Daily Links Archives: June, 2016

The Investment Company Institute released its latest "Money Market Fund Holdings" summary (with data as of May 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. (See our June 13 News, "Portfolio Holdings: Agencies, Repo Gain; Govt Holdings Surpass Prime.") The release explains, "Beginning this month, the Investment Company Institute's (ICI) monthly press release and Taxable Money Market Fund Portfolio report will utilize a new format and provide new data. ICI's press release and tables will now include additional types of securities; dollar-based reporting; and monthly rather than weekly reporting of liquidity. These changes reflect the new reporting requirements on the Securities and Exchange Commission's revised Form N-MFP. This report will be published in the middle of each month, reporting aggregated data for the prior month. As of the final Friday in May, prime money market funds held 30.8 percent of their portfolios in daily liquid assets (down from 32.4% in April) and 46.3 percent in weekly liquid assets (up from 43.9%), while government money market funds held 57.6 percent of their portfolios in daily liquid assets (down from 57.7%) and 73.9 percent in weekly liquid assets (down from 74.2%). At the end of May, prime funds had a weighted-average maturity of 31 days (down from 34 days) and a weighted-average life of 46 days (down from 51 days). Average WAMs and WALs are asset-weighted. Government money market funds had a weighted-average maturity of 39 days (down from 41 days) and a weighted-average life of 96 days (up from 95 days)." On Holdings By Region of Issuer, it adds, "Prime money market funds' holdings attributable to the Americas declined from $442.85 billion in April to $424.82 billion in May. Government money market funds' holdings attributable to the Americas rose from $1,081.79 billion in April to $1,159.46 billion in May." The Prime Money Market Funds by Region of Issuer table shows Americas at $424.8 billion, or 36.9%; Asia and Pacific at $228.7 billion, or 19.9%; Europe at $486.9 billion, or 42.3%; Supranational at $1.4 billion, or 0.1%; and Other at $8.5 billion, or 0.7%. The Government Money Market Funds by Region of Issuer table shows Americas at $1.159 trillion, or 84.2%; Asia and Pacific at $25.1 billion, or 1.8%; Europe at $192.4 billion, or 13.9%; Supranational and Other total or 0.1%. The release explains, "Each month, ICI reports numbers based on the Securities and Exchange Commission's Form N-MFP data. The report includes all money market funds registered under the Securities Act of 1933 and the Investment Company Act of 1940, that are publicly offered. All master funds are excluded, but feeders are apportioned from the corresponding master and included in the report."

AllianceBernstein filed a Prospectus Supplement to change its $1.8 billion AB Exchange Reserves Fund from Prime to Government. The filing states, "At a Meeting on March 9, 2016, the Board of Directors of AB Exchange Reserves (the "Fund") approved proposals to change the name of the Fund to AB Government Exchange Reserves and to change certain investment policies of the Fund to convert it to a government money market fund that invests almost all of its assets in U.S. Government securities in accordance with Rule 2a-7 under the Investment Company Act of 1940. U.S. Government securities generally have lower yields than the types of non-government securities in which the Fund has historically invested the bulk of its assets. As part of these changes, the Fund will also reduce its current management fee of 0.25% to an annualized fee of 0.20% of the Fund's average daily net assets. As a government money market fund, the Fund will invest at least 99.5% of its total assets in cash, marketable obligations (which may bear adjustable rates of interest) issued or guaranteed by the U.S. Government, its agencies and instrumentalities and repurchase agreements that are collateralized fully (i.e., by U.S. Government securities). The Fund will also invest at least 80% of its net assets in U.S. Government securities and repurchase agreements that are collateralized by U.S. Government securities. The proposals were recommended to the Board by the Fund's investment adviser, AllianceBernstein L.P. in light of recent money market fund reforms, after considering the nature of the Fund's shareholder base and the desirability of the Fund being able to continue to seek to maintain a stable $1.00 net asset value ("NAV") as opposed to operating with a "floating" NAV and, among other things, becoming subject to potential redemption fees and limitations on redemptions under certain circumstances. The changes to the Fund's name and management fee and changes to the Fund's investment policies to convert it to a government money market fund do not require stockholder approval. The changes are expected to be effective on or about July 1, 2016." With this conversion, $301.9 billion will have shifted from Prime funds into Govt MMFs by Oct. 14. In other news, Institutional Investor posted a story, "Money Market Reform: The Risks of Your Cash Strategy," written by Northern Trust's Peter Yi.

Wells Fargo Funds released an update on last week's "Brexit" vote in the U.K. It says, "From the Wells Fargo Money Market Funds portfolio management team. The idea that the U.K. would hold a referendum on European Union membership first appeared on our radar in December 2014, in advance of the elections that were to occur the following May. Indeed, it had been part of David Cameron's campaign platform, and when his Conservative Party received an outright majority, the likelihood that such a referendum would be held became a virtual certainty, with only the timing in question. In February 2016, the date of the referendum was announced. Consequently, the impact of the referendum's outcome has been a factor in our determination of minimal credit risk when we have analyzed U.K. credits for some time now. We do not expect the Brexit vote to change the approved status of U.K. banks. In the short term, there may be some pressure on U.K. banks, but this was anticipated and has been prepared for, with banks having increased liquidity and the Bank of England standing by to supply ample liquidity if needed. Near-term economic weakness may be likely, with cautious corporate behavior affecting investment and employment. This process, however, will likely take a considerable amount of time to play through. The eventual implementation of exit negotiations is not likely to occur until at least October, when a new prime minister is selected, followed by a minimum of a two-year negotiation and separation period. The outcome of this vote, which seems to have surprised many market participants, has led to market volatility in what are considered to be traditional risk assets -- such as equities and foreign exchange -- accompanied by a flight to quality to U.S. Treasury securities. The money markets, however, are relatively immune to this volatility, with both credit spreads and liquidity little changed. The Wells Fargo Money Market Funds have a very low exposure to the British financial sector -- about 6%, including roughly 2% in overnight maturities -- with a short average maturity of 14 days. We will continue to monitor the effects of this referendum and the impact on money market instruments, making changes as appropriate." Also, Wells Fargo Securities' Garret Sloan commented on the last week's Money Fund Symposium, "We had the opportunity to attend the Crane Money Fund Symposium last week in Philadelphia. Money market fund reform and the state of money market fund assets were discussed in detail throughout the conference. Although many fund complexes and clients have already converted prime to government fund assets, there are expected to be a number of clients who are waiting until October when MMF reform is implemented, to make any sort of move out of prime funds. Some fund complexes noted how they are keeping WAMs and WALs shorter and purchasing securities that mature right before MMF reform implementation, in anticipation of clients shifting out of prime funds." He adds, "The final day of the Crane conference concluded with a discussion on Brexit.... It was noted during the discussion at the conference that the vote and decision for the UK to leave the EU comes on the heels of quarter end, which can also naturally be a volatile period for cash managers."

A release from the SEC entitled, "Merrill Lynch to Pay $415 Million for Misusing Customer Cash and Putting Customer Securities at Risk" says, "The Securities and Exchange Commission today announced that Merrill Lynch has agreed to pay $415 million and admit wrongdoing to settle charges that it misused customer cash to generate profits for the firm and failed to safeguard customer securities from the claims of its creditors. An SEC investigation found that Merrill Lynch violated the SEC's Customer Protection Rule by misusing customer cash that rightfully should have been deposited in a reserve account. Merrill Lynch engaged in complex options trades that lacked economic substance and artificially reduced the required deposit of customer cash in the reserve account. The maneuver freed up billions of dollars per week from 2009 to 2012 that Merrill Lynch used to finance its own trading activities. Had Merrill Lynch failed in the midst of these trades, the firm's customers would have been exposed to a massive shortfall in the reserve account. According to the SEC's order instituting a settled administrative proceeding, Merrill Lynch further violated the Customer Protection Rule by failing to adhere to requirements that fully-paid for customer securities be held in lien-free accounts and shielded from claims by third parties should a firm collapse. From 2009 to 2015, Merrill Lynch held up to $58 billion per day of customer securities in a clearing account that was subject to a general lien by its clearing bank and held additional customer securities in accounts worldwide that similarly were subject to liens. Had Merrill Lynch collapsed at any point, customers would have been exposed to significant risk and uncertainty of getting back their own securities." "The rules concerning the safety of customer cash and securities are fundamental protections for investors and impose lines that simply can never be crossed," said Andrew J. Ceresney, Director of the SEC's Division of Enforcement. "Merrill Lynch violated these rules, including during the heart of the financial crisis, and the significant relief imposed today reflects the severity of its failures."

Money fund assets dropped for the fourth week in a row and money continued to shift from Prime to Govt MMFs, according to ICI's latest "Money Market Fund Assets" report. Prime funds continue to see substantial asset outflows, dropping by over $92.7 billion the past 4 weeks, while Government funds have risen by $71.0 billion. These latest shifts are apparently unrelated to Prime to Govt funds conversions. The release says, "Total money market fund assets decreased by $3.63 billion to $2.70 trillion for the week ended Wednesday, June 22, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $25.68 billion and prime funds decreased by $27.05 billion. Tax-exempt money market funds decreased by $2.25 billion." Government assets, including Institutional and Retail (and Treasury and Government), stand at $1.430 trillion, while Prime assets are at $1.072 trillion. Government fund assets moved ahead of Prime assets earlier this year, fueled by the conversion (or liquidation) of almost $250 billion of Prime funds to Govt funds to date (over $50 billion more is scheduled to move too). We believe that the recent Prime asset declines reflect investor segments shifting from Prime to Govt. ICI's release continues, "Assets of retail money market funds decreased by $4.07 billion to $957.86 billion. Among retail funds, government money market fund assets increased by $6.09 billion to $421.31 billion, prime money market fund assets decreased by $8.38 billion to $379.89 billion, and tax-exempt fund assets decreased by $1.77 billion to $156.66 billion. Assets of institutional money market funds increased by $440 million to $1.75 trillion. Among institutional funds, government money market fund assets increased by $19.60 billion to $1.01 trillion, prime money market fund assets decreased by $18.67 billion to $692.26 billion, and tax-exempt fund assets decreased by $480 million to $44.78 billion." Year-to-date through June 22, MMF assets are down $56 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."

Federal Reserve Chair Janet Yellen spoke yesterday to the Committee on Financial Services, U.S. House of Representatives and gave her "Semiannual Monetary Policy Report to the Congress. She said on Monetary Policy, "Given the economic situation I just described, monetary policy has remained accommodative over the first half of this year to support further improvement in the labor market and a return of inflation to our 2 percent objective. Specifically, the FOMC has maintained the target range for the federal funds rate at 1/4 to 1/2 percent and has kept the Federal Reserve's holdings of longer-term securities at an elevated level. The Committee's actions reflect a careful assessment of the appropriate setting for monetary policy, taking into account continuing below-target inflation and the mixed readings on the labor market and economic growth seen this year.... Another factor that supports taking a cautious approach in raising the federal funds rate is that the federal funds rate is still near its effective lower bound. If inflation were to remain persistently low or the labor market were to weaken, the Committee would have only limited room to reduce the target range for the federal funds rate. However, if the economy were to overheat and inflation seemed likely to move significantly or persistently above 2 percent, the FOMC could readily increase the target range for the federal funds rate. The FOMC continues to anticipate that economic conditions will improve further and that the economy will evolve in a manner that will warrant only gradual increases in the federal funds rate."

Fidelity posted a new commentary entitled, "Fed's Challenge Remains: Normalizing Rates without Undermining Growth" from its Leadership Series. Authors Michael Morin and Kerry Pope write, "Several Fed officials, including Chair Janet Yellen during a May speech at Harvard University, stated that a rate increase would be appropriate if the economy and labor markets continued to strengthen. She noted that the central bank would "cautiously" increase rates.... Notably, the phrase "in the coming months," which had been used by Ms. Yellen in recent communications and was likely intended to keep open the option of a June or July rate hike, was omitted from her speech on June 6 following the May payroll report -- a possible signal that the report had an impact on the near-term policy outlook. Anticipation of a potential rate increase as early as June significantly waned with the release of May's payroll data." They continue, "It is unclear whether institutional investors have not yet decided how the new rules will impact their investment allocations or if they have decided to remain in prime funds, but the move into government funds has been slower than anticipated. In the meantime, based on the yield differential between institutional prime and government money market funds (MMFs), shareholders are being paid to wait. Most of the outflows from prime funds have been attributed to about $280 billion moving into government MMFs. Conversions have also had some impact on bank funding rates. Looking forward, continued shifts in investor preference prior to October's regulatory deadline could further affect bank funding rates and may cause yield spreads between prime and government MMFs to widen further. Prime MMFs remain well positioned with shortened weighted-average maturities and enhanced liquidity to accommodate potential redemptions. Corporate bond proceeds flowing into MMFs have buoyed industry assets in recent months. However, the migration of other depositors away from banks due to regulatory pressures or rising market rates has slowed after an initial wave of activity. The Fed's one rate hike has not yet incentivized many depositors to move into market instruments, and at the same time, banks have created new product types and adjusted rates to retain attractive depositors. Once the Fed undertakes additional rate hikes, many depositors will likely opt for attractive market-sensitive alternatives, including MMFs."

Morgan Stanley writes, "Global Liquidity Solutions: Institutional Government & Treasury Money Market Funds." It says, "The Morgan Stanley Institutional Liquidity Funds Government, Treasury, and Treasury Securities Portfolios are managed with the conservative natures of their shareholders in mind. [T]he Morgan Stanley Government, Treasury and Treasury Securities fund positioning and scale has resonated well with clients as the funds' asset growth have both consistently outperformed the industry since 2011. This can be attributed to several factors including our defensive portfolio management approach, our tailored resources and expertise, and our strategic focus on building up our government and treasury money market funds in anticipation of money market regulatory reform. Early on we identified the direction of money market fund reform was suggesting a regulator and investor preference toward government and treasury funds. We therefore placed significant emphasis on building scale in this category of money market funds by positioning our funds in a manner to be most attractive to investors. We believe that scale is important because it allows for greater accessibility coupled with greater stability for a fund. Government and treasury money market funds play a significant role in today's $2.7 trillion money fund industry, representing nearly half of total industry assets. When safety and liquidity are the most critical investment objectives, government and treasury funds may offer an attractive investment option. In some cases, selection of a government or treasury fund is dictated by policy mandate; in others, it stems simply from a desire to take a more defensive path. The amended money market fund rules to be implemented in October 2016 will not require these funds to float their net asset value (NAV) nor have the potential for liquidity fees or redemption gates, rendering them an attractive alternative for some current Prime fund investors. Since safety is the highest priority, for some investors, a government or treasury fund's yield may be a secondary consideration. Nonetheless, investors have a natural desire to maximize returns within the parameters of their risk profiles." In other news, Pensions & Investments writes, “Illinois State Board names finalists in several searches.” It says, “For the $4.1 billion Illinois State Employees’ 457 Deferred Compensation Plan overseen by ISBI, Vanguard Group was named as the only finalist to manage a money market fund. Vanguard was the incumbent, managing a $36 million portfolio for the 457 plan."

Bloomberg wrote the article, "EU's $1.1 Trillion Money-Fund Market Faces Stricter Regulation." (See our June 16 News, "European Money Fund Reform Deal Poised to Pass; CNAVs to Be LVNAVs.") It says, "The European Union is moving closer to imposing tighter restrictions on money-market funds after years of wrangling, while stopping short of restrictions the industry said would upend the 1 trillion-euro ($1.1 trillion) market. The plan set for approval by EU finance ministers on Friday would require funds to toughen up risk management and invest in more liquid assets that can be easily traded in volatile markets should investors rush to pull out their money. It offers a way for many funds to continue quoting a fixed share price, known as a constant net-asset value, to banks, corporations and other investors who rely on them for short-term funding." Bloomberg continues, "The money-fund market in Europe is roughly split at the moment between constant and variable net-asset value funds with the asset-management arms of JPMorgan Chase & Co. and Goldman Sachs Group Inc., as well as Amundi SA and BlackRock Inc., among the top fund managers, according to data compiled by Fitch Ratings and Bloomberg. The market is heavily concentrated in Ireland and Luxembourg, which are both home primarily to constant value funds, and France, which is largely home to variable funds." It adds, "Under the member states' proposal, constant-value funds could remain if they invest almost entirely in government debt. The funds could also transition to become so-called low-volatility net-asset value funds, which would retain a constant share price so long as they meet curbs on investments and maintain sufficient liquidity to meet redemptions. The European Parliament also suggested the low-volatility concept, but would bar their authorization after five years. The member states dropped that so-called sunset clause, after opposition from lobbying groups such as the Institutional Money Market Funds Association, which represents constant value funds in Europe. "We believe the compromise text on LVNAV would make them a workable alternative option to current CNAV funds," Alastair Sewell, head of fund and asset manager ratings in Europe and the Asia-Pacific region at Fitch Ratings, said in an interview.... The debate will now turn to differences in the proposal about what kinds of assets the fixed and variable funds can invest in.... The issue of liquidity proved a late sticking point in member states' negotiations, when the U.K., Ireland and Luxembourg squared off against France and Germany over whether to allow government debt to be used for a liquidity buffer. While this obstacle was overcome, the Luxembourg Finance Ministry said the compromise text has "a number of shortcomings, notably -- but not only -- in the area of the liquidity requirements." These will need to be addressed when talks begin with the European Parliament, a ministry spokesman said. Neena Gill, lead lawmaker in the EU assembly on this bill, also pointed to liquidity requirements as an issue where member states and the parliament don't see eye to eye. The member states' removal of the sunset clause on low-volatility funds is another, she said. Still, Gill said she hopes for a final agreement on the legislation in early autumn."

Money fund assets dropped for the third week in a row, which included a quarterly tax payment date (June 15), according to ICI's latest "Money Market Fund Assets" report. Prime funds continue to see asset outflows, apparently unrelated to Prime to Govt funds conversions. The release says, "Total money market fund assets decreased by $18.56 billion to $2.71 trillion for the week ended Wednesday, June 15, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $7.38 billion and prime funds decreased by $23.03 billion. Tax-exempt money market funds decreased by $2.90 billion." Government assets, including Institutional and Retail (and Treasury and Government), stand at $1.404 trillion, while Prime assets are at $1.099 trillion. Government fund assets moved ahead of Prime assets earlier this year, fueled by the conversion (or liquidation) of almost $250 billion of Prime funds to Govt funds to date (over $50 billion more is scheduled to move too). We believe that the recent Prime asset declines reflect investor segments shifting from Prime to Govt. Compared to asset totals on 12/31/15, when Prime funds were at $1.284 trillion, they're now down $185 billion, or 14.4%. Government fund assets, which were $1.221 trillion, are now up $183 billion, up 15.0%. ICI's release continues, "Assets of retail money market funds decreased by $3.95 billion to $961.93 billion. Among retail funds, government money market fund assets increased by $2.15 billion to $415.22 billion, prime money market fund assets decreased by $3.67 billion to $388.27 billion, and tax-exempt fund assets decreased by $2.42 billion to $158.44 billion." It adds, "Assets of institutional money market funds decreased by $14.61 billion to $1.74 trillion. Among institutional funds, government money market fund assets increased by $5.23 billion to $988.72 billion, prime money market fund assets decreased by $19.37 billion to $710.93 billion, and tax-exempt fund assets decreased by $480 million to $45.26 billion." Year-to-date through June 15, MMF assets are down $52 billion with Inst assets down $75 billion and Retail assets up $23 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."

The Federal Reserve released the Statement from its June 14-15 FOMC meeting, and, as expected, didn't raise interest rates. It says, "Information received since the Federal Open Market Committee met in April indicates that the pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up.... Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent.... This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.... The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run." In her press conference, Fed Chair Janet Yellen discussed the revised dot plot, saying, "The median projection for the Federal Funds Rate rises only gradually to one and a half percent at the end of next year and two and a half percent by the end of 2018.... Although the median Federal Funds Rate at the end of this year is unchanged from March (0.9%), a number of participants revised down their projections." In other news, RBC Capital Markets strategist Michael Cloherty recently discussed the Fed's RRP cap. He writes, "At one of the next three FOMC meetings, we expect the Fed to reimpose a cap on the RRP (the $300bn cap was removed on the first rate hike). We think July is most likely, but there is an outside chance we see this tomorrow (in the implementation note part of the statement). This would not be a big deal as long as the decline in the cap size remains large through MMF reform in October. Usage has fallen below $50bn over the past week. But as Prime funds hoard liquidity to be sure they can meet any redemptions in front of the Oct 14th regulatory changes, they are unlikely to find enough private assets and will need to move into the RRP. But as long as the cap is large enough on Oct 14th, it doesn't matter whether the cap comes back in June, July, September, or another month. That said, we expect there to be a lot of teeth-gnashing by investors who are worried that the RRP might disappear altogether, loosening the floor on rates. We see no reason for concern -- the Fed will need a sizable RRP if it wants to retain operational control over money market rates."

Reuters writes, "U.S. money funds pare UK exposure before Brexit vote - J.P. Morgan." It says, "U.S. money market mutual funds have reduced their exposure to short-term British bank debt ahead of the June 23 referendum on whether Britain would stay in the European Union, J.P. Morgan Securities said on Monday. At the end of May, the prime money funds, which J.P. Morgan tracks, cut their holdings of commercial paper, certificates of deposits and other short-dated securities issued by British banks by $4 billion from April to $41 billion. Year-to-date, however, the funds' holdings of British bank debt was up $6 billion from the end of 2015, J.P. Morgan data showed. "Brexit risks appear to have had a modest effect on holdings of British banks to date," J.P. Morgan analysts Alex Roever, Teresa Ho and John Iborg wrote in a research note. "With the Brexit referendum vote just two weeks away, we expect volumes in short-term British bank debt to be low for the time being," they said.... Rating agencies might downgrade their credit ratings on Britain if Brexit were to happen, J.P. Morgan analysts said. Standard & Poor's has kept UK with its top AAA-rating since 1978, while Moody's and Fitch assigned their second-highest credit ratings to Britain. Credit downgrade might affect the ratings of British banks, according to the J.P. Morgan analysts. "However, all things considered it is important to note that British banks do not rely heavily on the U.S. money markets," they said. Prime money funds had $924 billion in assets at the end of May, down $35 billion from April." In other news, a press release entitled, "Moody's assigns Aaa-mf rating to two BlackRock Money Market Funds," says, "Moody's Investors Service has assigned Aaa-mf ratings to BlackRock Money Market Portfolio and BlackRock Liquidity Funds TempCash. The Aaa-mf ratings reflect Moody's view that the funds will be able to meet their dual objectives of providing liquidity and preserving capital.... The Aaa-mf rating assignments also consider the quality of the fund sponsor. BlackRock is a leader in managing cash portfolios with US$292 billion in global liquidity assets across multiple currencies." Also, another release titled, "Fitch Assigns New Ratings to Eight Western Asset Money Market Funds," reads, "Fitch Ratings has assigned 'AAAmmf' ratings to the following eight money market funds sub-advised by Western Asset Management Company (Western Asset) as follows: Western Asset U.S. Treasury Reserves; Western Asset Premium U.S. Treasury Reserves; Western Asset Institutional U.S. Treasury Reserves; Western Asset U.S. Treasury Reserves, Ltd.; Western Asset Government Reserves; Western Asset Institutional Government Reserves; Western Asset Government Money Market Fund, Ltd.; Western Asset U.S. Dollar Liquidity Fund.... The 'AAAmmf' ratings reflect: The funds' overall credit quality and diversification; Low exposure to interest rate and spread risk; Holdings of daily and weekly liquid assets consistent with shareholder profiles and concentrations; Maturity profiles consistent with Fitch's 'AAAmmf' rating criteria; The capabilities and resources of LMPFA and Western Asset."

Bloomberg posted an article entitled, "There's a Seismic Change Coming to Money Markets, But we don't quite yet know what it will be." It reads, "In 2014, the Financial Stability Oversight Council (FSOC) asked U.S. regulators to look into creating a replacement for Libor -- one that would prove more immune to the subjective, scandalous, scurrilous whims of traders. The Alternative Reference Rates Committee (ARRC), as the resulting body is known, last month suggested two potential replacements for the much-maligned Libor.... Fresh research from Credit Suisse Securities USA LLC suggests the chosen rate could also become the new target rate for the Federal Reserve, replacing the federal funds rate that has dominated money markets for decades but has been neutered by recent regulation and asset purchase programs. "The question of alternative reference rates and alternative policy rates are [sic] intertwined: ideally, they would be the same," writes Zoltan Pozsar, director of U.S. economics at the Swiss bank. "So it is likely that the rate the ARRC will ultimately choose will also be the Fed's new target rate. But there are problems with both alternatives." A potential new target rate comes at a time when the federal funds market is said to be losing relevance because of new rules requiring banks to hold billions of dollars worth of high-quality assets on their balance sheets as well as because of the Fed's quantitative easing (QE)." It continues, "While the Fed is faced with a fed funds target rate that's fading into irrelevance, the ARRC has been eyeballing two alternative rates as it seeks to replace untrustworthy Libor.... The two are the Fed's new overnight bank funding rate (OBFR) and the overnight U.S. Treasury general collateral repo rate. The OBFR, which mixes fed funds with overnight eurodollar deposits to come up with an average cost of funds for U.S. banks, has emerged as the front runner in recent weeks -- gaining support from at least one prominent financial industry body last month. The reasoning here is clear: The overnight eurodollar market is deep ($250 billion vs. an average $60 billion in fed funds) and features hundreds of participants vs. the 11 Federal Home Loan Banks (FHLBs) still active in the fed funds market. On the flip side, the OBFR deviates significantly from the fed funds rate in that it gauges offshore interbank funding as opposed to domestic. "Switching from the [fed funds] rate to OBFR as the Fed's policy target is not without a broad set of existential questions," writes Pozsar. "Were that switch to happen the Fed would go from targeting an onshore rate to targeting an offshore rate; from targeting an interbank rate to targeting a customer-to-bank rate." To avoid the complications associated with this path, the Fed could settle in on the repo rate as its new policy target. But here Pozsar also sees potential problems: "Switching to a repo rate won't be simple either. In fact, it is impossible at present. Why? Because primary dealers do not have access to the discount window and so there is no ex-ante mechanism in place that would enable the Fed to cap repo rates in a crisis. And if you can't cap it, you can't target it."

The FT writes "EU nears deal on regulating money market funds." It says, "EU governments have taken a major step towards ending one of the most politically rancorous debates on financial regulation in recent years as they brokered a deal on rules for money-market funds.... According to diplomats, a deal was wrapped up this week by officials from national financial ministries, and will be confirmed by finance ministers on June 17. This will then clear the way for negotiations with the European Parliament on the final version of the law. The thrust of the compromise brokered by the Netherlands, which holds the EU's rotating presidency, is that certain types of funds will be allowed to continue operating with a fixed-share price." See too William Fry's commentary, "Money Market Funds Regulation: Fifth Compromise Proposal Published." Author Niall Crowley writes, "On 10 May 2016, the Dutch presidency of the Council of the EU published a fifth compromise text on the proposed Regulation on Money Market Funds (MMF Regulation). This latest compromise proposal sets out a number of amendments to the fourth proposal, the more material of which are set out below: Constant Net Asset Value (CNAV) Money Market Funds (MMFs) will only be permitted to operate in the EU as either a CNAV MMF that invests in public debt instruments, or as a Low Volatility Net Asset Value MMF (LVNAV MMF).... A CNAV MMF, a LVNAV MMF and a Variable Net Asset Value (VNAV) MMF may all take the form of a short-term MMF. Only a VNAV MMF may take the form of a standard MMF.... The extension of the transitional period from one to two years following the entry into force of the MMF Regulation, as recommended in the fourth compromise proposal, has been retained. This means that existing CNAV MMFs will have two years to convert to either CNAV MMFs that invest in public debt instruments, LVNAV MMFs or VNAV MMFs." For more on the latest EU proposal, which some believe will pushed forward later this summer, see our May 10 Link of the Day, "Reuters on EU Reform Compromise."

Money fund assets dipped $8.0 billion, the second straight week of declines following five straight weeks of asset gains, according to ICI's latest "Money Market Fund Assets" report. Government assets and Prime assets continue to head in opposite directions with Govt Inst growing and Prime Inst assets falling. The release says, "Total money market fund assets decreased by $8.00 billion to $2.73 trillion for the week ended Wednesday, June 8, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $14.37 billion and prime funds decreased by $19.88 billion. Tax-exempt money market funds decreased by $2.49 billion." Government assets, including Institutional and Retail (and Treasury and Government), stand at $1.397 trillion, while Prime assets are at $1.122 trillion. Government fund assets moved ahead of Prime assets earlier this year, fueled by the conversion (or liquidation) of $245.4 billion of Prime funds to Govt funds (so far) through May 31. The past two weeks' Prime-to-Government shifts were influenced by the recategorization of funds and the liquidation of PNC's Prime Funds on May 31, but they also could well reflect the beginning of an investor shift from Prime to Govt. ICI's release continues, "Assets of retail money market funds decreased by $2.32 billion to $965.87 billion. Among retail funds, government money market fund assets increased by $3.05 billion to $413.08 billion, prime money market fund assets decreased by $3.86 billion to $391.93 billion, and tax-exempt fund assets decreased by $1.50 billion to $160.86 billion." It adds, "Assets of institutional money market funds decreased by $5.69 billion to $1.76 trillion. Among institutional funds, government money market fund assets increased by $11.32 billion to $983.49 billion, prime money market fund assets decreased by $16.01 billion to $730.30 billion, and tax-exempt fund assets decreased by $990 million to $45.74 billion." Year-to-date through June 8, MMF assets are down $34 billion with Inst assets down $60 billion and Retail assets up $27 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."

Reserve's Yield Plus Fund, an "enhanced cash" fund that seized up when its sister Reserve Primary Fund "broke the buck" in September 2008, issued an update, entitled, "Federal Court Approves Final Distribution of Assets." The release says, "The Board of Trustees of the Yield Plus Fund-In Liquidation is pleased to announce that final distributions relating to the Yield Plus Fund ("Fund"), aggregating approximately $35 million, will be made in June 2016. On March 28, 2016, the Federal Court approved: 1. Distribution of the Net Settlement Fund. The Net Settlement Fund (in the aggregate amount of approximately $4 million) in the Class Action entitled William Ross and Dawn Ross vs. Reserve Management Company, Inc., et al., will be distributed to eligible Class Members. The Net Settlement Fund includes both the RMCI and TD Ameritrade Cash Contributions. An eligible Class Member will not receive a payment from the Net Settlement Fund, if such distribution would be less than one penny ($.01). 2. Distribution of Final Remaining Fund Assets. All remaining Fund assets, (in the approximate amount of $31 million) will be distributed to Fund Shareholders ("Final Distribution"). The amount of the final remaining fund assets will be determined after the payment of, or reserve for, all applicable expenses." It continues, "For investors who hold the Fund through a brokerage account, the Fund will make distributions to the respective brokerage firms, including TD Ameritrade. These brokerage firms will follow their own procedures for allocating distributions among their client accounts. Please contact the respective brokerage firms with any questions or comments. It is anticipated that payment of the above-referenced distributions will occur in June 2016.... When combined with previous distributions, Fund investors will have received approximately 97-98 cents per share held in the Fund on September 15, 2008, depending on whether they purchased or held the shares through TD Ameritrade. The Fund will issue another Fund Update at the time the final distributions are to be made to advise Fund investors of the distribution date. Please check the Fund's website (www.primary-yieldplus-inliquidation.com) for future updates."

Fitch Ratings issued a release, "Money Fund Rating Puts Investor Liquidity at Risk." It says, "Money market funds are being forced to implement sweeping structural reforms by October 2016. Prime and municipal (tax-exempt) MMFs -- favored liquidity management options for businesses, local governments and not-for-profits -- face the most significant changes, Fitch Ratings says. A clear lesson from the financial crisis is the importance of maintaining an appropriate level of conservatism when assigning 'AAA' ratings. Investors will rely on these ratings while making critical decisions in the next few months on how to manage their cash post MMF reform. Many may not fully appreciate the important changes taking place for MMFs and the critical differences in ratings methodologies among the top three rating agencies. Treasurers and cash managers place a premium on principal preservation and timely liquidity. Money fund reform will increase liquidity risk due to fees and gates tied to weekly liquidity triggers. Fitch's money fund ratings address safety of principal and timely liquidity." It continues, "New regulation require MMFs to place provisions for liquidity fees or gates and switch from a constant to floating net asset value when assessing their positions. The regulation specifically ties fee and gate provisions to the amount of a fund's weekly liquid assets. If these assets fall below 30%, the fund's board may impose a liquidity fee of up to 2%. The board may also suspend redemptions for up to ten business days. If weekly liquidity drops below 10% of total fund assets, fund boards are required to impose a 1% redemption fee, unless the board determines that the fee would not be in the fund's best interest or that a higher (or lower) fee is more appropriate. Most industry observers believe investors will closely monitor a fund's cushion above the 30% trigger and proactively redeem their investment if a fund gets too close to a redemption trigger. In anticipation of these sweeping changes to MMFs, Fitch updated its Global Money Market Fund Rating Criteria, in December 2015." It adds, "A Fitch rating is an opinion on a MMF's ability to meet the dual objectives of preserving invested principal and timely liquidity. In other words, Fitch's rating opines on the likelihood that investors will get their money back on time and in full, upon request. Reflecting this emphasis on timely liquidity, Fitch's criteria set minimum guidelines that include a meaningful liquidity cushion above mandatory liquidity-based triggers. This means that funds rated 'AAAmmf' by Fitch will need to maintain weekly liquidity in excess of 30% to forestall the potential for a gate or redemption fee." Fitch concludes, "Investors need to understand fundamental differences in rating criteria that can impact a $1 trillion market. Nowhere is this more important than in the area of liquidity management, where investors value return of principal more than return on principal."

Morgan Stanley Investment Management posted a "European MMF Regulatory Update," which says, "The path toward European Money Money Market (MMF) reform has accelerated in recent months since the Dutch assumed the Presidency of the Council in January 2016. Recent discussions have increased in both intensity and frequency, with the Dutch aiming to finalise this proposal text before the end of their presidency in June. The Council's proposal text differs from the Parliament's agreement -- which was finalised in 2015 -- in many significant ways." (See the table in the document for full details.) MSIM lists differences in the following areas: CNAV funds, Low Volatility NAV funds, VNAV funds, Capital Buffer Provisions, Sponsor Support, and External Ratings Liquidity Requirements, Fees and Gates, and a Sunset Clause. It also outlines the Next Steps. They state, "The Dutch presidency hopes to finalise the compromise text by the end of their presidency in June. If the text is finalised, it will be used as the basis for trilogue negotiation with the Parliament and the Commission to produce an EU agreement on the file. The Council is expected to meet again in mid-May to further discuss and progress the text with the 28 Member States. Once law, the MMF Regulation will have direct application in all EU Member States. Supervision remains the prerogative of national competent authorities, but the European Securities and Market Authority (ESMA) will be tasked with ensuring consistent application." Finally, it gives Background, "In September 2013, the European Commission (Commission) released a proposal for new MMF regulation. Key components of this [initial] proposal included: 3% capital buffer for CNAV funds; all other funds convert to VNAV; Minimum daily and weekly portfolio liquidity and additional diversification requirements; Elimination of both amortised cost accounting and external credit ratings.... On 26 February 2015, the ECON Committee reached a political agreement on MMF regulation. The text of this agreement was ratified by a full vote of Parliament on 28 April 2015. The Parliament text simply reflects its negotiated position as it enters trilogue with the Commission and Council. Historically, regulations are amended as they are worked through the trilogue process."

Federated Investors' CIO of Global Money Markets Deborah Cunningham published her latest "Month in Cash" column, "Fed Doesn't Take Afternoon Tea." She writes, "Those obsessed with the possibility Britain will leave the European Union are realizing the Fed may not be.... We don't think Brexit matters to policymakers as much as the improving statistics, and a "leave" vote wouldn't be that big of an influence anyway because it will take years to implement all the changes that would entail." Cunningham continues, "In the meantime, we continue to see good returns for prime funds. The spread between prime and government funds is about 22 basis points across the industry versus a historic average of about 12-13 basis points. This performance has caused some cash managers to hold off moving investments from prime products to govies, and it might keep them from ever transferring a substantial portion of their cash. In addition, the London interbank offered rate is still ticking up, if slowly. Investors in prime funds are enjoying the yield spread for now. As to their feelings nearer to the Oct. 14 implementation of the new SEC money fund rules, no one knows for sure. But even as the industry endures many operational changes, much money spent and general stress, it might just be that cash managers keep calm and carry on." In other news, Fidelity Investments' Michael Morin and Kerry Pope also released new money market commentary, "With Easing Global Economic Pressures, U.S. Data Plays Bigger Role in Rate Policy." They write, "Calendar-based pressures around tax payments cause money market fund outflows. Money market fund flows are seasonal, and April tax payments from money market funds typically drive fund balances to their annual low point. Total money market assets fell during the month of April by $22 billion, or nearly -0.9%. Prime money market funds dropped by $42 billion, or over 3.0%, while government funds increased their balances by $20 billion -- a 1.5% increase. That said, ICI reported that total money market fund assets under management climbed by $117 billion, or 4.5% year to date, through April. This upward trend is expected to continue as market rates adjust higher and banks continue to rationalize their cost of deposits. A vast number of our corporate clients have yet to make any changes to their fund lineups. The expectation is that many corporate clients will assess money market fund alternatives during the second and third quarters."

Money fund assets were down fractionally in the latest week (which included the month-end), following five straight weeks of asset gains, according to ICI's latest "Money Market Fund Assets" report. It says, "Total money market fund assets decreased by $30 million to $2.73 trillion for the week ended Wednesday, June 1, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $23.66 billion and prime funds decreased by $22.67 billion. Tax-exempt money market funds decreased by $1.02 billion." Government assets, including Institutional and Retail (and Treasury and Government), stand at $1.378 trillion, while Prime assets are at $1.146 trillion. Government fund assets moved ahead of Prime assets earlier this year, fueled by the conversion (or liquidation) of $245.4 billion of Prime funds to Govt funds through May 31. (The latest flows were also no doubt influenced by Prime to Govt conversions, including the liquidation of PNC's Prime and Tax Exempt MMFs.) The release continues, "Assets of retail money market funds decreased by $3.17 billion to $968.19 billion. Among retail funds, government money market fund assets increased by $130 million to $406.03 billion, prime money market fund assets decreased by $3.13 billion to $399.80 billion, and tax-exempt fund assets decreased by $170 million to $162.36 billion." It adds, "Assets of institutional money market funds increased by $3.14 billion to $1.77 trillion. Among institutional funds, government money market fund assets increased by $23.52 billion to $972.17 billion, prime money market fund assets decreased by $19.54 billion to $746.31 billion, and tax-exempt fund assets decreased by $840 million to $46.73 billion." Year-to-date through June 1, MMF assets are down $26 billion with Inst assets down $55 billion and Retail assets up $29 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, Pensions & Investments wrote the editorial, "Lift Heavy Hand Off Interest Rates." It says, "The FOMC should move in June to raise rates further and keep raising them to a normalized level. It is a challenge to determine what that normal level should be. Interest rates have fallen steadily for 35 years. The Fed should relax its grip to allow the market to determine interest rates at any time in the economic cycle. Current monetary policy has failed to invigorate a weak economy.... Minutes of FOMC activity show its members have failed to take into account the ramifications of monetary policy on investment markets and its impact on the economy.... Retirement plans, whether defined benefit or defined contribution, have important social and economic value that the FOMC and Fed fail to take into account in monetary decisions. Their strength helps relieve pressure on government safety nets, already financially strained because of a weak economy."

A press release entitled, "Novantas Acquires Treasury Strategies" says, "Novantas, Inc. announced today that it has acquired Chicago-based Treasury Strategies, Inc., a leading consultancy in bank and corporate treasury functions. The transaction expands the Novantas portfolio and strengthens its position as the leading revenue management company serving the financial community. It also extends Novantas analytic advisory services and technology solutions into the corporate arena. Treasury Strategies is the acknowledged leader in treasury management consulting on treasury, liquidity and payments solutions for many of the largest North American commercial banks and corporations. The Firm has a thirty-year track record of advising senior banking executives, corporate treasurers, regulators, legislators and the press, on issues affecting banking industry stability and performance. Tony Carfang, a senior partner, has testified numerous times to Senate and Congressional committees on the impact of regulatory actions and legislation on the banking industry and their customers. The Firm is widely recognized as an expert in the post Dodd-Frank economy. "We're delighted that Treasury Strategies will become part of Novantas,” said Dave Kaytes, Co-CEO of Novantas. "Their expertise, analytical focus and client service culture are ideally matched to our own, and their capabilities in Corporate Treasury Management are an excellent complement to Novantas' market and customer focused services for banks. We are excited to offer the enhanced services of the combined Company to our clients." It continues, "With more than 200 professionals, Treasury Strategies and Novantas make a formidable team in both bank and corporate treasury markets," added Cathy Gregg, senior partner of Treasury Strategies. "We look forward to integrating Treasury Strategies offerings into the combined Company product line, and investing the kind of capital and expertise Novantas brings, into the technologies and models we offer to Bank Executives and Corporate Treasurers." The Company announced that it will operate under the Novantas name and retain the Treasury Strategies brand in the corporate advisory business line. Treasury Strategies partners, Tony Carfang, Cathy Gregg and Dave Robertson, will become Managing Directors of Novantas, Inc, and the Treasury Strategies Chicago office will be combined with the Novantas Chicago facilities. The corporate integration is expected to be completed during June 2016. Financial details were not disclosed." (Note: Treasury Strategies' Tony Carfang is scheduled to speak on "Investor Issues: Corporates, Brokerage Sweeps" in Philadelphia later this month at Crane's Money Fund Symposium.) In other news, the Investment Company Institute recently released, "BrightScope/ICI Defined Contribution Plan Profile: A close Look at ERISA 403(b) Plans, 2013," which shows that money funds account for 3% of investments in 403b plans.

Harbor Money Market Fund Writes in a 1st Quarter, 2016 Commentary, "Money market returns remained stable, susceptible to Federal Reserve's accommodation policy.... Short-term interest rates stabilized in the first quarter of 2016 after rising significantly at prior year end. In terms of the yield curve, December's monetary policy tightening by the U.S. Federal Reserve (the Fed) boosted short-term interest rates off the near-zero interest rate floor. Since year end, market sentiment has shifted considerably, reducing expectations for additional stages of tightening in the coming year. Against this backdrop, the Harbor Money Market Fund returned 0.07% for the first quarter, in line with its benchmark, the BofA Merrill Lynch US 3-Month Treasury Bill Index, which also posted a return of 0.07%.... Portfolio Manager Ken O'Donnell's comments were made in an April 11, 2016 interview." He discusses the "Growing Attractiveness of Money Market Securities," saying, "With improving returns, the relative attractiveness of money market funds should continue to draw interest from investors. At current yield levels, money market funds remain competitive relative to U.S. Treasury bills and other short-term government securities, and are likely to become increasingly competitive relative to short-term deposit rates. From a sector perspective, we maintained the conservative strategy of investing exclusively in government and agency securities, which we believe should provide the most value on a risk-adjusted basis."