Daily Links Archives: May, 2016

Dreyfus released a schedule of its "stike times," or settlement times, for its funds, including those that will have a floating NAV in October," according to a posting on ICD Portal's "Regulatory" page. Among its Institutional, or floating NAV, funds, the strike times, effective October 10, will be as follows: Dreyfus Cash Management Fund (3pm), Dreyfus Institutional Cash Advantage (9am, 12pm, and 3pm), Dreyfus Institutional Preferred MMF (9am, 12pm, and 3pm), and Dreyfus Tax-Exempt Cash Management (12pm). Furthermore, all the Prime Retail funds will have cutoff times of 5pm, while Muni Retail funds will price at 3pm, except for the BNY Mellon National Muni MMF, which settles at 12pm. The BNY Mellon Govt MMF also strikes at noon. The Dreyfus Government and Treasury funds settle at either 3pm or 5pm. Dreyfus Govt Securities Cash Mgmt, Dreyfus Inst Preferred Treasury Securities MMF, Dreyfus Inst Treasury Securities Cash Advantage, Dreyfus Treasury Securities Cash Management, and General Treasury Securities MMF all settle at 3pm. Dreyfus Govt Cash Management, Dreyfus Inst Preferred Govt MMF, General Govt Securities MMF, Dreyfus Variable Investment Fund Govt Money Market Portfolio, Dreyfus Inst Treasury and Agency Cash Advantage, Dreyfus Treasury and Agency Cash Management, and General Treasury and Agency MMF, all strike at 5pm. The update also lists a number of Dreyfus' fund mergers and liquidations that have taken place recently. In other news, Institutional Investor posted an article, "Why It's Prime Time to Rethink Prime Funds," written by Goldman Sachs Asset Management Managing Directors David Fishman and Kathleen Hughes. They write, "Ahead of new money market regulations taking effect in October 2016, many cash and liquidity investors are examining the potential impact on their investment practices. The biggest change, in our view at Goldman Sachs Asset Management, is a requirement that institutional prime and municipal money market funds, which invest mostly in corporate debt securities and tax exempt securities, respectively, adopt a floating net asset value (NAV), shifting the industry away from a stable $1 price per share." They continue, "But there is another less frequently discussed change whose implications could be surprising for some liquidity investors: the introduction of multiple intraday price points, multiple NAVs, for many prime funds. Multiple NAVs are not a regulatory requirement, but rather they are an attempt by the money market industry to preserve the same-day liquidity benefits that prime funds have historically offered. Intentions aside, we think this change transforms prime funds into a plan-ahead vehicle instead of the traditional same day liquidity role they have long played. We believe that the implementation details of these funds will be too complex for some investors -- at least at the outset -- and that the new features will drive at least some to use government funds, the features of which remain unchanged by the new rules."

Money fund assets increased for the fifth straight week, according to ICI's latest weekly "Money Market Fund Assets" report. It says, "Total money market fund assets increased by $14.21 billion to $2.73 trillion for the week ended Wednesday, May 25, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $17.96 billion and prime funds decreased by $1.44 billion. Tax-exempt money market funds decreased by $2.32 billion." Government assets, including Institutional and Retail (and Treasury and Government), now stand at $1.355 trillion, while Prime assets are at $1.169 trillion. Government fund assets moved ahead of Prime assets earlier this year, fueled by the conversion of $242.1 billion of Prime funds to Govt funds to date (through May 2). The release continues, "Assets of retail money market funds decreased by $3.14 billion to $971.36 billion. Among retail funds, government money market fund assets increased by $1.84 billion to $405.89 billion, prime money market fund assets decreased by $3.42 billion to $402.93 billion, and tax-exempt fund assets decreased by $1.56 billion to $162.54 billion." It adds, "Assets of institutional money market funds increased by $17.34 billion to $1.76 trillion. Among institutional funds, government money market fund assets increased by $16.12 billion to $948.64 billion, prime money market fund assets increased by $1.99 billion to $765.85 billion, and tax-exempt fund assets decreased by $760 million to $47.58 billion." Year-to-date through May 25, MMF assets are down about $26 billion with Inst assets down $58 billion and Retail assets up $33 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."

A press release entitled, "Putnam Investments Offers Investment Strategies for a World of Uncertainty," comments on "Exploring new opportunities at the short end of the yield curve." It says, "Money market funds have long been considered among the very safest investments. New regulations intended to make these investments more liquid also have had the effect of limiting their scope -- shrinking the universe of what is "safe". Moreover, the addition of mechanisms to allow redemption fees and "gates" -- limits on redemptions -- actually could make advance runs more likely if investors fear they will not be able to get their money out quickly in a crisis. Investors may find that their short-term investment vehicles potentially leave them at greater risk than they had thought." Putnam adds, "Advisors may want to `consider short-term investment vehicles that can exploit the space between money markets and ultra-short bond funds, which could offer both a robust capital preservation profile as well as real higher-yield potential." Putnam filed with the SEC to designate its Putnam Money Market Fund as Retail. The filing states, "In connection with the Securities and Exchange Commission's amendments to Rule 2a-7 under the Investment Company Act of 1940, as amended, which governs money market funds, Putnam Money Market Fund intends to operate as a "retail money market fund" as defined by Rule 2a-7. In anticipation of its operation as a retail money market fund, the fund has adopted policies and procedures reasonably designed to limit investments in the fund to accounts beneficially owned by natural persons and may redeem, at its option, all fund shares held by any investor who is not a natural person (an "involuntary redemption").... Effective on or about June 30, 2016, the fund will be closed to any new investor who is not a natural person." It continues, "The fund has also adopted policies and procedures that allow the fund, beginning on or about October 10, 2016, to impose liquidity fees and/or temporarily suspend all redemptions in the event that the fund's liquidity falls below required minimum levels. The fund will notify shareholders of the imposition or termination of any liquidity fee or redemption gate on the fund's website at putnam.com. Announcement of the imposition or termination of a liquidity fee or redemption gate will also be filed with the SEC on Form N-CR." Also, effective October 10, this disclosure will be added to the prospectus: "The fund may not achieve its goal, and is not intended to be a complete investment program. You could lose money by investing in the fund. Although the fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. The fund may impose a fee upon the sale of your shares or may temporarily suspend your ability to sell shares if the fund’s liquidity falls below certain required thresholds because of market conditions or other factors. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The fund's sponsor has no legal obligation to provide financial support to the fund, and you should not expect that the sponsor will provide financial support to the fund at any time."

The Investment Company Institute released its latest "Money Market Fund Holdings" summary (with data as of April 30, 2016), which reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds. (See our May 12 News, "Latest MF Portfolio Holdings: Repo, T-Bills Plunge; TDs, CP Increase," for our earlier report on holdings.) In the release, ICI's "Prime and Government Money Market Funds' Daily and Weekly Liquid Assets" table shows Prime Money Market Funds' Daily liquid assets at 31.9% as of April 30, up from 30.4% on March 31. Daily liquid assets were made up of: "All securities maturing within 1 day," which totaled 27.0% (vs. 24.6% last month) and "Other treasury securities," which totaled 5.0% (down from 5.8% last month). Prime funds' Weekly liquid assets totaled 42.0% (vs. 42.3% last month), which was made up of "All securities maturing within 5 days" (36.1% vs. 34.8% in March), Other treasury securities (4.7% vs. 5.7% in March), and Other agency securities (1.2% vs. 1.8% a month ago). The report shows that Government Money Market Funds' Daily liquid assets totaled 56.9% as of April 30 vs. 59.9% the previous month. All securities maturing within 1 day totaled 22.9% vs. 22.9% last month. Other treasury securities added 34.0% (vs. 37.0% in March). Weekly liquid assets for Govt MMFs totaled 72.7% (vs. 76.1%), which was comprised of All securities maturing within 5 days (30.5% vs. 31.5%), Other treasury securities (32.5% vs. 35.3%), and Other agency securities (9.6% vs. 9.3%). ICI's "Prime and Government Money Market Funds' Holdings, by Region of Issuer" table shows Prime Money Market Funds with 37.1% in the Americas (vs. 47.3% last month), 19.3% in Asia Pacific (vs. 18.7%), 43.2% in Europe (vs. 33.7%), and 0.3% in Other and Supranational (vs. 0.3% last month). Government Money Market Funds held 83.7% in the Americas (vs. 91.9% last month), 1.9% in Asia Pacific (vs. 1.0%), 14.4% in Europe (vs. 7.2%), and 0.0% in Supranational (vs. 0.0%). The table, "Prime and Government Money Market Funds' WAMs and WALs" shows Prime MMFs WAMs at 34 days as of April 30, down from 35 days last month. WALs were at 51 days, down from 54 days last month. Government MMFs' WAMs was at 41 days, down from 42 days last month, while Government fund WALs was at 95 days, down from 96 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."

The New York Federal Reserve's "Alternative Reference Rates Committee" announced the release of its "ARRC Interim Report and Consultation." A summary of the 34-page report says, "In response to the Financial Stability Oversight Council's recommendations and the objectives of the Financial Stability Board, the Federal Reserve convened the Alternative Reference Rates Committee (ARRC) on November 17, 2014 in a meeting with representatives of major over-the counter derivatives market participants and their domestic and international supervisors and central banks. The ARRC was convened to identify a set of alternative reference interest rates that are more firmly based on transactions from a robust underlying market and that comply with emerging standards, such as the International Organization of Securities Commission' Principles for Financial Benchmarks, and to identify an adoption plan with means to facilitate the acceptance and use of these alternative reference rates. Over the last year, the ARRC has focused on two main tasks, first, narrowing the set of potential alternative rates that might be chosen and, second, considering potential plans for transition to an alternative rate." It continues, "After extensive discussion, the ARRC has preliminarily narrowed the list of potential rates to two that it considers to be the strongest alternatives, the Overnight Bank Funding Rate and some form of overnight Treasury general collateral repurchase agreement (GC repo) rate. Because of the dominance of LIBOR in U.S. dollar interest rate derivative markets, planning for any transition to either rate poses a host of challenges. While the dealers and central counterparties currently represented in the ARRC play key roles in intermediating these markets, demand for interest rate derivatives is ultimately driven by end users. Therefore, it is key that end users play an integral role in the ultimate choice of an alternative and in an ultimate transition strategy. However, end users cannot be expected to choose or transition to trading a benchmark that does not have at least a threshold level of liquidity. Accordingly, the ARRC has thus far focused on formulating an initial transition strategy (the "paced transition") that could potentially provide this threshold level of liquidity <b:>`_. [F]urther work will be required -- following consultation and close involvement with end users -- both in developing the details of an initial transition strategy and in planning for a full transition strategy that would move a more significant portion of the derivatives markets away from LIBOR to the new rate." It adds, "Following the publication of this interim report, the ARRC intends to consult widely and closely with end users as it seeks to finalize a choice of alternative rate and transition strategies.... Comments on the consultation and any questions on the ARRC's plans can be delivered to `arrc@ny.frb.org. Comments should be received no later than July 15, 2016 and will be posted on the ARRC's website. In addition, the ARRC will host a roundtable at the Federal Reserve Bank of New York on June 21, 2016 and will host other roundtables in coming months if space does not allow for all interested parties to attend the June 21 roundtable."

Reuters published, "Widening U.S. money fund spread sets stage for $400 billion shift." It says, "The difference in yield between prime and government money market funds has widened by 6 basis points since January, according to data released on Wednesday, in a trend expected to accelerate as investors prepare for new rules being rolled out this autumn. Executives at big fund sponsors JPMorgan Chase & Co, Goldman Sachs Group Inc and others expect institutional investors to move perhaps $400 billion out of prime funds, or about half their assets, and into government money funds in coming months. Ensuring a smooth shift will amount to the first major test of how well U.S. regulators have strengthened the $2.7 trillion money fund industry, whose ultra-safe reputation was tarnished during the 2008 financial crisis. Clients like corporate treasurers worry that new rules could lock up some assets during times of stress. As those investors leave prime funds, companies such as banks that sell funds securities will have to offer better terms, said John Tobin, head of portfolio management for the liquidity business of JPMorgan Chase & Co's asset management unit. "They will be compelled to pay more to get those same trades done," Tobin said in a recent interview. The spread between the yields paid by prime and government money funds could widen to close to 40 basis points or more this summer, he said. That would also provide extra returns for investors willing to sit tight. "It's a great opportunity," he said." Reuters' article continues, "Among funds for institutional investors, prime funds' weekly average yield stood at 26 basis points, 17 basis points more than government funds, iMoneyNet said on Wednesday. At the start of the year the prime funds' yield was 15 basis points, or 11 basis points more than government funds. Institutional prime funds now hold $788 billion, while institutional government funds have $938 billion.... Safer-seeming government funds do not face the same rules, which has led asset managers to revamp their product lineups and has already reduced assets in prime funds.... The asset shift is not expected to cause much market disruption, according to analysts and fund executives, thanks to actions by regulators like pushing banks to use longer-term funding sources. Also, Dave Fishman, head of Goldman Sachs' liquidity solutions business, said there is less risk the new rules will push money into unregulated products because of a new overnight repurchase facility offered by the Federal Reserve where government funds can park cash leaving prime funds. Deborah Cunningham, senior portfolio manager for Federated Investors, said she plans for scenarios where the yield difference between prime and government money funds widens to as much as 50 basis points, the most since 2009. Even at that spread, however, many corporate treasurers will move their money, said James Gilligan, assistant treasurer of Great Plains Energy Inc. "Treasurers are going to sacrifice yield for security," he said." In other news, SEC Chair Mary Jo White delivered a keynote address Friday at ICI's General Membership Meeting and mentioned money funds briefly a couple times.

Money fund assets inched higher over the past week, according to ICI's latest weekly "Money Market Fund Assets" report. It says, "Total money market fund assets increased by $4.29 billion to $2.72 trillion for the week ended Wednesday, May 18, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $20.37 billion and prime funds decreased by $15.21 billion. Tax-exempt money market funds decreased by $870 million." Government assets, including Institutional and Retail (and Treasury and Government), now stand at $1.337 trillion, while Prime assets are at $1.170 trillion. Government fund assets moved ahead of Prime assets earlier this year, fueled by the conversion of $242.1 billion of Prime funds to Govt funds to date (through May 2). (We're not aware of any conversions this week though, so are not sure what caused ICI's Prime to Government shift in this latest report.) The release continues, "Assets of retail money market funds decreased by $330 million to $974.50 billion. Among retail funds, government money market fund assets increased by $7.99 billion to $404.05 billion, prime money market fund assets decreased by $7.18 billion to $406.36 billion, and tax-exempt fund assets decreased by $1.14 billion to $164.09 billion." It adds, "Assets of institutional money market funds increased by $4.62 billion to $1.74 trillion. Among institutional funds, government money market fund assets increased by $12.38 billion to $932.52 billion, prime money market fund assets decreased by $8.03 billion to $763.87 billion, and tax-exempt fund assets increased by $270 million to $48.34 billion." `Year-to-date through May 18, MMF assets are down $40 billion with Inst assets down $76 billion and Retail assets up $35 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, mutual fund publication Ignites will hold a webinar called, "Counting Down to Money Market Fund Reform" on Tuesday, May 24 at 10:30 a.m. EST. The description says, "Ignites will host its next Exchange webcast: Counting Down to Money Market Fund Reform. The webcast will explore the operational changes that fund shops have begun to implement. The panelists will also discuss the alternative types of products that some may opt to launch in light of the reforms. The panelists will be Peter Crane, president and CEO of Crane Data, and Bud Person, EVP and national director at Federated Investors' wealth-management and cash division. For more information, click here.

The Federal Reserve released the Minutes from its April 26-27 FOMC meeting yesterday. They state, "Participants agreed that their ongoing assessments of the data and other incoming information, as well as the implications for the outlook, would determine the timing and pace of future adjustments to the stance of monetary policy. Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the Committee's 2 percent objective, then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June. Participants expressed a range of views about the likelihood that incoming information would make it appropriate to adjust the stance of policy at the time of the next meeting. Several participants were concerned that the incoming information might not provide sufficiently clear signals to determine by mid-June whether an increase in the target range for the federal funds rate would be warranted. Some participants expressed more confidence that incoming data would prove broadly consistent with economic conditions that would make an increase in the target range in June appropriate." The minutes continue, "Against the backdrop of its discussion of current conditions, the economic outlook, and the risks and uncertainties surrounding the outlook, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent at this meeting.... One member, however, preferred to raise the target range for the federal funds rate at this meeting, noting that downside risks to the outlook had diminished and that the outlook was for outcomes consistent with the Committee's objectives.... The Committee expected that economic conditions would evolve in a manner that would warrant only gradual increases in the federal funds rate, and that the federal funds rate was likely to remain, for some time, below levels that were expected to prevail in the longer run. Regarding the possibility of adjustments in the stance of policy at the next meeting, members generally judged it appropriate to leave their policy options open and maintain the flexibility to make this decision based on how the incoming data and developments shaped their outlook for the labor market and inflation as well as their evolving assessments of the balance of risks around that outlook.... Some members expressed concern that the likelihood implied by market pricing that the Committee would increase the target range for the federal funds rate at the June meeting might be unduly low. Ms. [Esther] George dissented because she believed that a 25 basis point increase in the target range for the federal funds rate was appropriate at this meeting." In other news, Treasury Strategies and Fitch Ratings are holding a webinar on May 19 at 11:00 am, entitled, "Corporate Investing Following Money Market Fund Reform: Are you ready for the new cash management landscape?" Panelists are Ian Rasmussen of Fitch Ratings and Tony Carfang of Treasury Strategies.

Fidelity Investments released a "primer" entitled, "Money Markets: Repurchase Agreements," whose "Key Takeaways" include: Repurchase agreements (repos) are used by money market funds as short-term investments; Variations of repos are characterized by different types of collateral, including Treasury, government agency, and nontraditional collateral; and, Fidelity's money market mutual funds enter into repos with only counterparties that Fidelity's research team determines to represent minimal credit risk." Fidelity's `Michael Morin writes, "Repurchase agreements, "repos," are contracts for the sale and future repurchase of a pool of securities. On the termination (repurchase) date, the seller repurchases the securities and pays interest for the use of the buyer's funds. Fidelity's money market mutual funds primarily use tri-party repos, which consist of a buyer, a seller, and a tri-party clearing bank.... A majority of the repos executed across the industry comprise overnight investments in which the securities are repurchased by the seller on the next business day. Fidelity's taxable money market funds use overnight repos to help satisfy the Rule 2a-7 requirement to hold a 10% minimum of total assets in one-day liquid assets. Fidelity's money market funds also enter into term repos <b:>`_." The piece explains, "In money market investing, Treasury repos, government repos, and nontraditional repos are distinguished by the type of collateral subject to the repo. Collateral for Treasury repos is limited to securities issued by the U.S. Treasury, whereas collateral for government repos includes Treasury securities as well as securities issued or guaranteed by government agencies, including, among others, Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. Nontraditional repos involve a wider range of collateral, including, without limitation, investment-grade and non-investment-grade fixed income securities, equities, and money market securities." Finally, Morin comments, "In 2009, the Federal Reserve Bank of New York (FRBNY) requested that a group be formed to address weaknesses in the tri-party repo market that became apparent during the financial crisis. The Tri-Party Repo Infrastructure Reform Task Force (the Task Force) was organized to address concerns associated with the infrastructure supporting that market. The group included representatives from a diverse range of participants in the tri-party repo market. In May 2010, the Task Force issued a report with recommendations to modify tri-party repo settlement processes to reduce dependency on the intraday credit provided by triparty repo clearing banks (J.P. Morgan Chase and The Bank of New York Mellon).... A great deal of progress has been made in this area. The share of tri-party repo volume that is now financed with intra-day credit from a clearing bank has dropped markedly, from 100% as recently as 2012, to a level averaging 3% to 5% at the end of April 2016 (as compared with the Task Force's original target of no more than 10%). Clearing banks, dealers, and investors all made changes to their practices and processes, which helped to achieve this goal.... However, a remaining policy concern of the New York Fed, which was not addressed by the Task Force's roadmap for reform, is the risk of fire sales of collateral by a dealer that is losing access to repo financing (pre-default), or by creditors of a dealer once it has defaulted (post-default)." It adds, "Substantial progress has been observed to date with respect to pre-default fire sales, because of capital and liquidity regulations that have prompted dealers to extend the tenor of their financing for less liquid assets." Morin concludes, "Repurchase agreements offer money market investors a liquid and collateralized short-term investment."

The Illinois State Board of Investment put out a "Request for Competitive Proposal: Government Securities Money Market Fund." It reads, "The Illinois State Board of Investment ("ISBI") hereby issues a request for competitive proposals ("RFP") from qualified defined contribution government securities money market fund providers ("Respondent") on behalf of the State of Illinois Deferred Compensation Plan. The benchmark for this allocation will be the 90-day Treasury Bill. All forms needed for submitting a response to this RFP are available on ISBI's website at http://www.illinois.gov/isbi/Pages/RFP.aspx.... The deadline to Submit Written Questions is May 20, 2016, Noon CDT. The final Filing Date is May 30, 2016, 9:00AM CDT. The plan has a total of $4.1 billion in assets." Under Scope of Services it says, "The selected Respondent will provide a government securities money market fund for the Plan benchmarked to 90-day Treasury Bill. T. Rowe Price is currently the record-keeper for the Plan. The government securities money market fund selected and its transfer agent must enter into an agency agreement with T. Rowe Price Retirement Plan Services, Inc.... The agency agreement establishes roles, responsibilities and procedures governing the trading within the Plan." In other news, a press release entitled, "Federated Investors, Inc. Appoints New Head of Sales." It reads, "Federated Investors, Inc., one of the nation's largest investment managers, today announced the appointment of Paul A. Uhlman as president of Federated Securities Corp., Federated's distribution arm for domestic markets, effective June 15, 2016. The announcement was made by J. Christopher Donahue, president and chief executive officer of Federated Investors, Inc. Uhlman will replace Thomas E. Territ who will remain with Federated and participate in the transition of duties over the next three months before retiring later in the third quarter."

Ignites posted an article, "Morgan Stanley's Ultra-Short Aims to Eat Money Funds' Lunch." It says, "Morgan Stanley Investment Management has launched its Ultra-Short Income Portfolio, which the firm is marketing as an alternative to money market funds, as those products are expected to see big asset shifts in coming months.... In addition, when the SEC reforms are in effect, prime funds will have to manage to shorter duration targets and maintain greater liquidity, which will likely cause yields to decrease, Jonas Kolk, CIO for global liquidity and one of the fund's two portfolio managers, tells Ignites. Morgan Stanley's ultra-short fund may "fill a void" in this new environment by providing a return that is similar to what prime funds have historically delivered but probably will not be able to muster once the reforms take effect, says Kolk.... Morgan Stanley's new fund is an "old-style money fund," says Peter Crane, CEO of Crane Data, referring to the fact that it has a maximum weighted average maturity of 90 days. The SEC's 2010 reforms lowered the required maximum 90-day WAM to a 60-day WAM. Conservative ultra-short funds are an emerging subset within the broader ultra-short category, and Morgan Stanley's new offering is among the first of its kind, says Crane. Crane Data has launched a conservative ultra-short bond fund index that contains 18 products, but the company may further segment this group because of substantial differences among products within it, says Crane. "We would argue that there are nowhere near 18 competitor funds that have the same type of conservative investment standards that we do," says Morgan Stanley's Kolk. The fund's conservative approach is a "tremendous marketing tool," he says, noting that Fitch has given it a triple-A rating. `State Street and Deutsche have similar products in registration, says Crane. Many firms are waiting to see how existing conservative ultra-short funds perform and whether they attract assets before moving ahead with their own rollouts, he says. "There are some out there that think these are going to be more popular than prime institutional money market funds," he says. Rising interest rates could also spur more conservative ultra-short funds to come to market, says Sarah Bush, head of Morningstar's fixed-income manager research analyst team. The 18 funds that make up Crane Data's Conservative Ultra-Short Index have returned 0.26% year-to-date through March, 0.43% for the one-year period, 0.40% for the three-year period and 0.54% for the five-year period. The group represents $26.6 billion in total assets. The broader category of ultra-short bond funds represents $71.5 billion, Morningstar data shows.... Fidelity's Conservative Income Fund, launched in 2011, is among the biggest of the so-called conservative ultra-short funds in Crane Data's index. That fund represented more than $4 billion in assets as of the end of March, according to Crane Data. Among the new launches in the subcategory of ultra-shorts is Invesco's Conservative Income Fund, which went live in July 2014 and has $83 million in assets, according to Crane Data."

Money fund assets increased for the third straight week, up $5.7 billion, according to the latest weekly "Money Market Fund Assets" report. ICI says, "Total money market fund assets increased by $5.67 billion to $2.71 trillion for the week ended Wednesday, May 11, the Investment Company Institute reported today. Among taxable money market funds, government funds decreased by $1.37 billion and prime funds increased by $9.66 billion. Tax-exempt money market funds decreased by $2.61 billion." Government assets, including Institutional and Retail (and Treasury and Government), now stand at $1.316 trillion, while Prime assets are at $1.185 trillion. Government fund assets moved ahead of Prime assets earlier this year, fueled by the conversion of $242.1 billion of Prime funds to Govt funds to date (through May 2). The release continues, "Assets of retail money market funds decreased by $2.41 billion to $974.83 billion. Among retail funds, government money market fund assets decreased by $2.62 billion to $396.06 billion, prime money market fund assets increased by $1.98 billion to $413.54 billion, and tax-exempt fund assets decreased by $1.77 billion to $165.23 billion." It adds, "Assets of institutional money market funds increased by $8.08 billion to $1.74 trillion. Among institutional funds, government money market fund assets increased by $1.25 billion to $920.14 billion, prime money market fund assets increased by $7.67 billion to $771.90 billion, and tax-exempt fund assets decreased by $840 million to $48.07 billion." Year-to-date through May 11, MMF assets are down $44 billion with Inst assets down $80 billion and Retail assets up $36 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, Fitch issued a press release, "Fitch Withdraws BofA Money Market Funds' Ratings." It says, "Fitch Ratings has withdrawn the ratings of the following five money market funds managed by BofA Global Capital Management: BofA Government Plus Reserves, BofA Government Reserves, BofA Money Market Reserves, BofA Municipal Reserves, BofA Treasury Reserves. All of the funds were rated 'AAAmmf' prior to the withdrawal. Fitch is withdrawing the ratings of the five money funds as they no longer exist. BofA Municipal Reserves was liquidated and the remaining funds were merged into money funds managed by Blackrock Advisors, LLC, following the acquisition of the Bank of America money-market fund business by Blackrock. Accordingly, Fitch will no longer provide ratings or analytical coverage for the funds."

Vanguard released commentary by Mark Dorfler entitled, "Money market reform and stable value: Considerations for plan fiduciaries." He writes, "In light of changes to money market funds mandated by the Securities and Exchange Commission (SEC) and due to take effect October 14, 2016, many plan fiduciaries are taking the opportunity to review the options in their plan lineups for protecting principal. This commentary examines the benefits and risks of two common options: money market mutual funds and stable value funds. Although both types of investments seek to provide current income and preserve shareholders' principal investment by maintaining a net asset value (NAV) of $1 per share, they achieve this result through very different means. This paper also outlines these different investment approaches." Dorfler continues, "Money market mutual funds are SEC-registered investment funds that invest in very short-term, high quality securities. The amount of income a shareholder may receive from these securities largely depends on the current interest rate environment for such investments. The funds are designed to provide maximum liquidity to investors, and thus are considered one of Vanguard's most conservative investment options." He continues, "Stable value funds can take several forms, including bank collective trusts, insurance contracts, and separately managed accounts. One feature they all share is that they are not subject to SEC regulation -- and therefore also not subject to the SEC's money market fund rules. As a result, although they may be regulated to some degree under banking or insurance law, they don't have the same level of public reporting and disclosure requirements that apply to SEC-regulated investments like money market funds. In contrast to money market funds, stable value funds invest, directly or indirectly, in high-quality short- to intermediate-term fixed income investments. These investments typically provide more income than money market investments, but unlike the very short-term investments held by money market funds, the value of these investments can fluctuate significantly on a daily basis. As a result, stable value funds purchase insurance against daily market fluctuations that allows the stable value fund to use book-value, rather than market-value, accounting, permitting the fund to maintain a net asset value of $1 per share." He concludes, "A plan's fiduciaries are not required to offer any particular type of investment as the plan's protected-principal option. In reviewing money markets versus stable value in this regard, fiduciaries should undertake a prudent process to understand and evaluate the comparative benefits and risks of each investment vehicle and then make a reasoned choice. As this paper has described, either vehicle may be an appropriate investment option. Stable value offers bond-like performance with much lower volatility than traditional bond funds. By contrast, money market funds have had little return since the global financial crisis as a result of the zero-interest rate environment that prevailed until very recently, but they provide a much higher degree of liquidity and flexibility for plan fiduciaries than stable value funds. Plan fiduciaries considering stable value should particularly scrutinize their plan's design, participant demographics, and the likelihood of plan events. Fiduciaries should weigh these factors against stable value's attractive performance record and potential for preserving principal. In managing performance expectations, plan fiduciaries must always understand that past performance is no guarantee of future returns. Although the performance gap between stable value and money market funds may make stable value appear attractive today, that gap may narrow in the future as interest rates are expected to increase from their historically low levels."

Forbes posted, "Interest Rates May Rise, But Your Money Market Yield May Not." The article states, "Interest rates may be inching upwards, but it may be some time before your money market account does. While popular wisdom is that rates can only increase, many money market funds have been operating at losses. According to iMoneyNet, the average US taxable money fund yield is 0.10%, though a quick scan of most major brokerage firms shows many funds are still paying just above zero. Rising rates should lift all boats. However, most funds have been supplemented by operating expense waivers that have kept investors from experiencing negative returns . While the Investment Company Institute's 2016 Investment Company Fact Book has the average operating expense of a money fund at 0.11%, brokerage clients often pay significantly more. A quick scan of Schwab's money fund expenses shows many retail funds between 0.45-0.67%; these funds had yields of 0.01-0.15% as of March 4th, 2016." The piece adds, "In addition to funds needing to overcome operating expenses, the expense waivers may also be subject to a recapture of past fees. According to TIAA's website, the CREF Money Market Account anticipates ending a fee waiver before next April, and once the fee waiver ends the fund "may recover from the account a portion of the amounts waived.""

Reuters published an article, "Dutch propose more flexible EU money market funds rules." It says, "European Union plans to phase out up to half of the bloc's 1 trillion euro ($1.14 trillion) money market funds (MMFs) could be watered down under a compromise proposed by the Dutch." (See our April 26 News, "European Compromise Moves MMF Reforms Closer; Sterling MFs Jump.") Reuters' piece explains, "EU member states with a strong fund industry presence such as Ireland, Luxembourg and Britain have been battling to prevent the European Parliament phasing out so-called constant net asset value or CNAV funds, which account for half of the MMF market. The new proposal by the Dutch EU presidency, which has also been spurred by policymakers desperate to fuel economic growth, comes after three years of wrangling over the funds, which are used by thousands of companies for their day-to-day funding. Some regulators say CNAVs lack transparency as their share price remains unchanged even when markets rise or fall, unlike the share price of variable net asset value (VNAV) funds. The Dutch presidency has proposed giving CNAVs two years to switch into lower risk public debt instruments, or convert into a VNAV. CNAVs could also convert into a new type of hybrid money market fund known as low volatility net asset value (LVNAV). The European Parliament, which has joint say with EU states on the draft law, wants CNAVs to convert once the rule comes into force, with LVNAVs losing authorisation within five years under a so-called sunset clause, unless further action is taken. But under the Dutch EU Presidency compromise, which was seen by Reuters, CNAVs would have two years to make the changes, and LVNAV authorisations would not automatically lapse after five. Instead, there would be a review of the rules to see how they affect markets and investors before any further changes. "We hope that the outcome will be one which recognises the important role played by MMFs, facilitates the needs of investors and enables MMFs to provide much needed funding in the economy," Pat Lardner, chief executive of Irish Funds."

The website Accounting Today posted a story entitled, "IRS Offers Guidance on Money Market Funds," which addresses a couple of the minor outstanding tax issues related to MMF reforms. (It doesn't finalize the proposed "wash sale" and simplification of gains though.) It says, "The Internal Revenue Service has issued a notice and revenue procedure on requirements for investing in money market funds. Notice 2016-32 provides guidance to taxpayers regarding the diversification requirements under Section 817(h) of the Tax Code for a segregated asset account that invests in a government money market fund, or MMF. The notice provides an alternative diversification criterion so that a segregated asset account that invests in a government MMF can meet the diversification requirement." It explains, "In 2014, the Securities and Exchange Commission [amended] the rules governing money market funds. Rule 2a–7 as amended identifies circumstances under which an MMF is permitted or required to impose a liquidity fee or is permitted to impose a redemption gate.... Rule 2a–7 defines a government MMF as an MMF "that invests 99.5 percent or more of its total assets in cash, government securities, and/or repurchase agreements that are collateralized fully [by cash items or government securities]."" It adds, "Revenue Procedure 2016-31 provides that certain contributions that money market funds receive from sponsors may be excluded from the distribution requirements of Section 852(a) of the Tax Code but are included in investment company taxable income for purposes of Section 852(b). The revenue procedure provides temporary relief for certain money market funds that receive contributions from their advisers as the MMFs transition to comply with SEC rules that change how certain MMF shares are priced." In our April 6 News, "ICI Pushes IRS on MMF Tax Reforms; Goldman, USAA T-E Update; Yields," we ran a story on a comment letter filed by the Investment Company Institute urging the IRS to provide guidance to the industry on how to deal with the tax consequences of money fund reform <b:>`_. It says, "With respect to the remaining money market fund guidance requests, we wish to reiterate the industry's priorities. First, the issue for which most immediate guidance is necessary is the diversification of variable insurance product money market funds under section 817(h). Given the quickly approaching compliance deadline for money market fund rule, mutual fund complexes need guidance on this issue before they can determine whether and how to continue using money market funds in their variable insurance products. In the absence of such guidance, it is unclear whether the use of money market funds in such a way will remain a viable strategy." The ICI letter continues, "The second issue for which immediate guidance is necessary is the issue of adviser contributions. Again, fund complexes currently are deciding how to manage their existing money market funds in anticipation of the compliance date of the money market fund rule. The use of adviser contributions may be an important tool necessary to ease the transition for investors from stable net asset value to floating NAV money market funds." See too our July 30, 2014 News, "Reform Floating NAV Accounting Issues Addressed by Treasury Proposal."

Money fund assets increased slightly in the past week, up $1.7 billion, as another batch of Prime money funds officially converted to Government funds. ICI's latest weekly "Money Market Fund Assets" report says, "Total money market fund assets increased by $1.65 billion to $2.71 trillion for the week ended Wednesday, May 4, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $26.48 billion and prime funds decreased by $24.45 billion. Tax-exempt money market funds decreased by $380 million." Government assets, including Institutional and Retail (and Treasury and Government), surpassed $1.3 trillion for the first time (now at $1.313 trillion), while Prime assets dipped below $1.2 trillion (at $1.182 trillion). Government fund assets moved ahead of Prime assets earlier this year, fueled by the conversion of $242.1 billion of Prime funds to Govt funds to date (through May 2). ICI's report continues, "Assets of retail money market funds increased by $40 million to $978.61 billion. Among retail funds, government money market fund assets increased by $8.64 billion to $394.07 billion, prime money market fund assets decreased by $8.29 billion to $417.53 billion, and tax-exempt fund assets decreased by $320 million to $167.00 billion." It adds, "Assets of institutional money market funds increased by $1.61 billion to $1.73 trillion. Among institutional funds, government money market fund assets increased by $17.84 billion to $918.82 billion, prime money market fund assets decreased by $16.17 billion to $764.30 billion, and tax-exempt fund assets decreased by $60 million to $48.91 billion." Year-to-date through May 4, MMF assets are down $48 billion with Inst assets down $88 billion and Retail assets up $40 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." On May 2, 23 funds, totaling $28.4 billion, converted from Prime to Government. In other news, Invesco reported net inflows of $3.8 billion into its money market funds in the first quarter, according to their Q1 earnings release.

The Wall Street Journal's "Intelligent Investor column by Jason Zweig featured a piece entitled, "Take a Hint from Goldman: Squeeze More Out of Your Cash" this weekend. He writes, "Low interest rates have made many investors too complacent with their cash. Squeezing more income out of your cash hardly seems worth the bother in today's yield-parched world. The average bank money-market account yields 0.11%, according to Bankrate.com. At those rates, $10,000 will earn $11 in a year — enough to buy a few bags of potato chips at Wal-Mart. The Crane 100 Money Fund Index, a measure of returns on money-market mutual funds, yields a still-woeful 0.22%. With yields so low, even the personal-finance columnist of The Wall Street Journal has thousands of dollars languishing in a bank savings account earning 0.04% a year. Yes, I know that at that rate, my money won't double for another 1,733 years. But, along with many other investors, I have what economists call a delay-discounting problem. The work of having to move my money is immediate, while the rewards that come from moving it are delayed.... I've been procrastinating on this for years. Until now, that is. Earlier this month, Goldman Sachs -- the Wall Street giant that has long personified wealth and power -- began offering savings accounts and certificates of deposit through its online GS Bank. Goldman's initiative has prodded me to wring more return out of my cash. Over the next few weeks I'll finally move out of bank accounts with miniaturized returns into higher-yielding choices.... Getting extra yield without extra risk takes a bit of work. But cash accounts are perhaps the only area of investing where you can increase your returns 25-fold -- or more -- without incurring greater risk. For larger investors, wringing out more yield this way can add up to hundreds, even thousands, of dollars in extra income annually. How attractive are Goldman's rates? At 1.05% for a savings account and 2% for a five-year CD, they are quite competitive. Goldman's GS Bank is one good choice. This week, seven other online banks offered savings-account rates of 1.15% or greater, including the Bank of Princeton and UFB Direct." In other news, the New York Fed updated its "Reverse Repo Counterparties List." The latest entry says, "Federated Institutional Money Market Management has been added to the list of reverse repo counterparties, effective May 4, 2016." A prior update says, "Deutsche Cash Management Master Portfolio changed its name to Government Cash Management Portfolio, and Master Government Institutional Portfolio managed by Blackrock Advisors, LLC, changed its name to Master Treasury Strategies Institutional Portfolio, effective May 2."

A press release entitled, "StoneCastle Increases the Capacity and Liquidity of the Federally Insured Cash Account (FICA) Program," says, "StoneCastle Cash Management, LLC is proud to announce significant enhancements to its Federally Insured Cash Account (FICA) program. Effective immediately, clients can get the benefit of up to $60 million of FDIC insurance per tax ID with the convenience of next day liquidity. As post-crisis regulatory initiatives continue to impact many traditional cash vehicles, treasurers are left facing many headwinds." StoneCastle CEO Steve Rotella comments, "As treasurers look to eliminate market and regulatory uncertainty associated with Basel III and money fund reform, FICA remains a proven alternative to those seeking safety, liquidity and yield." Vice-President of Marketing Chris Takacs adds, "These enhancements are a direct response to the feedback from our clients and the treasury community. We believe FICA is now even better suited to meet the short term cash management needs of treasury professionals." The release adds, "FICA is a liquid, structured bank deposit vehicle that provides investors a competitive yield on multi-million dollar deposits backed by the full faith and credit of the U.S. Government." In other news, Vanguard Charitable posted an update, "Money market reform to impact investment options." It reads, "New rules by the Securities and Exchange Commission (SEC) have mandated to the financial industry that institutional investors of prime money market funds can no longer invest in retail prime money market funds. As an institutional client of The Vanguard Group, Vanguard Charitable is required to comply with the rule, effective on October 14, 2016. To do so, Vanguard Charitable will exchange all assets invested in the Vanguard Prime Money Market Fund to the Vanguard Federal Money Market Fund. This exchange will occur on April 29 and affect accounts invested in Vanguard Charitable's Money Market and Gift Preservation investment options." Also, Pensions & Investments published, "Colorado County Officials & Employees goes with Vanguard money market fund, drops Fidelity." The article states, "Colorado County Officials & Employees Retirement Association, Littleton, is adding the Vanguard Federal Money Market Fund to the lineup of its defined contribution plans, said Jacob Kuijper, executive director.... Effective May 20, the Vanguard Group fund will replace the Fidelity Money Market Fund. The change is being made due to the Fidelity Money Market Fund's new designation as a retail fund, Mr. Kuijper said. CCOERA participants have $5.8 million invested in the Fidelity fund."

The Wall Street Journal posted a story, "Repos Falling Out of Favor Since Fed Lifted Rates." It says, "The Federal Reserve has seen demand fall to a two-year low for a program it created to help it raise interest rates, and expanded last year in anticipation of heavier use. This hasn't hampered the Fed's ability to control rates, but reflects how, more than seven years after the financial crisis, policy makers are still experimenting with new financial tools and may sometimes be surprised by how markets respond. Through the temporary program, called overnight reverse repos, the Fed takes cash from a variety of lenders in exchange for Treasury securities, and pays interest to participants. Its aim is to help set a lower boundary, or floor, for short-term interest rates. The Fed used the program with other tools to raise its benchmark short-term rate in December by a quarter percentage point. Officials worried then that excess demand for the repos could alter U.S. money markets in unexpected ways, so they also boosted the daily volume allowed to around $2 trillion from $300 billion. Since then, use of the Fed's repo facility has fallen to its lowest level since early 2014. Daily use of the Fed repo program this month has averaged $33.4 billion and touched a two-year low of $16.6 billion on April 13, the latest available Fed data show. This compares with a daily average of $67 billion in March and $141 billion in December. Some analysts said the decline partly reflects money-market funds shifting their attention to higher-yielding substitutes. The Fed pays an interest rate of 0.25% on its repos. Treasury bills maturing in six months, on Oct. 27, are yielding 0.391% and private "general collateral" repos backed by Treasurys are yielding 0.341%. But the extent of the drop-off suggests other market forces that are not yet understood." It continues, "A spokeswoman for the New York Fed declined to comment on market action driving the declining use in the program. `Simon Potter, head of markets at the Federal Reserve Bank of New York, acknowledged in a February speech, "Usage [of the overnight repo program] has come down" as private money market rates rose. "Even with zero usage, the [repo] facility could still be effective" in controlling rates, he said. The turnaround in the program is surprising because it comes at a time of great demand for Treasurys, which the Fed's repos offer as collateral. U.S. money-market funds are converting to investing only in government securities by an October deadline to avoid more stringent regulations. Barclays PLC expects departures from credit funds to reach around $350 billion, with most of the money flowing into government-only funds. Other analysts speculated there may be seasonal factors involved in the shift. "We don't have a wonderful explanation for the diminished participation," wrote those at Stone & McCarthy Research Associates in an April 11 note to clients, adding that redemptions from funds associated with the mid-April tax filing deadline may be crimping demand for the Fed's repo program." In other news, the New York Fed's Liberty Street Economics blog featured a post, "What's Up With GCF Repo?." It says, "In a series of four posts we take a close look at the GCF Repo market and how it has evolved recently. This first post provides an overview of the GCF Repo market and evaluates its size relative to that of the tri-party repo market as a whole. We also explain what interbank GCF Repo is and show what share of the market it represents."

BlackRock posted a primer in its "Cash Academy" entitled, "Floating Net Asset Value: A Surmountable Shift." It reads, "One of the more significant changes to come out of U.S. money market fund reform is the requirement for Prime and Municipal Institutional Money market funds to adopt a floating rate net asset value (with measurement to the fourth rather than the second decimal place) by October 2016.... While this represents a shift from current constant net asset value practices, we believe the ultimate impact for investors will generally be relatively small." Under Key Takeaways, it says, "We expect the change to an FNAV is not likely to result in sudden material swings in the net asset value (NAV) for Prime Institutional funds. We expect financial consequences from the implementation of FNAV accounting to be minimal, even in a rising rate environment. We recommend Cash investors evaluate their Investment Policy Statements for language." BlackRock writes on the Tax and Accounting Impact, "The U.S. Department of the Treasury and the Internal Revenue Service (IRS) issued a proposal for simplified tax accounting for FNAV MMFs. View the proposal here. Look for more information as the proposals are finalized. The Securities and Exchange Commission, which has authority to set accounting standards, clarified that FNAV MMFs will be treated as cash equivalents. The IRS issued a revenue procedure that exempts shareholders of FNAV MMFs from the wash sale rule." In other news, Moody's issued a release, "US dollar-denominated money market funds to see significant outflows in Q2 2016." It states, "Up to 50% of remaining investor assets will likely leave US prime money market funds ahead of major regulatory reforms in October, says Moody's Investors Service. However, demand for euro prime funds is expected to be resilient despite record low yields. Total assets in the ten largest Moody's-rated offshore US Dollar prime funds fell 10% in 1Q 2016 as investors sought out higher yielding opportunities for their cash following year-end. "We expect US prime fund managers to limit investments in securities with maturities past October as they proceed cautiously in anticipation of the switch to floating net asset values," says Rory Callagy, a Vice President -- Senior Credit Officer at Moody's. "However, demand for euro prime funds is resilient amid uncertainties around Brexit and a lack of comparable investment alternatives," adds Vanessa Robert, a Vice President -- Senior Credit Officer.... Investors will likely continue to use euro-denominated MMFs as higher-yielding liquid vehicles with greater diversification than bank deposits. To date, this dynamic has kept euro CNAV MMFs' collective assets under management (AUM) from falling much below EUR70 billion. In anticipation of the Brexit referendum in June, Moody's expects euro and sterling portfolio managers to increase their funds' liquidity and exposure to government and agency securities, a positive for the funds' credit quality and market risk profiles. The rating agency also expects these funds to be a safe haven ahead of the Brexit vote.... Collectively, the Sterling prime money market funds' AUM increased to GBP156 billion at the end of Q1 from GBP151 billion at the end of the year, while the Moody's rated funds experienced GBP877 million outflows to GBP102 billion during Q1."