Daily Links Archives: July, 2016

A press release entitled, “Federated Investors, Inc. Reports Second Quarter 2016 Earnings says, “Federated Investors, Inc. (NYSE: FII), one of the nation's largest investment managers, today reported earnings per diluted share (EPS) of $0.51 for Q2 2016, compared to $0.40 for the same quarter last year on net income of $52.7 million for Q2 2016, compared to $41.8 million for Q2 2015. Federated reported YTD 2016 EPS of $0.94, compared to $0.74 for the same period in 2015 on YTD 2016 net income of $98.2 million compared to $78.1 million for the same period last year. Results for Q2 2016 and YTD 2016 included a pre-tax impact of $3.5 million, or $0.02 EPS, from insurance proceeds.” It explains, “Federated's total managed assets were $367.2 billion at June 30, 2016. Total managed assets were up $17.5 billion or 5 percent from $349.7 billion at June 30, 2015 and down $2.5 billion or 1 percent from $369.7 billion at March 31, 2016. Growth in equity assets was offset by lower money market and fixed-income assets in Q2 2016 compared to Q1 2016…. Money market assets were $255.0 billion at June 30, 2016, up $13.0 billion or 5 percent from $242.0 billion at June 30, 2015 and down $7.0 billion or 3 percent from $262.0 billion at March 31, 2016. Money market mutual fund assets were $218.1 billion at June 30, 2016, up $9.3 billion or 4 percent from $208.8 billion at June 30, 2015 and down $6.6 billion or 3 percent from $224.7 billion at March 31, 2016…. Revenue increased by $58.6 million or 26 percent primarily due to a decrease in voluntary fee waivers related to certain money market funds in order for those funds to maintain positive or zero net yields (voluntary yield-related fee waivers).... During Q2 2016, Federated derived 53 percent of its revenue from equity and fixed-income assets (37 percent from equity assets and 16 percent from fixed-income assets) and 47 percent from money market assets. Operating expenses increased by $40.2 million or 25 percent primarily due to an increase in distribution expenses as a result of a decrease in voluntary yield-related fee waivers…. Federated will host an earnings conference call at 9 a.m. Eastern on July 29, 2016. Investors are invited to listen to Federated's earnings teleconference by calling 877-407-0782 (domestic) or 201-689-8567 (international) prior to the 9 a.m. start time. The call may also be accessed in real time on the Internet via the About Federated section of FederatedInvestors.com.” (Watch for our coverage of this in Monday’s “News”.)

Investment News writes "Why aren't there more women fund managers?" The piece, written by John Waggoner, says, "If you're looking for comforting news about the great strides women have made breaking into investment management, you won't find it here. Men still overwhelmingly dominate the field. But the inroads that women have made in money market funds show that there is a path to greater representation in the industry. Morningstar Inc., the investment tracker, says only 8.69% of U.S. open-ended stock funds with named managers are run by women. The statistics in bonds are somewhat better: 9.37% of bond-fund managers are women. But that's still well below the percentage of women in the overall population." It continues, "The data aren't entirely bleak. If you define "fixed income" to include money market funds, the power of women portfolio managers increases vastly. Patricia Larkin, for example, runs more than $179 billion for Dreyfus. Federated Investors' Deborah Cunningham manages $260 billion in money market fund assets. And Charles Schwab's Linda Klingman handles about $619 billion in money funds. In taxable money market funds, about 36% are run by women, according to data from Money Fund Intelligence. "Women have a long history in the money fund business and, anecdotally, it has always seemed one of the areas of the investment business that isn't dominated by men," said Peter Crane, CEO of Crane Data, which publishes Money Fund Intelligence. Having women in the business tends to be a virtuous circle, at least among money market fund managers. "I think more women have started in money funds because they have more role models there," said Marie Chandoha, CEO of Charles Schwab Investment Management." In other news, see the Federal Reserve's latest FOMC Statement.

The Wall Street Journal featured a post entitled, "Libor Has Been Creeping Higher." It says, "An early warning signal for financial distress has been starting to flash. But that doesn't mean a crisis will follow. The London Interbank Offered Rate, or Libor, measures the cost of short-term interbank borrowing. It spiked during the financial crisis a bankers grew worried about the health of other banks. Now, the three-month U.S. dollar Libor rate is rising again. It climbed 0.08 percentage points since the end of last month, and 0.05 percentage points since July 18, to 0.734% on Monday, its highest since 2009, according to SIX Financial.... Analysts say the rise is not a harbinger of another financial crisis this time–at least now right now. Rather, it's a series of regulations that will go into affect in October, making it less attractive for money market funds to hold some of short-term securities often issued by banks as an alternative to funding on the interbank market. When demand for those securities falls, it can push up the price of Libor funding. New Securities and Exchange Commission rules will require that prime institutional money-market funds that hold short-term corporate debt have to allow their share prices to fluctuate. The funds will also be able to suspend redemptions or add liquidity fees for investors that pull out their money when markets are volatile. That's a response to the financial crisis, when the Reserve Primary Fund's net asset value dropped below $1 a share. The rules are also reshaping the market, driving investors out of prime funds and into money market funds that hold government debt. In just the past week, about $30 billion has shifted from one to the other, according to Credit Suisse. On top of that, many prime funds are reducing their average maturities to avoid volatility around the October 14th implementation date, which means forgoing a small amount of additional yield for the sake of stability.... Last week marked 90 days until the rules take effect, meaning that the three-month commercial paper and corporate certificates of deposit to which Libor is closely linked now come due after the implementation date, according to Citigroup. That's made prime funds hesitant to purchase debt due on the other side of the effective date, a trend that analysts say is likely to continue. "We expect the spread to go even wider from here before the October reform date," wrote Citigroup analyst Steve Kang. Still, with waning demand for commercial paper forcing issuers to offer buyers higher rates, some yield-starved investors sense opportunity. Ninh Chung, head of investment strategy and portfolio management at SVB Asset Management, said last month that his firm had recently found commercial paper to be a more attractive buy. "Issuers want to attract new investors as money market reform takes place," he said." See too Bloomberg's "This Is Why Libor's Moving Higher: Money market reform sends bank borrowing rates to a post-crisis high".

Last week, CNBC posted an article, "That 'safe' retirement investment is about to change." It reads, "Changes may be coming to one of your retirement plan's safer investment options.... [N]ew, more restrictive rules on money-market funds will be taking effect in October, paving the way for changes to 401(k) plan investment menus. "We have used money-market reform as a gateway to re-engage retirement plans on cash equivalents and what's appropriate in a low rate environment," said Aaron Pottichen, a plan consultant at CLS Partners Retirement Services. "More of them have opted to replace money-market funds with stable value." He's not alone. "More often than not, employers are switching over," said Shannon Main, managing director and retirement plan advisor at Penniall & Associates. "Some record keepers are changing their money-market funds to either a government fund or they're no longer supporting them," she said.... At the same time, money-market funds are plagued with paltry returns amid today's low interest rates." The article continues, "The changes to money-market funds stems from new rules issued by the Securities and Exchange Commission. The regulations, which will take full effect in October, require fund managers in periods of extreme volatility to temporarily bar investors from making withdrawals. Another change: the funds' value can now float, whereas before they generally maintained a fixed $1 per share value. These requirements will apply to institutional money-market funds, which would include the investments generally available in 401(k) plans. It will not apply to funds held by individual investors. Some employers aren't fans of the effect the changes will have on their plan's money-market funds. As a result, they are seeking alternatives by opting for government money-market funds, FDIC-insured bank deposit accounts and stable value funds. "Institutional funds aren't required to maintain the $1 per share NAV [net asset value]," said Stein Olavsrud, portfolio manager with FBB Capital Partners. "That's significant. A client could potentially lose money." CNBC adds, "Stable-value funds aren't mutual funds. Rather, they are a blend of insurance and bonds. The insurance provides principal protection and a minimum guaranteed rate of interest.... The median rate on stable-value funds was 1.93 percent in the first quarter of 2016, according Callan's data, compared with the 0.023 percent average yield for money-market funds. There's a trade-off for stable value's money market beating yields. Investors are dependent on the credit quality of the underlying bond portfolio and the company providing the insurance. If the insurer fails, you may have to get in line with other creditors for your payout, said Gregory Kasten, founder and CEO of Unified Trust Company."

Dreyfus Senior Portfolio Manager Colleen Meehan writes in her July "Tax-Exempt Money Market Commentary," "The Federal Open Market Committee continued their cautious approach to the near-term policy outlook at the June meeting. The statement cited risks associated with global growth and recent financial market volatility. The committee continues to closely monitor inflation indicators and global economic and financial developments. July 27 is the next meeting date. The Securities Industry and Financial Markets Association (SIFMA) index increased from 0.01% at the beginning of the year to a 0.40% average for the second quarter. The SIFMA index is a weekly high grade market index comprised of seven-day tax exempt variable rate demand notes produced by Municipal Market Data Group. The average year-to-date 2016 is 0.24% vs. a 0.05% average for 2015. The changing money market landscape, ahead of money market reform, continues to shift funds into shorter and highly liquid securities. The industry Weighted Average Maturity is currently 20 days with institutional funds posting a 15-day average. We continue to maintain high levels of liquidity and weighted average maturities within the industry averages." She continues, "The annual note season began in June with issuers entering the market with their one-year note financings. As expected, one-year rates have backed up as funds continue to stay short and liquid preparing for the shift in fund assets ahead of money market reform. Demand from separately managed accounts, intermediate bond funds and long-term bond funds has picked up as that sector of the market has seen continued asset inflows. We expect issuance to increase during July with a continued rise in the one-year yield on smaller, local issuers as demand for these notes is limited. Careful and well-researched credit selection remains key. Many state general obligation bonds, essential service revenue bonds issued by water, sewer and electric enterprises, certain local credits with strong financial positions and stable tax bases, and various health care and education issuers should remain stable credits. Overall, municipal credit now appears to have stabilized following years of slow improvement. This is particularly evident at the state government level, as rainy day emergency funds have been replenished to pre-recession levels, providing a cushion against future economic downturns. The degree of recovery by region, however, remains varied. Isolated credit concerns still persist, such as the State of New Jersey and the State of Illinois, as pension funding and retiree health care benefits remain challenges. The financing of large-scale infrastructure needs is also a crucial issue for all states."

ICI's latest "Money Market Fund Assets" show Prime assets plummeting, the week after their first increase in 10 weeks. The release says, "Total money market fund assets decreased by $5.59 billion to $2.71 trillion for the week ended Wednesday, July 20, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $23.56 billion and prime funds decreased by $29.04 billion. Tax-exempt money market funds decreased by $110 million." Government assets, including Institutional and Retail (and Treasury and Government), stand at $1.518 trillion, their first time ever above the $1.5 trillion level. Meanwhile Prime assets are poised to fall below $1 trillion (at $1.008 trillion) for the first time since 1998. Government fund assets moved ahead of Prime assets earlier this year, fueled by the conversion (or liquidation) of over $300 billion of Prime funds to Govt funds (to date). The release explains, "Assets of retail money market funds increased by $3.89 billion to $958.37 billion. Among retail funds, government money market fund assets increased by $6.55 billion to $457.11 billion, prime money market fund assets decreased by $1.68 billion to $357.17 billion, and tax-exempt fund assets decreased by $980 million to $144.09 billion.... Assets of institutional money market funds decreased by $9.47 billion to $1.76 trillion. Among institutional funds, government money market fund assets increased by $17.02 billion to $1.06 trillion, prime money market fund assets decreased by $27.36 billion to $651.06 billion, and tax-exempt fund assets increased by $870 million to $44.18 billion." ICI notes, "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." (Note: The most recent conversion is SEI, which is liquidating its Prime funds on 7/22.) Year-to-date through July 20, money fund assets are down $44 billion, or 1.6%, with Institutional assets down $64 billion and Retail assets up $19 billion. Prime MMF assets have declined by $275.6 billion YTD (-21.5%) and have declined by $450.2 billion (-30.9%) since 10/31/15 (when the first of the large Prime-to-Govie conversions began). Government MMFs assets have increased by $297.3B (24.3%) YTD and have increased by over half a trillion dollars -- $504.5B -- (49.8%) since 10/31. Tax-Exempt MMFs have declined by $66.1B YTD (-26.0%) and by $56.7B (-23.1%) since 10/29/15. See also the FT's "Investors stall on prime money market pullout".

A release entitled, "Fitch: U.S. Prime Money Funds See Massive Shifts Ahead of Reform," says, "U.S. Prime institutional money market funds experienced significant outflows from May 31-July 8 ahead of money market fund reform coming in October, according to a new 'U.S. Money Fund Reform Dashboard' from Fitch Ratings. Government institutional funds increased by $93 billion between May 31 and July 8, while prime institutional money market funds saw significant asset outflows, declining $79 billion in the same period. Since Oct. 27, prime institutional money funds lost $301 billion." "We have seen massive shifts out of prime funds ahead of money market fund reform. While a large portion of this has been from prime to government fund conversions, recent fund flows are driven by investor movement as corporates and institutional investors change their cash investment strategy for reform," said Greg Fayvilevich, Senior Director, Fitch Ratings. The release adds, "The new regulations will require a floating net asset value for institutional prime money market funds as well as require the funds' boards to consider imposing liquidity fees and redemption gates if weekly liquidity falls below 30%. Of primary concern to players in the money fund universe is liquidity. Fund managers anticipate redemptions ahead of the Oct. 14 reform implementation deadline and have been building weekly liquidity buffers in excess of the key 30% regulatory threshold that could trigger liquidity fees or redemption gates. As of July 8, average weekly liquidity for prime institutional funds was 53.4%, with four funds' liquidity below 35% and no funds' liquidity falling below 30%. An additional focal point of investors and managers alike has been yield trade off between prime and government money funds. Following the December 2015 Fed rate hike, net yields on prime institutional funds began rising steadily, increasing 16 basis points (bps) between Dec. 15, 2015 and Feb. 29, 2016 from 0.08% to 0.24%. Since the end of February, yields have stabilized, fluctuating between 0.24% and 0.26%."

Harvard University professors Marco Di Maggio and Marcin Kacperczyk posted a paper entitled, "The unintended consequences of the zero lower bound policy for the money market funds industry." It says, "The zero lower bound policy for nominal interest rates was implemented to stimulate sluggish economic growth and boost employment. This column explores whether this policy had unintended effects on the money market fund industry. Traditionally enjoying relatively low and safe returns, money market funds could respond to the low interest rate environment by either exiting the market or changing product offerings and accepting higher portfolio risk. The results show evidence of both, and point to an important but neglected channel for monetary policy transmission." The piece states, "In the aftermath of the Global Crisis of 2007-2008, the US Federal Reserve took an unprecedented decision to lower short-term nominal interest rates to zero, a policy commonly known as the zero lower bound policy. This initial action was followed by a sequence of announcements providing guidance that the short-term rate would stay near zero for a longer period. While several economists have argued that the Fed's policy exerted a positive impact on the US economy by stimulating sluggish economic growth and boosting employment, some critics pointed out that the policy might have also produced undesired consequences, such as inflation in asset prices, or ill-suited incentives to chase higher yields (e.g. Maddaloni and Peydro 2011 and Jimenez et al. 2014, among others). One important part of the financial system that could be significantly impacted by the long-term low interest rates is the money market fund (MMF) industry." It continues, "Traditionally, MMFs used to offer relatively low returns for the provision of safety. While this idea has been somewhat shattered by the collapse of the Reserve Primary Fund and the run on MMFs in September 2008 (e.g. Kacperczyk and Schnabl 2013, Chernenko and Sunderam 2014, Strahan and Tanyeri 2015), until then, MMFs had provided investors positive returns, even after paying fees. The consequence of the unprecedented change in interest rates to levels close to zero has been that returns on traditional money market instruments -- such as Treasuries, repos, or deposits -- declined to similarly low levels. Therefore, any fund investing in these assets was likely to produce negative net-of-fees nominal returns to their investors. It has thus become obvious that such business models cannot be sustained for too long, as money would flow out of funds with negative returns. Such a dire situation has posed a dilemma for money funds. On the one hand, they could accept the situation and keep their risk profiles unchanged. This, however, would force them to first reduce or even waive their fees, and in the end, if the low rates persisted, to exit the market. On the other hand, funds could change their product offerings by shifting their risk into securities with higher interest rates, thus accepting higher risk in their portfolios, an idea referred to as reaching for yield. Increasing fund risk would boost returns and investor flows (e.g. Christoffersen 2001), and would likely prevent funds from exiting the market. The cost of increasing risk would be a higher chance of being run on in the event of distress in the money market industry.” The paper concludes, "Overall, our results highlight an important channel for transmission of monetary policy that has been completely overlooked by the academic literature, but one that is extremely relevant for practitioners and policymakers, especially in the current regime of unusually low interest rates worldwide. This message resonates well with the August 2009 Fitch report about US MMFs that states: "Over the longer term, more conservative portfolio composition, combined with the current low interest rate environment, may result in fund closures, fund consolidation, and/or a resurgent appetite for credit and liquidity risk.""

The Financial Times writes, "Brexit vote prompts flood of cash into money market funds." It reads, "Investors are pouring cash into low-risk money market funds as they postpone allocation decisions amid market volatility and weaker business confidence. Sterling-denominated mon­ey market funds have seen more than $30bn of inflows since October last year, with a spike of new money in the aftermath of the UK's vote to leave the EU, according to EPFR Global, the research house.... "We're seeing inflows from larger corporate institutions that might want to leave cash with us," said Craig Inches, fixed income fund manager at Royal London Asset Management, which oversees L88bn. "We're [also] seeing investors who want to reduce the duration of the bonds that they have but keep returns." It continues, "Money market funds -- which are cash-like investment vehicles with higher returns -- typically purchase highly-rated government bonds and securities, so have also seen yields compressed by low interest rates. But they have proved popular for parking cash as investment decisions are postponed due to uncertainty. Mr Inches said that banks such as HSBC and Lloyds and other large institutional investors have shifted cash into the vehicles while they wait for fixed income yields to rise and interest rates "to reflect economic fundamentals." Royal London's largest money market fund has doubled in size to L2bn in the last year, he said, and it has launched another short term cash fund this year in response to demand. Steven Bell, fixed income fund manager at BMO Global Asset Management, the Canadian investment house, said that its asset management business is increasingly re-routing cash to money market funds while the outlook for global growth remains unstable. "I don't imagine that investors will sit on cash for ever but I do think that the shift between banks and money market funds is permanent," he said. With interest rates on savings accounts at record lows since the financial crisis, holders of larger sums of cash -- often institutional investors and banks -- have moved into the money markets.... Moody's, the rating agency, predicts that more assets will flow into money market funds "as uncertainty prevails." In related news, a press release says, "Moody's Investors Service has today assigned a Aaa-mf rating to the Aberdeen Liquidity Fund (Lux) Sterling Fund managed by Aberdeen Asset Managers Limited."

A press release entitled, "ICI Reports Continued Downward Trend in Mutual Fund Fees in 401(K) Plans in 2015," says, "The study, "The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2015," also affirmed prior ICI research that shows that participants who invest in mutual funds in their 401(k) plans tend to hold lower-cost funds." On Money Market Funds, it says, "Only 3 percent of 401(k) mutual fund assets were invested in money market funds at year-end 2015. 401(k) participants holding money market funds had an asset-weighted average expense ratio of 0.16 percent in 2015, the same as in 2014 and lower than in 2013. The decline in money market fund fees over the recent years has been largely because of investment advisers waiving advisory fees in the current low interest rate environment.” `Given that total 401k plan assets in mutual fund are about $2.8 trillion, this means that money funds represent a mere $84 billion. In other news, Employee Benefit News posted the article, "How plan sponsors can prepare for new money market fund rules." It says, "New money market rules from the Securities and Exchange Commission -- effective in October -- will change how retail funds need to operate, creating a major impact on retirement rules. Plan sponsors need to be prepared. The new fund rules establish new definitions and rules for government and retail funds.... Investors that are not natural persons, including institutional and other non-retail investors, will not be permitted to invest in retail funds. Instead, they will be required to use institutional funds. Since a defined benefit plan does not qualify as a “natural person” under the new rules, plan sponsors who maintain both a DB and a DC plan should thoroughly examine their fund options going forward.... Government funds will not be subject to the floating NAV rule, creating a very important exception for this special category of fund. For investors that are not natural persons (including institutional and DB plans in particular), this is the only category of fund that will be exempt from the floating NAV requirement (as noted above, all institutional prime and municipal funds will float).” It continues, "During this period of transition to the new rules, fund companies have been busy merging funds, re-naming funds, etc. Many fund providers have been proactively migrating their DC plan clients to a retail-designated government fund. Plan sponsors should take note and archive any correspondence received in this regard. Any new or updated fund prospectuses and statements of additional information should be reviewed by plan sponsors or their service providers, along with the fund's competitive position, and the fund's retention/replacement should be affirmatively acknowledged by a vote of the plan fiduciaries charged with investment discretion, documented through minutes and archived accordingly. Every plan sponsor should work expeditiously to determine what sort of fund is appropriate for its plan(s). Each plan sponsor also should be engaging its service providers -- if it has not done so already -- to examine any fund held by its plan(s) to make sure the plan sponsor understands that fund in light of the new rules, and to affirm that it is a reasonable choice given plan requirements. If a plan sponsor elects to use a government fund, the plan sponsor should make a special effort to determine if the selected government fund will have the ability to impose fees and gates.... Proper monitoring of the fund's shareholder communications also is required, since only 60 days' advance notice is required to impose fees and gates."

ICI's latest "Money Market Fund Assets" report shows Prime assets increasing for the first time in 10 weeks. The release says, "Total money market fund assets increased by $19.48 billion to $2.72 trillion for the week ended Wednesday, July 13, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $14.98 billion and prime funds increased by $12.13 billion. Tax-exempt money market funds decreased by $7.63 billion." Government assets, including Institutional and Retail (and Treasury and Government), stand at $1.494 trillion, while Prime assets are at $1.038 trillion. Government fund assets moved ahead of Prime assets earlier this year, fueled by the conversion (or liquidation) of over $300 billion of Prime funds to Govt funds. The release explains, "Assets of retail money market funds decreased by $1.95 billion to $954.48 billion. Among retail funds, government money market fund assets increased by $7.81 billion to $449.89 billion, prime money market fund assets decreased by $4.25 billion to $359.52 billion, and tax-exempt fund assets decreased by $5.51 billion to $145.07 billion. Assets of institutional money market funds increased by $21.44 billion to $1.77 trillion. Among institutional funds, government money market fund assets increased by $7.17 billion to $1.04 trillion, prime money market fund assets increased by $16.38 billion to $678.59 billion, and tax-exempt fund assets decreased by $2.12 billion to $43.31 billion." ICI notes, "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." Year-to-date through July 13, money fund assets are down $39 billion, with Institutional assets down $54 billion and Retail assets up $15 billion. Prime MMF assets have declined by $245.7 billion YTD (-19.1%) and have declined by $420.3 billion (-28.8%) since 10/31/15 (when the first of the large Prime-to-Govie conversions began). Government MMFs assets have increased by $272.9B (22.4%) YTD and have increased by $480.1B (47.4%) since 10/31.

Goldman Sachs Asset Management posted a white paper entitled, "From Stable to Floating NAV: Implications for Prime and Municipal Money Market Funds." It says, "Starting on October 14, 2016, the U.S. Securities and Exchange Commission (SEC) rules will require institutional prime and municipal money market funds to migrate from a stable $1.00 price per share to a floating new asset value (NAV). The new rule allows all prime and municipal money market funds to temporarily prevent investors from making withdrawals or to impose fees for investors who redeem shares under certain extraordinary circumstances. The changes were proposed after the financial crisis of 2007-08, when the Reserve Primary Fund dripped bellow a $1.00 NAV price and "broke the buck," prompting a run of redemptions from institutional prime money market funds. The new rules will have implications for how institutional investors use and evaluate money market funds, and have therefore raised number of questions in advance of the rule change later this year. What is a floating NAV and how are such funds priced? A floating NAV is calculated using market value or-mark-to-market-accounting rather than the amortized cost accounting that money market funds have historically used. This means that floating NAV funds have to calculate and transact at the underlying value of all of the securities in the fund on an ongoing basis and publish out to four decimal places. Pricing services determine the NAV based on how like securities are trading in the market, and will adjust the price as needed to reflect credit events or other market developments impacting prices. As such, the NAV can fluctuate, or float, whereas stable NAV funds are able to round up to $1.00 so long as the amortized cost per share is $0.9950. Could changes in NAV be material? In most cases, we believe changes to the NAV will likely be immaterial, as the value of the underlying securities in most prime and municipal money market funds rarely move. Nevertheless, there may be instances where the change in the NAV has a material impact on the underlying principal and investors in floating NAV funds should prepare for this possibility. What tax and accounting requirements are there for floating NAV funds? Floating NAV market funds will still be treated as cash and cash equivalents on the balance sheet, but those who use them will now have to recognize the gains and losses associated with their fluctuation prices. At the bare minimum, investors will need to do this once per year, though ultimately it may make sense to track gains and losses more frequently. Check with your auditors to determine the best course."

The Association for Financial Professionals, an organization of corporate treasurers, issued a press release on its "2016 AFP Liquidity Survey" entitled, "Vast Majority of Treasury Professionals Value Their Bank Relationships." It states, "Relationships matter -- especially in corporate treasury and finance. According to the 2016 AFP Liquidity Survey, underwritten by State Street Global Advisors (SSGA), 90 percent of treasury and finance professionals cite their overall relationship with their bank as an important determinant when choosing a bank in which to invest their short-term cash. This is the first time in the 11 years AFP has conducted the Liquidity Survey that finance professionals have indicated their relationship with their bank plays a more important role when selecting their banking partner than the bank's credit ratings, signaling a stronger confidence in the banking industry. In addition, 85 percent of survey respondents cited banks as resources their organizations use to access information about operating cash and short-term investment holdings. This a further endorsement to their confidence in their banking partners. The results were drawn from 787 respondents. Full results are available at http://www.afponline.org/liquidity/. Other key findings include: 71 percent of organizations with cash and short-term investment holdings outside the United States maintain most of their holdings in bank-type investments, including certificate of deposits and time deposits; 55 percent of corporate cash holdings are maintained at banks; Safety of principal continues to be a top priority among investment objectives. The share of treasury and finance professionals reporting safety as a top objective increased from 65 percent in 2015 to 68 percent in 2016; With the SEC ruling on money funds taking affect this October, 62 percent plan to make changes in how they invest in prime funds. "Bank relationships continue to grow in level of strategic importance for organizations," said Jim Kaitz, president and CEO of AFP. "Bank deposits continue to hold the majority of corporate cash and short-term investments, and banks also play a role as sponsor of both onshore and offshore money market funds held by organizations." Yeng Felipe Butler, Head of SSGA's Global Cash Business, comments, "State Street Global Advisors (SSGA) is pleased to once again partner with the AFP to sponsor the Liquidity Survey." AFP provided some more commentary on the survey in a summary PDF. It says, "Finance professionals have remained cautious about holdings outside the U.S. Only 42 percent of organizations made few changes to their cash and investment balances outside the U.S. from May 2015 to May 2016, while 58 percent of finance professionals report that in the past year their organizations' investments outside the U.S. were unchanged. Seventy-three percent of organizations have a written investment policy that dictates their short-term investment strategy.... Thirty percent of survey respondents indicate that their organizations' most important cash investment objective is liquidity. As safety and liquidity remain the top two investment objectives for companies, yield continues to be a distant third." Look for full coverage of the Survey in our "News" tomorrow.

The Federal Reserve Bank of New York posted a piece on its "Liberty Street Economics" blog entitled, "How Have High Reserves and New Policy Tools Reshaped the Fed Funds Market?" The intro states, "Over the last decade, the federal funds market has evolved to accommodate new policy tools such as interest on reserves and the overnight reverse repo facility. Trading motives have also responded to the expansion in aggregate reserves as the result of large-scale asset purchases. These changes have affected market participants differently since, for instance, not all institutions are required to keep reserves at the Fed and some are not eligible to earn interest on reserves. Differential effects have changed the profile of participants willing to borrow and lend in this market, and this shift provides an opportunity to study how unconventional policy actions shape participant incentives. In today's post, we take a detailed look at regulatory filings to identify the main players in today's fed funds market and understand how their roles have evolved." It continues, "Measuring the size of the fed funds market has been challenging traditionally. Practitioners and researchers have resorted to regulatory filings to estimate the amount of fed funds sold and purchased at quarter-ends. On March 1, the New York Fed began publishing aggregate data on fed funds volume (see announcement), which will make these data easily accessible for future research." The blog adds, "As of the end of 2015, borrowing in the fed funds market reached $56 billion, a big number to be sure, but only about a fourth of its size ten years ago and down from a peak of $280 billion in the first quarter of 2008. The main decline in fed funds volume occurred in late 2008 as the level of reserves in the United States rose to unprecedented levels. As excess reserves increased, the need to borrow fed funds to meet reserve requirements and to clear balances gradually disappeared and many participants exited the market. Over the last two years, the market has stabilized at around $50 billion on quarter-ends. Data published by the New York Fed show a sharp drop in daily volumes from an average of $69 billion in March to $50 billion at the end of the first quarter. This is consistent with incentives to reduce liabilities at quarter-end to meet regulatory requirements such as the Liquidity Coverage Ratio. This quarter-end effect and its impact on fed funds rate volatility was analyzed in a recent Liberty Street Economics post."

Bloomberg writes, "Bank Strains Emerge as Brexit Collides With Money-Fund Overhaul." It says, "For U.S. banks, Brexit couldn't have come at a worse time, raising funding costs just as changes to the $2.7 trillion money-fund industry threaten to sap demand for the lenders' short-term debt.... Ripple effects from the British vote to leave the European Union are compounding strains that have been building for months as a result of efforts to make the financial system safer. Wall Street strategists predict investors will pull as much as $400 billion from U.S. prime money funds before an overhaul of the industry is completed in October. Those investors are key buyers of banks' commercial paper. With prime money funds facing possible outflows, "they aren't chomping at the bit" for commercial paper, said Priya Misra, head of global interest-rates strategy at TD Securities in New York." The piece adds, "The exodus from prime funds started last year as some investment companies converted prime funds into those that only buy government debt -- exempting them from rules beginning in mid-October that require daily net asset values to fluctuate. Now investors are leaving prime funds, to avoid floating NAVs as well as restrictions such as redemption fees. The funds’ assets have declined about 20 percent this year, or $252 billion, while government-related funds gained $245 billion, or about 21 percent, according to Crane Data LLC figures through June. Banks' reliance on commercial paper leaves them in the crosshairs during the money-fund overhaul. The potential for weaker demand from prime funds is contributing to lift financing costs. Three-month commercial paper rates have risen to about 0.63 percent, from 0.24 percent a year ago. "June is the first month that we've seen noticeable outflow from prime money funds that weren't conversions-related," said Peter Crane, president of Westborough, Massachusetts-based Crane Data. "No doubt we will see more."" In other news, Reuters posted "Floating NAVs: SEC money market fund compliance risk looms on the horizon." It reads, "With the deadline for new valuation rules on certain money market funds only months away, compliance and risk professionals at fund management firms need to confirm they have taken the necessary steps to ensure that their systems are ready, as well as having communicated how such changes will impact their clients.... Of all the changes put forward, perhaps the most difficult will be the transition to floating NAV for client sales and redemptions. "The main crux of the new reforms ... from a prime and municipal perspective in the institutional funds is that those funds have to float their NAVs," Tracy Hopkins, executive vice president at BNY Mellon Fixed Income, told a recent Thomson Reuters webinar on the SEC's impending rules. Part of the challenge for funds in calculating and posting up-to-date NAVs for their funds is the timing and frequency of intraday updates, or so-called "snaps." According to Hopkins, an industry consensus seems to be forming around three updates: 9 a.m., 12 noon, and 3 p.m., but some funds are considering an 8 a.m., 12 noon and 2 p.m. schedule."

ICI's weekly "Money Market Fund Assets" report shows that overall MMF assets declined in the latest week as Prime assets fell sharply. ICI's release says, "Total money market fund assets decreased by $17.41 billion to $2.70 trillion for the week ended Wednesday, July 6, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $3.27 billion and prime funds decreased by $23.17 billion. Tax-exempt money market funds increased by $2.48 billion." Government assets, including Institutional and Retail (and Treasury and Government), stand at $1.479 trillion, while Prime assets are at $1.026 trillion. Government fund assets moved ahead of Prime assets earlier this year, fueled by the conversion (or liquidation) of over $300 billion of Prime funds to Govt funds. The release explains, "Assets of retail money market funds increased by $2.42 billion to $956.44 billion. Among retail funds, government money market fund assets increased by $2.32 billion to $442.08 billion, prime money market fund assets decreased by $680 million to $363.77 billion, and tax-exempt fund assets increased by $780 million to $150.58 billion. Assets of institutional money market funds decreased by $19.83 billion to $1.74 trillion. Among institutional funds, government money market fund assets increased by $950 million to $1.04 trillion, prime money market fund assets decreased by $22.49 billion to $662.21 billion, and tax-exempt fund assets increased by $1.71 billion to $45.44 billion." ICI notes, "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." Year-to-date through July 6, money fund assets are down $58 billion, with Institutional assets down $76 billion and Retail assets up $17 billion. Prime MMF assets have declined by $257.8 billion YTD (-20.1%) and have declined by $432.4 billion (-29.6%) since 10/31/15 (when the first of the large Prime-to-Govie conversions began. Government MMFs assets have increased by $257.9B (21.1%) YTD and have increased by $465.1B (45.9%) since 10/31.

First American Funds posted a piece called, "Qualifying The Impact of a Floating Net Asset Value," which illustrates the impact on $1 million in dollars for slight changes in NAVs. It says, "Beginning October 14, 2016, institutional prime obligations fund investors will be in for a change. Rather than transacting at a stable NAV, shareholders will transact with the fund at a floating NAV. Fund managers are sensitive to the needs of shareholders and will manage portfolios to minimize NAV changes. That being said, small fluctuations in NAVs will happen over time and understanding how that impacts the value of an investment is important. In these hypothetical examples, the assumption is that the initial investment is made at $1.0000." First American also released a commentary entitled, "Where Do We Go From Here? Revisiting Money Market Funds." Tom Moore writes, "The final money market reform deliverable goes into effect October 14, 2016 and it disproportionately affects institutional investors in prime funds. If your organization hasn't yet spent time developing a game plan for cash investing, the time may be now." He continues, "It's useful to observe how other institutional investors choose to determine the appropriate investment vehicle for their short-term operating cash. In many instances, these investors will decide that a bifurcated approach best enables them to meet their operational objectives.... So, as investors navigate the forthcoming changes to their money fund investment options, every institutional cash investor has the opportunity to revisit their objectives and constraints -- as well as their organization's strategic plans -- to help determine where money market funds best fit in the scheme of things.... Where do we go from here? The answer depends on your specific circumstances and we believe there are compelling solutions for everyone." Finally, the Federal Reserve released the Minutes from its June 14-15 FOMC meeting. It says, "In domestic money markets, the effective federal funds rate once again stayed close to the middle of the FOMC's 1/4 to 1/2 percent target range over the intermeeting period except on month-ends. Usage of the System's overnight reverse repurchase agreement facility remained low. Market participants anticipated that changes to the regulation of money market mutual funds that will take effect later in the year could lead to some increase in usage of the facility.... An additional factor in the Committee's policy deliberations was the upcoming U.K. referendum on membership in the European Union. Members noted the considerable uncertainty about the outcome of the vote and its potential economic and financial market consequences. They indicated that they would closely monitor developments associated with the referendum as well as other global economic and financial developments that could affect the U.S. outlook."

Federated Investors released its latest "Month in Cash" commentary entitled, "Money funds anchored during Brexit." Federated's Deborah Cunningham writes, "Of all the nautical slang that has stuck around from the days when Britain ruled the high seas, "Keeping an even keel" most describes how money markets reacted to the shock of Brexit. The Leave vote caused tremendous volatility in the equity markets -- plenty of investors abandoning ship -- but didn't produce unusual flows or activity for cash managers. Our dollar and sterling products have behaved normally. It is, of course, often the case that volatility drives investors and brokers to take money out of equities and into money funds, but that didn't happen in any meaningful way after the unexpected outcome of the referendum. In fact, one way of judging the severity of a financial upheaval is the volume of flows into money funds. The greater the amount, the more serious the panic. So it was no surprise to us that equities rallied only a few days after they plunged in the immediate aftermath of the announcement that the U.K will leave the European Union. Actually, much of the activity since that announcement can be attributed to the run-up to quarter-end, with its typical reduced supply and higher rates. To be sure, overnight rates were elevated on Friday in part because banks were willing to make repo transactions early in the process due to Brexit. Everyone wanted to make sure they were funded rather than shopping around for few more basis points. For banks, the winning path for liquidity has traditionally been not to hesitate in obtaining repo capital when there is turmoil and uncertainty, and that was the track most banks took. But liquidity was never an issue -- even participation in the reverse repo facility was not out of the norm. After the shock of the referendum began to dissipate, typical quarter-end pressures clearly became the dominating factor for rates. The Independence Day holiday weekend is a complication, but operations will likely return to business-as-usual July 5. Also, it is important to keep in mind that the U.K.'s extrication from the EU will be a drawn-out process, probably over two years. Nothing is going to happen quickly. There are several long-term implications of Brexit. Money market funds registered in the U.K. will have to review the situation, but the vast majority are not domiciled there. As is the case with most firms, we will closely monitor and frequently assess the credit of U.K. banks, which we use and will continue to use. If it looks like the world is renegotiating in a way that's problematic for them, we will take that into account as we update our credit views. Then there's the Federal Reserve. Cash managers would love this to be a medium-term and not a long-term issue. The outlook before the British vote was for a September move, and the London interbank offered rate (Libor) reflected that. But the shock of the Leave vote sunk that chance and pushed Libor down. We have not changed our Weighted Average Maturity (WAM) target ranges and have found value in some longer-dated fixed pieces. However, we think a rate hike is not off the table for 2016, just that the bar has been raised considerably. If the U.S. labor market returns to its recent strength and other economic data impresses, the Fed could well navigate through the headwinds." See also, Financial News' "Brexit raises money market worry for pensions"."

Fidelity Investments removed the term Institutional from the names of a number of funds and recently posted a Chairman's Message from Abigail Johnson. The link and website fund profiles note that "Fidelity Investments Money Market Funds (FIMM) were formerly named Fidelity Institutional Money Market Funds." The update on Fidelity's money market funds reads, "After months of planning and many conversations with investors, Fidelity recently provided more details about changes for our money market mutual funds, which we are making in response to regulations that will go into effect in late 2016 We have announced these modifications to our funds well in advance of the U.S. Securities and Exchange Commission's (SEC's) October implementation deadline to give investors plenty of time to understand these developments. The new rules will require institutional prime (general purpose) and institutional municipal money market mutual funds – those primarily held by institutional investors rather than individuals – to price and transact at a "floating" net asset value (NAV), or price per share, instead of at the stable $1 NAV that typically applies to such shareholder transactions today. Prime and municipal money market funds that are defined as retail funds will continue to be eligible to transact at a stable $1 NAV. Also, during periods of extraordinary market stress, institutional and retail prime and municipal funds will have the ability, if they choose to use it, to temporarily charge liquidity fees, payable to the funds upon redemption, or to temporarily halt redemptions by applying redemption "gates." Government and U.S. Treasury money market mutual funds will continue to be eligible to transact at the stable $1 NAV. In addition, Fidelity will not impose liquidity fees or redemption gates on government and U.S. Treasury money market mutual funds. In recent months, we announced which Fidelity prime and municipal money market mutual funds will be designated as retail funds, and which will be considered institutional funds, and began the process of transitioning institutional accounts out of retail funds. We also detailed several investment policy changes and new share-class offerings, as well as several fund mergers and name changes, many of which have been completed. In addition, we announced certain changes that will apply to our prime institutional money market funds when they adopt the floating NAVs required by the new rules later this year, including new daily NAV calculation times. While we will continue to offer a full range of money market funds to meet the needs of our shareholders, we believe a retail designation is appropriate for the vast majority of our money market mutual funds. It's important to note that our funds will not be subject to the new requirements, such as liquidity fees, redemption gates and, for institutional funds, a floating NAV, at this time. We expect to implement these features by October 2016. We will continue to manage all of Fidelity's money market funds as we always have – with the goal of providing security and safety for shareholders' investments. You can learn more by visiting www.fidelity.com/mmktregs."

Invesco recently filed to launch "PowerShares Actively Managed Exchange Traded Fund Trust - Government Portfolio," a fund of funds ETF with Government money funds underneath. It appears similar to another recent MMF ETF filing BlackRock Collateral Trust. (See our May 4 News, "BlackRock Collateral Trust ETF to Own Govt MMFs; SEI Goes Ultra Short." Both appear to be geared towards use as collateral by exchanges, and not for general public consumption by cash investors. The Invesco Form N-1A filing says, "The PowerShares Government Portfolio seeks to provide high levels of liquidity and minimum volatility of principal, while providing a competitive level of current income." Under "Principal Investment Strategies," it states, "The Fund is an actively managed exchange-traded fund that seeks to achieve its investment objective by investing, under normal market conditions, at least 80% of its assets in a portfolio of registered money market mutual funds that hold U.S. dollar-denominated government securities and other securities eligible for investment by registered U.S. government money market and in direct investments in such securities. As of the date of this prospectus, the Fund intends to invest a substantial portion of its assets in the following Underlying Funds: the Treasury Portfolio, Government TaxAdvantage Portfolio, Government & Agency Portfolio and Premier US Government Money Portfolio, each of which is advised by an affiliate of the Adviser. In constructing the Fund's portfolio, Invesco Advisers, Inc., the Fund's sub-adviser, generally allocates and reallocates the Fund's assets among the Underlying Funds on a monthly basis on an approximate pro rata basis that is based on the amount of net assets of each Underlying Fund. However, Invesco is not required to invest the Fund's assets in any particular Underlying Fund or allocate any particular percentage of the Fund's assets to any particular Underlying Fund. Invesco may add, eliminate or replace any or all Underlying Funds at any time. The Adviser, the Sub-Adviser or their affiliates may advise some or all the Underlying Funds." It adds, "Each Underlying Fund is a "government money market fund" (as that term is defined under Rule 2a-7 of the Investment Company Act of 1940, as amended and seeks to maintain a stable $1.00 net asset value. The securities held by the Underlying Funds will comply with all requirements of Rule 2a-7 and other SEC rules applicable to money market funds seeking a stable NAV.... Unlike the Underlying Funds, the Fund will not be a money market fund, meaning that it will not seek to maintain a stable NAV of $1.00, nor will it be subject to other requirements of Rule 2a-7. The Fund's market price may fluctuate up or down independent of the net asset value of its holdings. However, the Fund will only purchase securities issued by registered government money market funds, or securities that comply with the quality and eligibility requirements of Rule 2a-7, as described above. Additionally, the Fund and the Underlying Funds may invest in variable and floating rate instruments that are permitted under the requirements of Rule 2a-7 and may transact in securities on a when-issued, delayed delivery or forward commitment basis."