cent they can impose a fee of 1 per cent. The fund could also prevent redemptions completely for up to 10 days if the 30 per cent threshold is breached." The FT adds, "How much money has so far left prime funds? As a result of the reform more than $200bn has shifted from prime to government funds. The bulk of this has come through prime funds reclassifying to become government funds.... Why are prime funds reclassifying? Although there is been some suggestion that investors are unwilling to adopt floating NAVs, fund providers say the vast majority of money has shifted for fear of the ability to take money out of prime funds being suspended. This is of particular concern for large institutions, such as broker dealers, that manage retail money. At the end of each business day, money left over from the activities of each individual account is "swept" into money market funds to pick up additional yield. "Fidelity alone is sitting on hundreds of billions of dollars," says Peter Crane at Crane Data, a money mark[et] fund data company. "They can't afford for that to lock up. It would freeze up the economy." It continues, "Will there be further impact and what is the significance of the reform? As the October deadline approaches, focus will sharpen on institutional investors who will have to weigh up whether the extra yield available by sticking in prime funds offsets the drag of the new rules. Prime funds are braced for further outflows and are building up large liquidity buffers to avoid falling beneath the 30 per cent threshold. Some fund managers also say that funds will begin to limit investment in longer dated assets that extend beyond the October 14 deadline.... It could begin to impact the market for commercial paper that many banks use to raise short-term funding.... "Now that we are six months away the market for commercial paper is thinning out," Mr. Crane says. "Everyone is bracing for outflows and preparing to have huge liquidity war chests ahead of the October deadline.""

SEI filed with the SEC to change the sub-adviser for its money market funds -- Money Market, Prime Obligations, Government, Government II, Ultra-Short Duration Bond, Short Duration Government, and GNMA funds -- from BofA to BlackRock. It says, "Under the heading titled "The-Sub-Advisers," under the section titled "The Adviser and Sub-Advisers," the text relating to BofA Advisors, LLC is hereby deleted and replaced with the following: Blackrock Advisors, LLC -- BlackRock Advisors, LLC ("BAL") serves as a Sub-Adviser to a portion of the assets of each of the Money Market, Prime Obligation, Government, Government II, Treasury and Treasury II Funds.” However, as we reported in our March 29 News, "Another Two Bite the Dust: SEI Liquidates Prime; Wilmington Goes Govt," SEI is liquidating both Prime Obligations and Money Market Fund on June 24. (See the SEC filing for details.) In related news, a press release entitled, "Moody's Affirms Aaa-mf Ratings of Four BlackRock Money Market Funds Following Merger with BofA Funds," says, "Moody's Investors Service today affirmed the Aaa-mf ratings of the following four money market funds managed by BlackRock Asset Management: BlackRock TempFund, BlackRock FedFund, BlackRock T-Fund, BlackRock Federal Trust Fund. Moody's also withdrew the Aaa-mf ratings of the following four money market funds managed by BofA Global Capital Management: Government Plus Reserves, Government Reserves, Money Market Reserves and Treasury Reserves, which merged into the aforementioned BlackRock Funds. The rating action follows BlackRock's 18 April 2016 announcement of the funds' mergers and the reorganization of its fund lineup. The rating affirmations reflect Moody's expectation that, following the fund mergers, the surviving fund portfolios will continue to maintain credit and stability profiles consistent with a Aaa-mf rating. The investment strategy of the surviving BlackRock Funds will remain the same as prior to the merger. The Aaa-mf ratings reflect Moody's view that the funds will have a very strong ability to meet the dual objectives of providing liquidity and preserving capital. The fund reorganizations were approved by both fund boards, fund shareholders and regulators. BofA Funds's shareholders were requested to elect between redeeming their shares of the BofA Funds or receiving new shares in the BlackRock Funds. On 18 April 2016, the net assets of the BofA Funds were merged into the BlackRock Funds, and the BofA Funds closed. The total amount of the net assets transferred from the BofA Funds to the BlackRock Funds was $39 billion. BofA Cash Reserves ($7.6B) and BofA Money Market Reserves ($15.9B) merged into BlackRock TempFund ($55.5B); BofA Government Plus Reserves ($1.8B) merged into BlackRock FedFund ($13.5B); BofA Government Reserves ($3.8B) merged into BlackRock Federal Trust Fund ($314M); and, BofA Treasury Reserves ($9.8B) merged into BlackRock T-Fund ($21.6B). All figures are as of 15 April 2016."

Fidelity posted an update in its Leadership Series called "Institutional and Muni Money Market Funds Begin Publishing Flow and NAV Data." Authors Michael Morin, Director of Institutional Portfolio Management and Kerry Pope, Institutional PM, write, "Money market fund flows continued to suggest an investor preference for government MMFs in light of the rapidly approaching 2a-7 reforms. From February 29 to March 31, assets in these funds rose from $1,245 billion to $1,268 billion, a $23 billion increase. We continue to believe government MMF assets are likely to continue their trend higher as, given the enhanced bank regulations, large banks cost-justify their deposits. Fidelity's prime MMFs continued to be well positioned for potentially increased flow volatility associated with regulation reform. MMFs have had plenty of supply in the short end of the yield curve thanks to increases in repurchase agreements and agencies." They add, "As we outlined in our March 2016 Money Market Commentary "Money Markets: Data-Dependent Fed Holds Rates Steady," beginning in April 2016, institutional prime and institutional municipal MMFs are required to publish market-value NAVs. In accordance with this requirement, Fidelity began providing data for the following categories: Daily and Weekly Liquidity (weekly only for municipal MMFs); Daily Net Shareholder Flows; Fees & Distribution (Pricing); and Daily Market Value (NAV)."

A press release entitled, "Moody's assigns Aaa-mf ratings to Four New UBS Government Money Market Funds," says, "Moody's Investors Service has assigned Aaa-mf ratings to the Master Trust - Government Master Fund and three of its feeder funds: UBS Select Government Preferred Fund, UBS Select Government Institutional Fund, and UBS Select Government Investor Fund. These are new funds managed by UBS Asset Management (Americas) Inc. The ratings reflect Moody's view that the funds will have a very strong ability to meet the dual objectives of providing liquidity and preserving capital. This view is supported by the funds' high scores across all key rating factors, which include (i) credit quality, (ii) asset profile, (iii) liquidity and (iv) market risk exposure. We expect the investments held in the funds' portfolios will be of high credit quality, as evidenced by the model portfolios average weighted credit quality of Aaa. The portfolio will be comprised only of securities issued or guaranteed by the United States, including US Treasury securities and US Government agencies or repurchase agreements fully collateralized by United States obligations. The rating benefits from the funds' short weighted average maturity and low asset concentration, each of which results in a score of '1' for our assessment of the fund's asset profile under Moody's Revised Money Market Fund Rating Methodology.... While the funds' shareholder bases are likely to exhibit some lumpiness as the funds ramp up, our expectation is that the funds will maintain strong liquidity profiles supported by high levels of overnight and near-term liquidity, based on the nature of the investments and management's risk management protocol.... We expect the funds' sensitivity to market risk to remain low due to the high quality of the Master fund's investment portfolio." (The new UBS Select Government Funds hasn't gone live yet, but will be added to Crane Data's collections as soon as it does.) Also, PIMCO posted a video, "Understanding Money Market Fund Reform: A Conversation with Jerome Schneider and Paul Reisz."

We learned from the website Better Regulation that a Council of the European Parliament "published a presidency compromise on the proposal for a Regulation on Money Market Funds (MMF)" on April 14, which could mean changes for European-domiciled money funds are imminent. The site explains, "Money Market Funds (MMFs) are an important source of short-term financing for financial institutions, corporates and governments. Money market instruments traditionally include treasury bills, commercial paper or certificates of deposit. MMFs hold almost 40% of short-term debt issued by the banking sector and represent a crucial link bringing together demand and offer for short-term money." Better Regulation adds, "The financial crisis demonstrated that money market funds, although seen as relatively stable investment vehicles, could in fact pose a systemic risk not only due to their size but also their interconnectedness with the banking sector on the one hand and with corporate and government finance, on the other. On 4 September 2013, along with a "Roadmap" within a Communication for initiatives regarding shadow banking reforms, the European Commission proposed a new European framework designed for Money Market Funds (MMFs). The Proposed Regulation introduces new rules aimed at making MMFs more resilient to future financial crisis and at the same time securing their financing role for the economy. The objective of the proposal being to preserve the integrity and stability of the internal market, ensuring an increased protection of investors in MMFs." They add, "The latest changes to the compromise text are denoted by bold underline for additions, and bold strikethrough for deletions." Watch for more details on the EU MMF Regulatory compromise, as well as a review of "International" money funds in Tuesday's News. At first glance, it looks like the EU has allowed a LNAV or low-volatility NAV version of money funds to continue to use CNAV (without the previous sunset clause), but the remainder of the regulations continue to look pretty ugly (they include a ban on sponsor support). We're also unclear on whether this means passage of the new regulations, which have a 24-month implementation date, is imminent.

Crane Data, money fund providers, and various segments of the cash marketplace are preparing for a number of conferences over the coming weeks and months. Below, we review and list several that we'll be speaking at, attending, or hosting. First on our agenda is the SIFMA AMA Roundtable, which takes place May 1-3 in Miami, Fla. Our Peter Crane will speak on "Money Fund Trends & Lineup Shifts and he'll host a "Cash Sweeps & MM Products" panel, which will feature Kevin Bannerton from Total Bank Solutions, Tom Nelson from Reich & Tang and Doug Pagliaro from UMB. The SIFMA AMA Roundtable involves Brokerage product and sweep professionals and is run in conjunction with the SIFMA Ops Conference. (Contact Crane Data or SIFMA's Charles DeSimone to ask about attending or to see the agenda.) We won't be attending this year, but next on the conference calendar is New England AFP's Annual Conference, which is May 2-4 at Mohegan Sun in Connecticut. Crane Data will be exhibiting at this year's ICI General Membership Meeting, which isn't expected to have much money fund content. But fund industry heavyweights will all be there, and we'll be discussing fund issues and pushing our new Bond Fund Intelligence product line. In early June, the New York Cash Exchange takes place (June 1-3 in NYC), and then our big show, Money Fund Symposium takes place June 22-24 at the Philadelphia Marriott. (We encourage attendees to make their hotel reservations and to register soon. The hotel always sells out.) We'll also be hosting our next European Money Fund Symposium, Sept. 20-21, 2016 in London, and the biggest show for corporate treasurers and money fund salespeople, the AFP Annual Conference will be Oct. 23-25 in Orlando, Fla. Finally, mark your calendars (and watch for the websites to go live in coming months) for Crane's Money Fund University 2017, Jan. 19-20, 2017 in Jersey City, NJ. and for Crane's Bond Fund Symposium, March 23-24, 2017 at the Hyatt Regency Boston.

Bank of America Merrill Lynch Rates Strategist Mark Cabana published a brief entitled, "Prime money funds: liquidity vs yield," which discusses how "Prime money funds have been shortening the tenor of their holdings to increase liquidity and meet potential outflows" and how this "challenges prime fund ability to generate yield sufficient to keep investors in the product after full money fund reform." Cabana explains, "Ahead of full implementation for money fund reform in October prime money funds have been shortening the tenor of their holdings in order to increase liquidity and meet potential outflows. This has likely provided some upward pressure on commercial paper and LIBOR-OIS spreads, including around the 6-month tenor which now rolls into the money fund reform window.... According to Crane Data, prime money fund holdings of financial CP (commercial paper) and CD (certificates of deposit) with final maturities of greater than 6 months have declined from around 15% at the end of September to 7% at the end of March. Across prime funds, maturities with over 180 days now comprise less than 5% of total assets and this has challenged their ability to generate return." A section, "Sacrificing yield for liquidity to meet potential outflows," explains, "Prime funds find themselves in a bit of a "catch-22" ahead of October. Prime fund managers need to take duration risk to generate yields that are sufficiently attractive for investors to remain in the product, but have received very little clarity from investors about how much cash will remain invested after the implementation date. Given this uncertainty and the potential for redemptions, prime fund managers have needed to shorten duration to stay liquid. This has caused prime funds to increase their amounts of daily and weekly liquidity while also shortening their weighted average maturities and weighted average lives.... Declining duration and increased liquidity makes it challenging for prime funds to generate sufficient yield such that investors feel compensated for the risk of a potential liquidity fee or redemption gate.... The current 7-day yield spread between prime and government funds is 16bps according to Crane, so some additional yield pickup could be required." Finally, he adds, "Given the uncertainty around investor behavior and subsequent need to stay liquid, there will likely be additional flows out of prime money funds ahead of full implementation date. When taken in the context of the $230 billion in prime fund outflows since the start of 2015 and the nearly $300 billion in announced prime to government conversions (with roughly $75 billion yet to fully convert), we now believe flows out of prime funds could total $600 to $800 billion.... We believe that risks skew towards the high end of this range but continue to acknowledge uncertainty around our estimate. We also continue to believe outflows will likely increase over the summer and into the fall. Shifts out of prime funds should result in a further increase in LIBOR-OIS spreads and a widening of shorter-dated swap spreads."

The Investment Company Institute released its latest "Money Market Fund Holdings" summary (with data as of March. 31, 2016), which reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds. ICI's "Prime and Government Money Market Funds' Daily and Weekly Liquid Assets" table shows Prime Money Market Funds' Daily liquid assets at 30.6% as of March 31, up from 30.5% on Feb. 29. Daily liquid assets were made up of: "All securities maturing within 1 day," which totaled 24.9% (vs. 25.4% last month) and "Other treasury securities," which totaled 5.7% (up from 5.1% last month). Prime funds' Weekly liquid assets totaled 42.2% (vs. 41.1% last month), which was made up of "All securities maturing within 5 days" (35.0% vs. 34.8% in February), Other treasury securities (5.6% vs. 5.1% in February), and Other agency securities (1.6% vs. 1.2% a month ago). The report shows that Government Money Market Funds' Daily liquid assets totaled 59.3% as of March 31 vs. 57.7% the previous month. All securities maturing within 1 day totaled 23.3% vs. 23.3% last month. Other treasury securities added 36.1% (vs. 34.4% in February). Weekly liquid assets for Govt MMFs totaled 75.6% (vs. 77.5%), which was comprised of All securities maturing within 5 days (31.9% vs. 33.5%), Other treasury securities (34.4% vs. 32.7%), and Other agency securities (9.3% vs. 11.3%). ICI's "Prime and Government Money Market Funds' Holdings, by Region of Issuer" table shows Prime Money Market Funds with 46.2% in the Americas (vs. 39.2% last month), 19.0% in Asia Pacific (vs. 18.9%), 34.2% in Europe (vs. 41.5%), and 0.2% in Other and Supranational (vs. 0.0% last month). Government Money Market Funds held 91.8% in the Americas (vs. 84.2% last month), 0.9% in Asia Pacific (vs. 1.4%), 7.3% in Europe (vs. 14.5%), and 0.0% in Supranational (vs. 0.0%). The table, "Prime and Government Money Market Funds' WAMs and WALs" shows Prime MMFs WAMs at 35 days as of March 31, down from 36 days last month. WALs were at 54 days, down from 57 days last month. Government MMFs' WAMs was at 42 days, up from 41 days last month, while Government fund WALs was at 96 days, up from 93 days. The release explains, "Each month, ICI reports numbers based on the Securities and Exchange Commission's Form N-MFP data, which many fund sponsors provide directly to the Institute. ICI's data report for June covers funds holding 94 percent of taxable money market fund assets." (Note: ICI publishes aggregates but doesn't publish individual fund holdings.)

Website MoneyRates.com recently posted the piece, "Do money market accounts have FDIC insurance coverage?" It asks, "Q: Are money market accounts insured by the FDIC? A: That depends on what you mean by "money market accounts." It is important to distinguish between money market savings and money market funds when determining FDIC insurance coverage." On "Money market savings accounts vs. money market funds," the basics article says, "The two names are very similar: money market deposit accounts, and money market funds. They are both liquid assets offering similar (generally relatively low) interest rates. However, for all the similarities, there is a critical difference. Money market savings accounts held at participating FDIC-insured institutions are covered. Money market funds, on the other hand, are a form of mutual fund and as such they are not covered by FDIC insurance.... This lack of insurance for money market funds does more than open up the possibility of losses in those investments. A couple years ago the U.S. Security and Exchange Commission adopted reforms (inspired by the 2008 financial crisis) that could restrict the liquidity of money market funds." MoneyRates explains, "For one thing, the SEC changed accounting rules for money market funds so that their market values can now vary. Therefore, if a fund is trading below what you paid for it, you cannot count on getting all of your original value back when you need it. Also, to prevent runs on money market funds in times of financial stress, the SEC also now allows fund companies to restrict withdrawals under certain circumstances, or impose a fee for those withdrawals. Either of these could impact the availability of your money. So, generally speaking, both money market deposit accounts and money market funds provide stability and liquidity. However, if you want absolute stability and liquidity, you should look at money market deposit accounts."

The Charles Schwab Corp. released record first quarter earnings Friday, driven by reductions in money fund fee waivers. Schwab's release says, "CFO Joe Martinetto commented, "The ongoing effect of the Fed's initial interest rate hike in December has provided a glimpse of Schwab's earnings power as rates normalize, with our diversified revenue streams generating strong first quarter revenue growth and our steady expense discipline continuing. Asset management and administration fees rose 9% year-over-year – boosted by a $61 million sequential improvement in money market fund revenue due to higher short-term rates and higher balances, but limited by market valuations that persisted below year-end levels for much of the quarter. Net interest revenue jumped 31% year-over-year, reflecting robust interest-earning asset growth during the past several quarters, and the firm's greater sensitivity to the rise in short rates relative to the decline in the long end of the curve.... Altogether, revenues grew approximately 16% from the prior year to a quarterly record of $1.8 billion." Martinetto continued, "During the first quarter, we continued working to migrate more client cash to our balance sheet while maintaining healthy capital levels. The company issued $750 million of non-cumulative perpetual preferred stock at a rate of 5.95%. Proceeds will help support the transfer of approximately $6 billion in balances relating to money fund regulatory reform, primarily in the July to September timeframe. In addition, we expect to support approximately $3 billion of incremental Schwab Bank deposit growth throughout the second half of the year, as the Bank is now the default sweep option for all new accounts. We also completed a $1.4 billion bulk transfer of client sweep cash from the broker-dealer to Schwab Bank in March." Schwab had $97 million in fee waivers in Q1 '16 compared to $184 million in Q1 '15. In other earnings news, BlackRock Chief Financial Officer Gary Shedlin told analysts on BlackRock's Q1 earnings call that the deal to buy BofA's money fund business would close later this month. (It closes Monday; watch for more Crane Data News coverage Tuesday a.m.) The transcript from Seekingalpha.com states, "In line with that commitment, we anticipate closing the Bank of America Global Capital Management transaction later this month, assuming investment management responsibilities for approximately $87 billion of related cash and liquidity AUM."

Money fund assets dropped $7.7 billion last week, with all of it coming from Government funds, according to the ICI. Their latest "Money Market Fund Assets" release says, "Total money market fund assets1 decreased by $7.69 billion to $2.73 trillion for the week ended Wednesday, April 13, the Investment Company Institute reported today. Among taxable money market funds, government funds decreased by $7.18 billion and prime funds increased by $2.77 billion. Tax-exempt money market funds decreased by $3.29 billion." Government assets, including Institutional and Retail (and Treasury and Government), stand at $1.288 trillion, while Prime assets are at $1.221 trillion. Government fund assets moved ahead of Prime assets earlier this year, fueled by the conversion of $214 billion of Prime funds to Govt funds to date. (Another $75.6 billion is scheduled to switch over before the October 14 MMF Reform deadline.) ICI's report continues, "Assets of retail money market funds decreased by $8.87 billion to $988.87 billion. Among retail funds, government money market fund assets decreased by $890 million to $381.84 billion, prime money market fund assets decreased by $6.21 billion to $434.76 billion, and tax-exempt fund assets decreased by $1.77 billion to $172.27 billion." It adds, "Assets of institutional money market funds increased by $1.18 billion to $1.74 trillion. Among institutional funds, government money market fund assets decreased by $6.29 billion to $906.16 billion, prime money market fund assets increased by $8.98 billion to $786.13 billion, and tax-exempt fund assets decreased by $1.51 billion to $49.95 billion." Year-to-date through April 13, MMF assets are down $28 billion with Inst assets down $78 billion and Retail assets up $50 billion. (We've seen a number of reclassifications from Inst to Retail too.) A Footnote to ICI's release 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." This week, the $111 million Schwab MM Portfolio converted into Schwab Govt MM Portfolio on April 14; the $824 million UBS Liquid Assets will convert into UBS Liquid Assets Govt Fund on April 15; and $316 million Goldman Sachs VIT MMF will convert into Goldman Sachs Govt MMF on April 15. We expect large outflows over the next several weeks due to the April 15 income tax filing deadline (April 18 this year due to the Evacuation Day holiday in Washington).

The U.S. Treasury's Office of Financial Research released its "Markets Monitor newsletter for Q1'16. In it, they briefly discuss negative rates and European money funds. The OFR writes, "Will other central banks "go negative"? Some European central banks have already introduced negative interest rates in recent years. The news in Japan raised the possibility that other major central banks might follow suit as global growth slows. Since the Bank of Japan's decision in January, central banks in Canada and Norway have discussed negative rates as policy options and the European Central Bank cut rates further into negative territory. Expectations for negative rates in the United States remain very low. In the March FOMC press conference, Federal Reserve Chair Janet Yellen said the central bank is "not actively considering negative rates" and that other options could be used if the economic outlook called for more stimulus. Although market expectations for the federal funds rate have declined, the expected path is still well above zero." It continues, "To date, market participants have not reported major disruptions in the European economies with negative rates. There have been no reports of major shifts in market structure or functioning. Negative policy rates have been successfully transmitted to interbank rates, repurchase agreement rates, and foreign exchange basis swap rates. In some cases, banks have passed on the negative rates to corporate depositors, but generally not to retail depositors. However, these experiences with negative rates have been too limited to rule out disruptions in the future or in other markets. Policy rates have been only modestly negative so far -- lower negative rates could cause greater withdrawals by savers and investors. Similarly, most of these economies have had negative rates for less than a year, and longer-term responses could be different. Meanwhile, some of the observed responses to negative rates may increase risks over time. European money market funds have expanded their investments outside Europe to find yield. This strategy may increase currency risk in these funds. Some European companies are exploring cutting cash balances to reduce the impact of negative rates. Japanese money market funds have had heavy investor withdrawals in recent months, forcing some funds to close. More fund closures could reduce liquidity in Japan's short-term funding markets. In addition, the reductions in interest rates in Europe and other foreign countries may spill over to U.S. interest rates. Long-term U.S. Treasury yields and term premiums fell markedly in the first quarter, and they are again near historic lows. As discussed in the OFR's 2015 Financial Stability Report, the continued low level of U.S. long-term interest rates is a source of financial stability risk." In other news, the Federal Reserve released the Minutes from its March 15-16 FOMC meeting.

Wells Fargo Money Market Funds writes its monthly, "Overview, strategy, and outlook," "It was a long time coming, but yields in the municipal money market space finally adjusted higher in dramatic fashion during March. While yields in the taxable space responded promptly to the Fed's first tightening in monetary policy back in December, yields in the tax-exempt space had remained stuck at historical lows through the first two months of the year due to the persistence of an acute imbalance between supply and demand for variable-rate demand notes, tender option bonds, and other short-term municipal instruments. However, market dynamics were subject to a staggering reversal as municipal money market funds experienced roughly $15 billion in outflows in March. The Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Index which had seemingly been frozen in time at 0.01%, rose sharply to 0.40% -- its highest level since 2009. While it is quite typical for municipal money market yields to lag their taxable counterparts, history has shown the ensuing recalibration in the tax-exempt space is often sudden -- particularly during times of seasonal weakness in demand. Municipal money market funds usually experience tax-payment-related outflows during the March–May time frame, which result in temporarily elevated tax-exempt rates." It continues, "This year, however, money market fund reform–related outflows, as well as liquidations in the municipal money market space, may have contributed to an accelerated surge in the SIFMA Municipal Swap Index. Dealers were quickly forced to competitively price tax-exempt paper in order to attract crossover buyers and reduce swelling inventory levels.... During the month, we continued to focus our investments in the overnight and weekly sectors in order to emphasize principal preservation and overall portfolio liquidity. As we had positioned our portfolios for what we considered to be an inevitable adjustment in tax-exempt/taxable ratios, we were subsequently rewarded for our patience in waiting for SIFMA to rise. As such, we continued to maintain relatively low weighted average maturities across our municipal funds during the month and continued to opportunistically purchase high-grade commercial paper, notes, and pre-refunded bonds in the one-month to three-month range for diversification purposes."

Institutional investment consultant Marquette Associates posted a commentary entitled, "Money Market Reform and Implications for Institutional Investors." It says, "Marquette expects to see a wave of institutional investors switching from prime MMFs to government MMFs. We also expect to see investment managers who provide institutional prime MMFs launch institutional prime commingled funds in order to retain clients. We expect to see certain prime MMF assets flow to stable value funds as a third alternative. In a normal environment, a prime fund would yield eight to twelve basis points higher than a comparable duration government fund. From our discussions with various money market fund managers, the consensus expectation is for this gap to rise an estimated 25 to 50 basis points because the inflow of investors switching to government funds will boost prices and reduce yields for government funds, while the outflow of investors from prime funds will depress prices and increase yields for prime funds. With regard to liquidity fees and the gating of client redemptions for institutional and retail MMFs (but not government MMFs), Marquette expects MMF providers to refrain from using these mechanisms in normal market environments. They have been established by the SEC as a means to maintain stability should the markets become stressed. Therefore, we expect MMF providers to use these mechanisms only in financial crises like the one we experienced in 2008." It continues, "Marquette recommends that clients engage in a dialogue with their consultants on the best course of action. The four key alternatives for liquid cash investments are: 1. Accept the vNAV of the institutional prime MMF from October 2016 going forward: the NAV of an institutional prime MMF is not expected to vary much over time. 2. Switch from a prime MMF to a government MMF: the reduction in yield for the benefit of the cNAV must be considered in this scenario. However, the government MMF will not impose liquidity fees or client redemption gates. 3. Switch from a prime MMF to a prime commingled fund: this option offers the enhanced yield of a prime fund over that of a government fund, but additional paperwork is involved to participate in a commingled fund. In addition, many of these commingled funds have been newly launched, so fund assets under management and critical mass should be considered. 4. Switch from a prime MMF to a stable value fund: this option offers even greater yield, but has the downside of reduced liquidity, as most stable value funds have put provisions of 24 to 36 months. This means that if a plan wishes to move its assets from one stable value fund provider to another, there are instances when the stable value provider may require the plan to wait 24 to 36 months."

A new press release entitled, "Fitch Assigns New Ratings to Nine UBS Money Market Mutual Funds," reads, "Fitch Ratings has assigned a 'AAAmmf' rating to the nine UBS money market mutual funds listed below -- UBS Select Prime Preferred Fund (SPPXX); UBS Select Prime Institutional Fund (SELXX); UBS Select Prime Investor Fund (SPIXX); UBS Select Treasury Preferred Fund (STPXX); UBS Select Treasury Institutional Fund (SETXX); UBS Select Treasury Investor Fund (STRXX); UBS Select Government Preferred Fund (SGPXX); UBS Select Government Institutional Fund (SEGXX); and UBS Select Government Investor Fund (SGEXX). The funds are registered 2a-7 money market funds managed by UBS Asset Management (Americas) Inc. (UBS AM). UBS Select Government Preferred Fund, UBS Select Government Institutional Fund and UBS Select Government Investor Fund became legally effective on March 29, 2016. All funds are feeder funds that invest all of their assets in a corresponding master fund with the same objective as the fund." Fitch continues, "The 'AAAmmf' rating assignments reflect: The funds' overall credit quality and diversification; Low exposures to interest rate and spread risks; Holdings of daily and weekly liquid assets consistent with shareholder profiles and concentrations; Maturity profiles consistent with Fitch's 'AAAmmf' rating criteria. The funds seek to maintain diversified, high credit quality portfolios consistent with Fitch's criteria for 'AAAmmf' rated MMFs, by investing exclusively in first-tier rated securities with limited exposure to individual issuers. The funds' Portfolio Credit Factors (PCF) are in line with Fitch's 'AAAmmf' rating criteria of 1.50 or less as of Feb. 29, 2016. The PCF is a risk-weighted measure of a fund's portfolio assets that accounts for the credit quality and maturity profile of a fund's portfolio." They add, "The funds seek to limit interest rate and spread risk by maintaining weighted average maturities (WAM) and weighted average lives (WAL) below 60 days and 120 days, respectively. The funds seek to maintain sufficient levels of daily and weekly liquidity to meet investors' flows. Specifically, the funds invest at least 10% of their total assets in securities offering daily liquidity, and at least 30% in securities maturing within seven days or other qualifying liquid assets. As UBS Select Government Preferred Fund, UBS Select Government Institutional Fund and UBS Select Government Investor Fund accept new investors following the funds' launch shareholder concentration may be high. However, UBS will be managing liquidity conservatively with this consideration in mind. The funds seek to provide current income in line with prevailing money market rates, while aiming to preserve capital consistent with these rates and to maintain high degrees of liquidity. Assets under management as of February 29, 2016 for the Select Prime Funds and Select Treasury Funds were $15.2bn and $10.8bn, respectively." In other news, Institutional Investor posted a brief, "Investor Sentiment Remains Volatile," which discusses a steep drop in money fund assets the past week.

Money fund assets plummeted in the past week, which included quarter-end, with almost all of it coming from Prime Institutional MMFs, according to the ICI. Their latest "Money Market Fund Assets" release says, "Total money market fund assets decreased by $26.70 billion to $2.74 trillion for the week ended Wednesday, April 6, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $5.40 billion and prime funds decreased by $30.21 billion. Tax-exempt money market funds decreased by $1.89 billion." Government assets, including Institutional and Retail (and Treasury and Government), stand at $1.295 trillion, while Prime assets are at $1.218 trillion. Government fund assets moved ahead of Prime assets for the first time earlier this year fueled by the conversion of $212.3 billion since November 2015. (Another $75.6 billion is scheduled to switch over before the October 14 MMF Reform deadline.) ICI's report continues, "Assets of retail money market funds increased by $3.29 billion to $997.74 billion. Among retail funds, government money market fund assets increased by $2.89 billion to $382.73 billion, prime money market fund assets decreased by $3.61 billion to $440.97 billion, and tax-exempt fund assets increased by $4.01 billion to $174.05 billion." It adds, "Assets of institutional money market funds decreased by $29.99 billion to $1.74 trillion. Among institutional funds, government money market fund assets increased by $2.51 billion to $912.42 billion, prime money market fund assets decreased by $26.60 billion to $777.15 billion, and tax-exempt fund assets decreased by $5.90 billion to $51.46 billion." Year-to-date through April 6, MMF assets are down $20 billion. A Footnote to ICI's release 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 the latest week, BBH, Cavanal Hill and Prudential all converted Prime funds to Government. (ICI's collection did not include the $43 billion internal Prudential Core Taxable MMF, which converted into Prudential Core Ultra Short Bond Fund on March 31.)

The Federal Reserve released the Minutes from its March 15-16 FOMC meeting. On the RRP, they state, "The deputy manager also outlined factors that the Committee might consider in determining whether to offer term reverse repurchase agreements (RRPs) over the end of the first quarter. In the ensuing discussion of this question among Committee participants, it was noted that, in view of the very elevated capacity of the overnight (ON) RRP facility that would remain available for the time being, offering term RRPs in addition to ON RRPs would be unlikely to enhance control of the federal funds rate over quarter-end, and offering term RRPs at an interest rate spread over ON RRPs could marginally increase the Federal Reserve's interest costs. For these reasons, Committee participants generally preferred not to offer term RRPs over the end of the first quarter. Participants noted that it may be appropriate to offer term RRPs at some point in the future after the Committee reintroduces an aggregate cap on ON RRP operations, and the Committee's decisions regarding term RRPs over quarter-ends had no implications for the FOMC's plan to phase out the ON RRP facility when it was no longer needed to help control the federal funds rate." On the Fed Funds rate they state, "[M]ost participants judged it appropriate to maintain the target range for the federal funds rate at 1/4 to 1/2 percent at this meeting while noting that global economic and financial developments continued to pose risks.... A couple of participants, however, saw an increase in the target range to 1/2 to 3/4 percent as appropriate at this meeting, citing evidence that the economy was continuing to expand at a moderate rate despite developments abroad and earlier volatility in financial conditions.... In their judgment, increasing the target range for the federal funds rate too gradually in the near term risked having to raise it quickly later, which could cause economic and financial strains at that time." Furthermore, they say, "A number of participants judged that the headwinds restraining growth and holding down the neutral rate of interest were likely to subside only slowly. In light of this expectation and their assessment of the risks to the economic outlook, several expressed the view that a cautious approach to raising rates would be prudent or noted their concern that raising the target range as soon as April would signal a sense of urgency they did not think appropriate. In contrast, some other participants indicated that an increase in the target range at the Committee's next meeting might well be warranted if the incoming economic data remained consistent with their expectations for moderate growth in output."

Wilmington Trust issued a basic, "US Money Market Fund Reform Overview." It says, "The reforms change the way MMFs operate in an attempt to reduce their susceptibility to heavy redemptions during times of stress, as well as increase the transparency of MMF risk, without negating the benefits currently afforded by MMFs. Key structural changes to MMFs include: New distinctions between "retail" and "institutional" prime and tax-exempt MMFs, which will limit who can invest in these types of MMFs; Imposition of floating net asset value (NAV) share pricing on institutional prime and institutional tax-exempt MMFs, which will require share prices of these fund types to increase or decrease along with the underlying value of the fund's assets, or "float," as opposed to maintaining a stable $1.00 per share price; New rules for liquidity fees and redemption gates, which may impact an investor's ability to redeem shares, particularly in prime and tax-exempt MMFs." In other news, a press release entitled, "Fitch Assigns New Rating to First American Government Obligations Fund," says, "Fitch Ratings has assigned an 'AAAmmf' rating to First American Government Obligations Fund, a registered 2a-7 money market fund managed by U.S. Bancorp Asset Management, Inc. The 'AAAmmf' rating assignment reflects: The fund's overall credit quality and diversification; Low exposure to interest rate and spread risks; Holdings of daily and weekly liquid assets consistent with shareholder profile and concentration; Maturity profile consistent with Fitch's 'AAAmmf' rating criteria; The capabilities and resources of U.S. Bancorp Asset Management, Inc. The Fund seeks to maintain a diversified, high credit quality portfolio consistent with Fitch's criteria for 'AAAmmf' rated MMFs, by investing exclusively in first-tier rated securities with limited exposure to individual issuers."

Federated Investors' CIO of Global Money Markets Deborah Cunningham writes in her April "Month in Cash" column, entitled, "Yellen Cages the Hawks," "It was no surprise that the Federal Open Market Committee (FOMC) did not raise rates at its mid-month meeting, in the process dialing back the projections for hikes this year.... Why then did several Fed officials start emitting hawkish screeches not long after the meeting concluded" A string of speeches suggesting the economy is looking good enough for policy action was enough to build in at least the probability of a move at the April meeting from a federal funds futures perspective, and definitely put June in play. That turned out to be fleeting as Chair Janet Yellen dismissed the hawkish tone in her own dovish speech at the end of the month at the Economic Club of New York. Her words quickly pushed market expectations out at least until September, which is unfortunate because I think we are on track and the target of June for the next hike is realistic. So far, Yellen has been a consensus builder behind the scenes, but here seemed to be a public rebuke to some members, including St. Louis Fed's James Bullard. Perhaps the bigger question is why Yellen would be against a hike when she herself has referred to them at this point as normalization, not tightening? In a sense, the offsetting domestic data makes the case for continued normalizing.... Yellen has tried to be a shepherd of the economy so far in her tenure, but this month she turned more to herding. While the clock is paused on rate hikes, it is ticking loudly toward the implementation of the SEC money market reforms in fall. We've seen action by some fund families to convert prime money market funds into government funds. But direct investors seem to be taking their time to make a decision, choosing to stay where they are and not move to different products despite the impending regulations. Spreads have widened between prime and government instruments, and that may yet prove to convince institutional investors to stay in the prime space in spite of floating NAVs and gates and fees. We will obviously not know until closer to October. The Fed drama and the plateauing of the London interbank offered rate (Libor) has led us to keep our weighted average maturities short, with WAM for prime portfolios in a 30-40 day range and government portfolios in a range five days further out. We have been buying more in the 3-6 month area for institutional products, not wanting to take the risk with longer-dated securities." In other news, BlackRock unveiled its "Cash Academy," the first lesson of which features commentary from MD & PM Rich Mejzak on "Adapting Investment Policy Statements for Money Market Fund Reform." (We mentioned their new white paper, "Insights to Act On: Adapting Cash Investment Policies for Money Market Reform," in a previous "News".)

Both Citi Money Market Strategist Andrew Hollenhorst and RBC Capital Markets Strategist Michael Cloherty commented on quarter-end distortions in repo and money market rates late last week. Hollenhorst's latest "Short End Notes," says, "Quarter-end dislocations in money market rates have become more pronounced in recent years and Q1 2016 is no exception. 3m T-bill rates fell from 22.4bp to 19.8bp, interdealer repo rates spiked from 43bp to 64bp and fed funds effective dipped to 25bp from a stable average of 37bp. The factors driving month-end and quarter-end volatility are structural and we expect this to continue going forward.... Large movements in the price of front-end securities are driven by supply-demand imbalances at month and quarter-ends. As quarter-end approaches banks look to reduce the size of their balance sheets. That means taking certificates of deposit (CDs) and commercial paper (CP) that money funds (MMF) and other short end investors purchase out of the market. Investors are left scrambling to find alternatives for parking their cash over quarter-end." He continues, "For MMF the ultimate resting place for excess cash is now the Fed's reverse repo facility (RRP).... We have found watching flows into this facility slightly ahead of quarter-end gives some indication of the severity of the cash supply-demand imbalance and hence of the dislocations to be expected in short-end markets. For instance, in the days leading up to this quarter-end RRP usage increased from around $40 billion to $127 billion before spiking to $304 billion on quarter-end itself." RBC's Cloherty states in an e-mail brief, "Are there lessons to be learned by the combination of GCF RP averaging 64bps yesterday (with some trades well north of that) at the same time that $304bn of cash went into the RRP at 25bp? Think all it meant is that people got a bit overconfident about quarter-end balance sheet availability, thinking the Q3 and Q4 crunches on dealer sheets were just due to the GSIB buffer date on Sep 30 and year end, and had to scramble when sheet was hard to find. In the wake of yesterday everyone is going to expect every single quarter end to be a mess, with even greater fear in at the end of Q3 and Q4. So investors are likely to aggressively prepare ahead of time, meaning the June 30 crunch is unlikely to be as bad as yesterday's squeeze. Think it also suggests that market depth is going to be minimal around quarter ends. As long as there is little selling, it won't matter (which is what we had this month). But if there is a reasonable amount of selling into quarter end, dealer balance sheets won't be able to absorb it and prices are likely to move significantly." Finally, see WSJ's "Cash Squeeze Fuels Repo Rate Surge"."

Money fund assets increased $13.9 billion last week, breaking a 3 week skid. ICI's latest "Money Market Fund Assets" release says, "Total money market fund assets increased by $13.85 billion to $2.77 trillion for the week ended Wednesday, March 30, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $19.80 billion and prime funds decreased by $2.69 billion. Tax-exempt money market funds decreased by $3.26 billion." Government assets, including Institutional and Retail (and Treasury and Government), stand at $1.290 trillion, while Prime assets are at $1.248 trillion. Government fund assets moved ahead of Prime assets for the first time earlier this year fueled by the conversion of over $211.9 billion since November that has converted from Prime to Govt MMFs. Another $76.0 billion is scheduled to switch over before the October 14 MMF Reform deadline. ICI's report continues, "Assets of retail money market funds decreased by $2.45 billion to $994.45 billion. Among retail funds, government money market fund assets increased by $790 million to $379.84 billion, prime money market fund assets decreased by $1.71 billion to $444.57 billion, and tax-exempt fund assets decreased by $1.53 billion to $170.04 billion." It adds, "Assets of institutional money market funds increased by $16.30 billion to $1.77 trillion. Among institutional funds, government money market fund assets increased by $19.01 billion to $909.92 billion, prime money market fund assets decreased by $980 million to $803.75 billion, and tax-exempt fund assets decreased by $1.73 billion to $57.35 billion." Year-to-date through March 30, MMF assets are up $6 billion. For the month of March, through 3/30, assets are down about $39 billion. A Footnote to ICI's release 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, The Wall Street Journal reports, "BlackRock to Cut About 400 Jobs." It reads, "BlackRock Inc. is cutting about 400 jobs, or roughly 3% of its staff, as the world's largest money manager tries to streamline parts of its business and bolster areas it believes are poised for growth, according to a person familiar with the matter.... It wasn't clear which areas would be affected by the cuts." No word yet on whether money fund personnel are involved or if any cuts are related to BlackRock's pending acquisition of BofA's money fund business.