Daily Links Archives: August, 2016

Monday's Wall Street Journal featured an article entitled, "Wall Street Titans Reboot," which discusses a move into retail banking by Goldman Sachs and Morgan Stanley. It explains, "In the darkest days of the financial crisis, Goldman Sachs and Morgan Stanley became bank-holding companies to shore up confidence and gain the implicit backing of the Federal Reserve. But few believed the Wall Street powerhouses would fundamentally change -- that they would don the banking cloak until their trading and investment-banking businesses came roaring back.... In response, both firms have turned to more basic banking businesses, betting that the cachet of their brand names can overcome relative lack of experience in dealing with the deposits and loans of middle-class Americans." The piece adds, "In embracing banking, the two firms are trying the latter, albeit in different ways. Morgan Stanley, which already had made wealth management a key part of its business, is looking to squeeze more revenue from its existing pool of generally well-off clients. Goldman is casting a wider net, hanging out an internet shingle in hopes of attracting deposits from and making loans to Main Street America -- opening the door wide to less-wealthy clients it once shunned.... In one regard, the move into banking could be well timed. Investors now sniffing around downtrodden bank stocks expect they will do well if interest rates rise." The article continues, "To keep from being left behind, both have been growing deposits and loans the past few years.... As of June 30, the firms' combined $276 billion in outstanding deposits were about one-fifth of J.P. Morgan Chase.... Deposits are popular with regulators since they are a cheap source of the funding needed to guard against another meltdown.... Morgan Stanley last month began offering clients new perks to move outside cash into their brokerage accounts, including reimbursing ATM fees and offering free identity-theft protection. It soon will begin offering a savings account that pays about 0.45 percentage points a year, according to a person familiar with the plan. That is 30 times what existing Morgan Stanley clients make on their deposits, but about half what Goldman is paying in its new savings accounts." In other news, a press release entitled, "BinckBank Chooses SAFENED covers news of interest to the savings deposit market in Europe."

Forbes.com features the behind-the-curve titled, "Bank of America Pulls Out Of Money Market With New SEC Regulations." It says, "As the second largest bank in the United States, Bank of America plans to simplify their investment options as increased regulation looms on the horizon –– and other investment groups seem to be planning on doing the same. After the financial hardships of 2008, The Security Exchange Commission (SEC) passed new regulations aimed at reducing risks for money market funds. These new regulations are set to go into action in October of this year, and will dramatically change investing practices." The piece asks, "Why is this happening? In many cases, money market accounts can be extremely volatile. During the financial crisis of 2008, failed money market funds left shareholders in treacherous waters, which led to the subsequent invocation of increased regulation from the government." (Note: Bank of America had gotten out of the money fund business several months ago; see our April 19 News, "BlackRock Completes BofA Funds Merger; Now 2nd Largest MMF Manager.") In other news, last week Bloomberg featured the editorial, "Money-Market Funds Should Tell the Truth." It says, "New rules aimed at strengthening one of America's most popular savings products -- the money-market mutual fund -- are causing a minor tempest in financial markets, drawing complaints about unintended consequences. Actually, where they've been applied, the rules are working as they should. To avoid the unintended consequences, they need to be applied more comprehensively.... Why didn't the SEC apply the change to all money-market funds -- as the Financial Stability Oversight Council recommended back in 2012? Because the exempted funds, it argued, were less susceptible to runs: Retail investors didn't pull much out of money-market funds in 2008, and funds that invest in government debt actually attracted money. In other words, the SEC says it's OK to maintain the buck-a-share fiction as long as investors believe it. This is a poor foundation for financial stability."

Fed Chair Janet Yellen spoke Friday on "The Federal Reserve's Monetary Policy Toolkit: Past, Present, and Future." She said, "The Global Financial Crisis and Great Recession posed daunting new challenges for central banks around the world and spurred innovations in the design, implementation, and communication of monetary policy. With the U.S. economy now nearing the Federal Reserve's statutory goals of maximum employment and price stability, this conference provides a timely opportunity to consider how the lessons we learned are likely to influence the conduct of monetary policy in the future.... Looking ahead, the FOMC expects moderate growth in real gross domestic product (GDP), additional strengthening in the labor market, and inflation rising to 2 percent over the next few years. Based on this economic outlook, the FOMC continues to anticipate that gradual increases in the federal funds rate will be appropriate over time to achieve and sustain employment and inflation near our statutory objectives. Indeed, in light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months. Of course, our decisions always depend on the degree to which incoming data continues to confirm the Committee's outlook. And, as ever, the economic outlook is uncertain, and so monetary policy is not on a preset course. Our ability to predict how the federal funds rate will evolve over time is quite limited because monetary policy will need to respond to whatever disturbances may buffet the economy. In addition, the level of short-term interest rates consistent with the dual mandate varies over time in response to shifts in underlying economic conditions that are often evident only in hindsight. For these reasons, the range of reasonably likely outcomes for the federal funds rate is quite widw.... The line in the center is the median path for the federal funds rate based on the FOMC's Summary of Economic Projections in June. The shaded region, which is based on the historical accuracy of private and government forecasters, shows a 70 percent probability that the federal funds rate will be between 0 and 3-1/4 percent at the end of next year and between 0 and 4-1/2 percent at the end of 2018. The reason for the wide range is that the economy is frequently buffeted by shocks and thus rarely evolves as predicted. When shocks occur and the economic outlook changes, monetary policy needs to adjust. What we do know, however, is that we want a policy toolkit that will allow us to respond to a wide range of possible conditions."

Prime assets fell hard again, breaking below the $900 billion level for the first time since 1998, after seeing their steepest decline of the year last week. ICI's "Money Market Fund Assets" report shows MMFs overall increasing $24.6 billion in the latest week. Prime funds fell $23.8 billion -- their 14th decline out of the past 15 weeks (-$300.0B). Government funds gained $55.1 billion, renewing the recent trend of Govt MMFs gaining more than prime funds lost. Since Oct. 29, 2015, Prime assets have fallen by a massive $577.8 billion, or 38.0%. Govt MMFs have increased by $684.0 billion during this same time (up 67.5%) while Tax Exempt MMFs have fallen by $88.6 billion (-36.2%). YTD in 2016, Prime MMFs are down by $403.2 billion, or 31.4% while Govt MMFs are up by $476.7 billion, or 39.1%. The shift was initially fueled by the conversion of over $300 billion of Prime funds into Govt funds, but since June appears to be driven by investors and investor segments. ICI's latest weekly says, "Total money market fund assets increased by $24.63 billion to $2.73 trillion for the week ended Wednesday, August 24, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $55.07 billion and prime funds decreased by $23.82 billion. Tax-exempt money market funds decreased by $6.62 billion." Government assets, including Institutional and Retail (and Treasury and Government) stand at $1.698 trillion, while Prime assets, which dipped below the $1.0 trillion level for the first time in 17 years 4 weeks ago, are at $880.6 billion. The release explains, "Assets of retail money market funds decreased by $2.85 billion to $933.54 billion. Among retail funds, government money market fund assets increased by $3.03 billion to $490.52 billion, prime money market fund assets decreased by $2.05 billion to $322.07 billion, and tax-exempt fund assets decreased by $3.83 billion to $120.95 billion.... Assets of institutional money market funds increased by $27.48 billion to $1.80 trillion. Among institutional funds, government money market fund assets increased by $52.04 billion to $1.21 trillion, prime money market fund assets decreased by $21.77 billion to $558.54 billion, and tax-exempt fund assets decreased by $2.79 billion to $35.41 billion." In other news, see the WSJ's "Number of U.S. Prime Money-Market Funds to Drop as Rules Change", which says, "The number of U.S. prime money-market funds is projected to decline by nearly half, while the tally of government funds is expected to climb 23% when fund sponsors complete revamping their lineups to reflect Securities and Exchange Commission rules that take effect in October, according to iMoneyNet, which tracks money funds."

The Treasury's Office of Financial Research (OFR) posted a blog entitled, "Shedding Light on Securities Lending," which says, "An OFR working paper released today analyzes new data measuring securities lending activity. A securities loan is a transaction in which the lender (a securities owner) temporarily transfers securities to another party (a securities borrower) for compensation. Both securities lending and repurchase agreements (repos) play critical roles in our financial system in money and collateral markets. Analyzing and measuring activity in these markets are key components of the OFR's work in shadow banking." OFR also released a paper, "A Pilot Survey of Agent Securities Lending Activity, which says, "This paper reports aggregate statistics on securities lending activity based on a recently concluded pilot data collection by staff from the Office of Financial Research (OFR), the Federal Reserve System, and staff from the Securities and Exchange Commission (SEC).... A securities loan is a transaction in which the lender (a securities owner) temporarily transfers securities to another party, a securities borrower, for compensation.... This transfer is secured by collateral which can be cash, securities, or another form of financial commitment such as a letter of credit." The OFR paper continues, "The lender derives compensation from the interest earned on cash collateral reinvestment. The total compensation for the lender is a function of the investment returns on the cash collateral and the rebate rate. Lenders typically share a portion of their total compensation with the agent and it is common for the lender to retain most of it.... There may be the potential for systemic stability risks associated with securities lending. For example, in many securities loans against cash collateral, the securities and the cash collateral must be returned on demand. However, cash is generally reinvested, and its sudden withdrawal may result in losses of the collateral's principal value due to liquidity and maturity transformations. During the 2007-09 financial crisis, some securities lenders experienced large losses stemming from aggressive practices of cash reinvestment. For example, cash received in securities loan transactions was reinvested in higher yielding but long-dated and less liquid securities. In one case, these losses were so sizable that they contributed to distress at American International Group, Inc. (AIG), threatening a disorderly liquidation that would have destabilized global financial markets." It says, "After the financial crisis, many securities lenders revised their collateral management policies to reduce exposures to risks emanating from cash reinvestment in long-dated or high-risk assets. Cash collateral reinvestment practices of some lenders have reportedly become more conservative since the financial crisis. In addition to regulatory limits imposed on some securities owners, regulators have taken further steps to reduce risks and improve transparency of cash pools that securities owners commonly use for cash reinvestment purposes." The OFR piece comments, "There were, on average, $1 trillion in securities loans outstanding or about 11 percent of the lendable assets. The collateral received was about equally split between cash ($532 billion) and noncash ($487 billion)." Finally, under "Table 12. Collateral Types Accepted by Securities Owners," it states, "Chart 1 reports information on the reinvestment of cash collateral. For each collection date, the percentage of total cash collateral reinvested is calculated in each of 18 reinvestment categories specified in the pilot data submission request. The most common reinvestment choice was money market securities, including asset-backed commercial paper (ABCP). This option represents over 19 percent of cash collateral reinvestment for each reporting date. Other top reinvestment choices include various types of repos, prime money market funds, as well as direct investment by securities lenders that do not rely on agents for cash collateral management services."

Fidelity published a new "Money Markets" brief, entitled, "Investors Positioning for October Regulation Changes." Written by Michael Morin and Kerry Pope, it says, "Despite the domestic and international environments, Fed officials are sounding slightly more upbeat about the prospect of another hike before year-end.... Investors could gain more clues about the Fed's interpretation of economic data and its interest rate outlook when Fed Chair Yellen speaks at the Jackson Hole economic symposium on August 26." Fidelity explains, "In 2014, the Securities and Exchange Commission (SEC) approved regulatory changes for MMFs. The final date for compliance with the regulations is October 14, 2016.... Aspects of the regulatory changes, such as potential redemption gates and liquidity fees for prime MMFs during periods of heightened market stress, have caused investors to shift assets from prime to government MMFs, which are exempt from the SEC's new reforms. While the flow of assets to date has largely been driven by sponsors of money market funds, flows into government MMFs over the past couple of months were driven by institutional investors seeking to avoid implications of regulatory changes, and may accelerate as the regulatory deadline approaches.... The anticipated shift in investors' preferences has resulted in LIBOR (London Interbank Offered Rate) moving higher. Banks, in a scramble to lock-in term funding, have paid up for three- to 12-month term funding as demand for prime money market funds has waned.... While prime MMFs have been aggressive buyers of issues with one month or less to maturity, fixed-rate bank commercial paper and certificates of deposit maturing in three months or longer now represent just 7% of the total market, down from 25% at the beginning of 2016. During July, transactions with maturities of one week or less made up close to 85% of all dollar-weighted transactions. To attract term funding, banks have increased rates to attract funding from non-prime MMF sources. For example, Japanese and French banks have led the drive for term deposits, pushing three-month LIBOR to 0.76% and six-month LIBOR to 1.11%.... This growing supply-versus-demand imbalance could continue through October. Prime MMFs continue to build liquidity, given uncertainty surrounding the timing and amount of potential redemptions as the date to comply with money market regulations nears." See also, WSJ's blog "Money Market Squeeze on Short-Term Bank Debt Gets Tighter".

The Association for Financial Professionals, which represents corporate treasurers, will host a webinar entitled, "Liquidity in Perspective: Results from the 2016 AFP Liquidity Survey," on Thursday, August 25 at 3pm Eastern. Presenters, including the AFP's Tom Hunt, Crane Data's Pete Crane, SSGA's Yeng Felipe Butler and Hilton Worldwide's Fred Schacknies, will discuss the recently-released 2016 AFP Liquidity Survey. (See our July 14 News, "AFP Liquidity Survey Shows Bank Deposits Still King, But Down; MMFs Up.") The session description says, "Attend this webinar to hear from key participants in the short-term corporate investing marketplace on strategies around managing cash effectively. Better understand how changes in money fund reform will impact investment decisions and timing around those decisions. Participants will walk away with an understanding of current investment allocation best practices, investment policy changes, and what corporate treasurers are doing in light of money market fund reform." Also, money market funds and cash investors are gearing up for the 2016 Annual Conference, which will take place October 23-26 in Orlando, Fla. (Crane Data will be exhibiting, so look for our booth if you're attending.) In other news, we just learned that the latest "Fed Minutes" contain a couple references to money market funds. (See today's "News".) They say, "Finally, the staff noted that various aspects of U.S. money markets, which determine short-term interest rates and are important for transmitting monetary policy, have changed since the financial crisis. The differences include changes the Federal Reserve has made to its policy tools and balance sheet, changes in market participants' business practices, and the regulatory changes made around the globe to strengthen the financial system. Taken together, these factors may, for example, raise the long-run demand for safe assets, including reserve balances, and they should help make U.S. money markets more stable than they were before and during the financial crisis.... During the intermeeting period, federal funds continued to trade at rates well within the FOMC's 0.25 to 0.50 percent target range. However, the average effective federal funds rate was modestly higher than in the previous intermeeting period. The slightly firmer conditions in the federal funds market were supported by higher rates in money markets for secured transactions, which appeared to reflect at least in part more cautious liquidity management by some money market participants in the wake of the U.K. referendum. Take-up at the System's overnight reverse repurchase agreement facility rose somewhat. The increase seemed to be in part the result of shifts in investments by money market funds in advance of the scheduled implementation in October of changes to the regulation of the money market fund industry." Finally, they say, "Although upcoming regulatory changes were expected to improve the stability of money market funds in the longer run, the staff noted the potential for large withdrawals by investors in anticipation of those changes to lead to some disruptions in the short run."

Invesco posted a blog entry recently entitled, "What's behind the recent rise in US dollar Libor? Written by Rob Corner, it explains, "US dollar Libor (London Interbank Offered Rate denominated in US dollars) spiked recently to its highest level in seven years. Typically, US dollar Libor jumps during times of market stress, and/or when the US Federal Reserve tightens monetary policy. However, Invesco Fixed Income believes the recent increase in Libor is due to neither of those circumstances.... We believe the recent rise is primarily a result of the decline in demand by prime money market funds for short-term unsecured money market instruments, such as bank certificates of deposit (CDs) and corporate commercial paper (CP). The decline in demand for CDs and CP is a result of the exodus of $420 billion out of prime money market funds over the last year, driven by looming money market fund reform, which is set to be fully implemented on Oct. 14. Additionally, prime money market fund managers' unwillingness to commit a lot of capital to these instruments with maturities beyond Oct. 14, 2016, has reinforced the supply-demand imbalance. Substantiating this point, the weighted average maturity (WAM) of all prime money market funds has declined to 21 days from 36 days just three months ago. We believe this is a major reason for the disproportionate rise in three-month and six-month US dollar Libor. The shift of assets out of prime money market funds is expected to continue through October, likely providing little reason for US dollar Libor to revert before then.... In our view, there are three types of investors who may stand to benefit from a rise in US dollar Libor: Retail investors in mutual fund products that are not subject to money market fund reform, specifically ultra-short bond funds. Some institutional investors that can invest in institutionally oriented solutions such as global money market funds and separately managed accounts.... Existing holders of US dollar Libor-based floating rate notes.... We believe the future path of US dollar Libor will likely depend on the supply of and demand for loanable funds to banks. Libor could remain elevated if prime money market fund assets persist at relatively low levels and banks struggle to find new sources of funding to replace the decline in prime money market fund assets. On the other hand, if banks can easily replace the lost funding and/or assets move back into prime money market funds, Libor could revert back to a new clearing level."

The Investment Company Institute released its latest "Money Market Fund Holdings" summary (with data as of July 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 August 10 News, "MF Portfolio Holdings: TDs, Treasuries, Agencies Jump; CDs, CP Plummet.") The release explains, "The Investment Company Institute (ICI) reports that, as of the final Friday in July, prime money market funds held 34.0 percent of their portfolios in daily liquid assets and 52.0 percent in weekly liquid assets, while government money market funds held 55.8 percent of their portfolios in daily liquid assets and 72.5 percent in weekly liquid assets. At the end of July, prime funds had a weighted-average maturity of 24 days and a weighted-average life of 37 days. Average WAMs and WALs are asset-weighted. Government money market funds had a weighted-average maturity of 41 days and a weighted-average life of 99 days." On Holdings By Region of Issuer, it adds, "Prime money market funds' holdings attributable to the Americas declined from $446.67 billion in June to $365.15 billion in July, primarily reflecting a decrease in repurchase agreements with the Federal Reserve. Government money market funds' holdings attributable to the Americas declined from $1,335.10 billion in June to $1,267.45 billion in July, which also primarily reflects a decrease in repurchase agreements with the Federal Reserve." The Prime Money Market Funds by Region of Issuer table shows Americas at $446.7 billion, or 43.5%; Asia and Pacific at $215.5 billion, or 21.1%; Europe at $351.1 billion, or 34.4%; and Other at $6.1 billion, or 0.7%. The Government Money Market Funds by Region of Issuer table shows Americas at $1.335 trillion, or 90.4%; Asia and Pacific at $23.7 billion, or 1.6%; and Europe at $116.6 billion, or 7.9%. 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."

We've been regularly browsing the SEC's latest EDGAR filings looking for announcements of money fund liquidations. But we noticed a couple recent filings listing intermediaries and distributors of money funds, so we thought we'd highlight them to show readers a representative list of organizations, "portals" and platforms that sell money market mutual funds. A recent Prospectus Supplement for State Street Institutional Liquid Reserves Fund says, "Effective immediately, the list of financial intermediaries and introductory paragraph thereto located on Page 36 of the Funds' SAI in the sub-section entitled "Payments to Financial Intermediaries" within the section entitled "Investment Advisory and Other Services" are deleted in their entirety and replaced with the following: Set forth below is a list of financial intermediaries, including but not limited to, those to which SSGM (and its affiliates) expects, as of August 3, 2016, to pay compensation with respect to the Funds in the manner described in this "Payments to Financial Intermediaries" section." The list includes the following: Bank of New York Mellon, Benefits Trust Company, BMO Capital Markets Corp, Brown Brother Harriman & Co., Chicago Mercantile Exchange Inc., Common Fund Securities Inc., FIS (formerly Sungard Institutional Brokerage, Inc.), Goldman Sachs & Co, Highland Capital Management Fund Advisors L.P., Institutional Cash Distributors LLC, Investor Services, a division of State Street Bank and Trust, JP Morgan Clearing Corp, Morgan Stanley Smith Barney LLC, My Treasury Limited, Neuberger Berman Management Company LLC, John Hancock Trust Co., SG Americas Securities, LLC, State Street Bank and Trust Company - Wealth Manager Services, Thales Capital Partners LLC, The Bancorp Bank, Union Bank, N.A., US Bank, N.A., Van Eck Securities Corporation." A separate August 15 "SAI sticker" filing for Deutsche's Cash Account Trust, Government & Agency Securities Portfolio says, "The Advisor, the Distributor and their affiliates have undertaken to furnish certain additional information below regarding the level of payments made by them to selected affiliated and unaffiliated brokers, dealers, participating insurance companies or other financial intermediaries (financial advisors) in connection with the sale and/or distribution of fund shares or the retention and/or servicing of investors and fund shares (revenue sharing)." It lists a host of financial institutions and brokerages, then under "Channel: Cash Product Platform," it lists: Allegheny Investments LTD, Bank of America/Merrill Lynch, Barclays Capital Inc., BMO Capital Markets, BNY Mellon, Brown Brothers Harriman, Brown Investment Advisory & Trust Company, Cadaret Grant & Co. Inc., Chicago Mercantile Exchange, Citibank Global Markets, COR Clearing LLC, Deutsche Bank Group, Fiduciary Trust Co. - International, First Southwest Company, Goldman Sachs & Co., Institutional Cash Distributors, LLC, J.P. Morgan Clearing Corp., J.P. Morgan Securities LLC, Lincoln Investment Planning, LPL Financial, My Treasury, Pershing Choice Platform, SAMCO Capital Markets, State Street Bank & Trust Company, State Street Global Markets, Sungard Institutional Brokerage Inc., Treasury Brokerage LLC, Union Bank, US Bancorp, William Blair & Company."

The Wall Street Journal capped off a week of money fund coverage with an editorial on the subject. Entitled, "The Money Fund Mistake," it says, "The taxpayer safety net is about to get a little smaller thanks to a sensible reform from the Securities and Exchange Commission. Too bad regulators also enacted changes to money-fund rules that are discouraging investment and could exacerbate the next financial crisis. The good news is that a 2014 SEC rule that will become effective October 14 requires some institutional money-market funds to report more accurate prices to investors. By allowing their net asset values to float, rather than reporting a fixed value per share, these funds will make clear that they are investment vehicles, not guaranteed bank deposits. By clarifying that investors really can lose money, fund managers can help avoid another 2008-style panic and taxpayer rescue in the event that some funds "break the buck" -- i.e., their values fall below $1 per share. Now for the bad news. Along with this sensible reform, the SEC also enacted rules encouraging new fees and redemption limits in times of stress. These limits are often called "gates" because they would temporarily lock investors into a fund even when they wish to sell. Whereas the first reform creates a more transparent market and conditions investors to accept slight declines without panic, the second does the opposite. Uncertain investors wondering if the fees and gates are about to come crashing down on them will start guessing about the right time to flee. We warned regulators that the threat of such penalties would likely inflame a crisis rather than dampen it. They didn't listen. Now institutional investors like corporate treasurers are asking how they can rely on an account that may not be available when they most need it. The result is less liquidity for the commercial paper and municipal debt markets. This is translating into sharply higher short-term borrowing costs for companies, banks and municipalities.... [T]he threatened gates and fees are driving sharp rate increases while providing only uncertainty for the credit markets. The SEC should scrap these expensive creators of systemic risk." See also the Journal's "Hunting for Yield? They're Handing It Out in the Money Market"," which says, "Something that has been hard to find recently is showing up in the money markets: yield. Rising rates paid by banks and other companies that issue commercial paper are luring new investors to the market, just as more-traditional buyers are scaling back in response to looming regulations."

The Independent Advisor for Vanguard Investors newsletter recently sent out a brief entitled, "Billions In, Billions Out - It's Real Money," which discussed the huge flows from Prime into Govt MMFs at Vanguard. They wrote, "Billions of dollars are sloshing into, and out of Vanguard's money market funds as investors wrestle with new SEC's rules scheduled to take effect in October. Investors are sucking billions per month out of prime money market funds, which invest mainly in short-term debt issued by companies, and pouring it into funds focused on government debt. The SEC rules, meant to make money market funds safer, have set off a slew of unintended consequences. Over the past four months at Vanguard $13.5 billion has drained out of Vanguard Prime Money Market while more than $19 billion has sluiced into Vanguard Federal Money Market.... You can see there have been net outflows for all of Vanguard's prime and municipal money market funds while the government money market funds have raked in billions of dollars." The newsletter also pointed out a recent Vanguard filing for its internal Market Liquidity Fund and Municipal CMF. This says, "Vanguard Market Liquidity Fund has announced a 1-for-100 reverse share split at the close of business on August 12, 2016. The reverse share split will not affect the rights or total dollar value of a shareholder’s investment in the Fund and will not be taxable.... Vanguard Municipal Cash Management Fund has announced a 1-for-100 reverse share split at the close of business on August 12, 2016. The reverse share split will not affect the rights or total dollar value of a shareholder's investment in the Fund and will not be taxable." We believe this means that Vanguard intends to reset the NAVs for these soon-to-be-floating NAV funds at $100.00 instead of $1.0000. (See our June 29 News, "UBS Liquidates Sweeps, Goes Govt; Vanguard Floats Internal Money Fund.")

Investment News writes "Money-market funds scramble ahead of SEC's floating NAV rule." The article says, "With less than two months remaining before new investor safeguards kick in, the $2.7 trillion money-market fund industry is becoming a radically altered landscape. In an effort to prepare for the Securities and Exchange Commission's Oct. 14 rule changes that will introduce special fees and redemption restrictions, as well as a floating net asset value for some money funds, it has become a state of "money in motion," according to Peter Crane, president of Crane Data. With more than $500 billion having shifted from the affected prime-category money funds into money funds that invest exclusively in government bonds, the total assets in prime money funds dropped below $1 trillion for the first time in 17 years." The IN piece quotes Crane, "We're seeing a massive shift from prime funds to government funds, but underneath it all we're seeing the big sort." It also quotes Jerry Klein, head of the corporate cash management group at HighTower Treasury Partners, "Most of the money that has moved so far has been money that the fund companies have converted from prime funds to government funds, largely through changing the default option on sweep products at brokerage firms.... If they can avoid it, the fund companies don't want to use a money fund that could be subject to exit gates and redemption fees." Finally, Investment News adds, "Mr. Crane said, until recently, the prime fund shrinkage has been driven by fund companies moving money into government funds, but he expects the prime fund space to continue shrinking as we get closer to October and institutional investors start pulling more money out. "We've already seen $500 billion come out of prime funds since October," he said. "I think we could see another $500 billion move out in the next few months." Even though prime funds generally pay a yield premium of about 25 basis points over government funds, that difference isn't considered enough of a spread to derail the direction of asset flows out of prime funds, Mr. Crane said."

Money fund assets increased for the third week in a row the latest week to their highest level since March 30, but Prime and Tax Exempt MMF assets continued their steep slide. Prime assets fell below $1 trillion for the first time in almost 20 years 2 weeks ago and total declines since late 2015 are now above $500 billion. Government MMF assets again took in more than the Prime and Muni declines. Gains here were likely driven by the conversion of a major chunk of Morgan Stanley sweep assets -- Morgan Stanley Govt Sec Inst took in over $21 billion on the week according to our Money Fund Intelligence Daily, while MS's prime and municipal Active Assets, and Liquid Assets funds saw big declines. (Watch for more on this Monday.) ICI's weekly "Money Market Fund Assets" report shows all MMFs increasing $6.0 billion in the latest week. Prime funds fell $22.8 billion -- their 12th decline out of the past 13 weeks (-$236.3B). (Govt funds continue to be the recipient of these assets.) Since Oct. 29, 2015, just prior to Fidelity Cash Reserves' huge conversion, Prime assets have fallen by a massive $514.0 billion, or 35.2%. Govt MMFs have increased by $613.8 billion during this same time while Tax Exempt MMFs have fallen by $72.0 billion. YTD in 2016, Prime MMFs are down by $339.4 billion, or 26.4% while Govt MMFs are up by $406.5 billion, or 33.3%. The shift was initially fueled by the conversion of over $300 billion of Prime funds into Govt funds, but since June appears to be driven by investors and investor segments shifting from Prime funds into Govt MMFs. ICI's latest weekly says, "Total money market fund assets increased by $6.04 billion to $2.74 trillion for the week ended Wednesday, August 10, the Investment Company Institute reported today. Among taxable money market funds, government funds2 increased by $40.40 billion and prime funds decreased by $22.76 billion. Tax-exempt money market funds decreased by $11.61 billion." Government assets, including Institutional and Retail (and Treasury and Government), which broke above the $1.5 trillion level for the first time ever 3 weeks ago, stand at $1.627 trillion, while Prime assets, which dipped below the $1.0 trillion level for the first time in 17 years 3 weeks ago, are at $944.4 billion. The release explains, "Assets of retail money market funds decreased by $12.31 billion to $946.09 billion. Among retail funds, government money market fund assets increased by $4.81 billion to $481.35 billion, prime money market fund assets decreased by $8.86 billion to $332.61 billion, and tax-exempt fund assets decreased by $8.26 billion to $132.13 billion.... Assets of institutional money market funds increased by $18.34 billion to $1.80 trillion. Among institutional funds, government money market fund assets increased by $35.58 billion to $1.15 trillion, prime money market fund assets decreased by $13.90 billion to $611.80 billion, and tax-exempt fund assets decreased by $3.34 billion to $40.87 billion."

A press release entitled, "BMO Global Asset Management Expands Distribution of Newly-Named BMO Stable Value Fund," says, "BMO Global Asset Management (BMO GAM) today announced expanded availability of the BMO Employee Benefit Stable Principal Fund as the company broadens its reach in the Defined Contribution Investment Only (DCIO) channel. As part of this initiative, this collective trust has been renamed the BMO Stable Value Fund. The BMO Stable Value Fund is now available to outside recordkeepers and other 401(k) providers. The Fund is now accessible through the National Securities Clearing Corporation (NSCC), which offers automated trading capabilities. Prior to this change, the collective trust was available only to plan sponsors that had an existing relationship with BMO Harris Bank N.A." Christopher Barlow, National Director of Defined Contribution Investments for BMO Global Asset Management, comments, "This change is designed to meet the needs of more and more plan sponsors as they continue to look for easily accessible products that can provide more yield than a traditional money market fund.... The BMO Stable Value Fund provides those plan sponsors with an attractive alternative for the growing number of plan participants who are looking for conservative investments. It also demonstrates our sustained commitment to our Stable Value and Defined Contribution Investment business." The release adds, "The BMO Stable Value Fund adds a collective trust option to BMO GAM's suite of 45 mutual funds available to U.S. investors. This Fund is in addition to the existing family of money market funds, which includes the recently launched BMO Institutional Prime Money Market Fund as well as the BMO Prime Money Market Fund, BMO Tax-Free Money Market Fund and BMO Government Money Market Fund." In other news, iTreasurer writes "Outflows from Prime MMFs Increasing". They write, "Companies continue to pull cash out of MMFs as they don't want to be the one to turn the lights out in October.... Companies ahead of the implementation have been seeking out places to put their cash, aside from going to government funds. Many are staying in bank deposits, although that may be short-lived, as several companies in The NeuGroup network have reported "getting the call" to take their cash somewhere else."

The Wall Street Journal continues its unofficial "Money Fund Week with the article, "5 Things Investors Should Know About New Rules on Money-Market Funds." It says, "Investors in money-market funds should prepare now for extensive new rules in mid-October that promise to fundamentally change the $2.7 trillion industry, fund managers and experts say. Under the new rules, prime institutional money-market funds -- those that invest in short-term corporate debt and cater to large investors -- and institutional municipal money-market funds must allow the value of their shares to fluctuate to reflect the current market price of their underlying holdings. Prime and retail municipal money-market funds aimed at individual investors will try to continue with a stable $1 net asset value, but they may impose redemption fees or other selling restrictions during times of crisis. Government money-market funds for institutional or individual investors will still attempt to maintain a $1 share price after the rules are in place, and they aren't required to impose redemption fees or suspend redemptions." The piece explains, "Here are five things individual money-market-fund investors should consider ahead of the Oct. 14 implementation: 1. Share Prices May Fluctuate <b:>`_. For many years, money-market funds have kept their share prices fixed at $1 regardless of what occurred in the market. Yet factors such as interest-rate changes and market and credit conditions can cause a fund's market-based net asset value to fluctuate above or below $1.... Investors have already pulled billions from prime funds and shifted much of that money into government money-market funds that will still attempt to maintain a $1 share price after the rule change. If the notion of a fluctuating net asset value is unsettling, investors who remain in institutional prime funds may want to move their money. But they should consider that, since April, money-market funds have been required to publish daily their per-share net asset values based on market prices. Those disclosures have shown that there has been little fluctuation from $1." The Journal quotes our Peter Crane, "It's like watching paint dry.... $0.9999 or $1.0001 is the most fluctuation you'll see." It adds, "It will take a disturbance, such as an interest-rate move by the Federal Reserve or a default or a major downgrade of a blue-chip borrower, to create a greater gap, he says. "These minuscule movements ... are not going to cause noticeable losses to investors." Among the other "5 Things to Know," the WSJ lists: "2. Your Money Could Be Locked Up During a Period of Stress; 3. Your Fund Could Still 'Break the Buck'; 4. Fund Directors Will Shoulder Weighty New Duties; and, 5. Fund Companies Now Rate Their Own Holdings." See also, CFO Journal's piece, "New Money-Fund Rules Test Need for Liquidity Versus Yield." It says, "Money-market managers find themselves at the mercy of corporate finance chiefs, who stand to pull hundreds of billions of dollars in cash out of funds within the next 10 weeks, disrupting short-term lending markets. The threat, spurred by regulations set to take effect Oct. 14, is rippling through the bank lending market and unsettling the $2.7 trillion money-market industry, according to fund managers."

Reuters writes "European money market reforms to have global impact: Morgan Stanley," which discusses a recent update from Morgan Stanley entitled, "`EU MMF Reform: On the Horizon, but Uncertainty Remains." Reuters' story explains, "Proposed money market reforms in Europe could raise short-term borrowing costs for banks around the world if some funds shun bank debt in favor of owning only government securities, according to Morgan Stanley analysts. This move has already occurred in the United States, where a number of U.S. prime money funds have been converting to government-only portfolios since late last year, ahead of new regulations on the $2.7 trillion industry which go into effect on Oct. 14. Government-only funds are exempt from some provisions, including floating per-share price and fees imposed during times of market volatility, which some corporate treasurers and institutional investors dislike. Reduced demand from U.S. prime funds for commercial paper and certificates of deposit issued by banks has raised a benchmark on interbank borrowing costs to its highest in over seven years. Morgan Stanley analysts Mikhail Levin and Jesper Rooth said in a report late Thursday that European money funds may respond similarly to their U.S. counterparts as European Union regulators seek to finalize rules to safeguard a sector that was roiled following the collapse of Lehman Brothers during the global financial crisis in September 2008." The Morgan Stanley report comments, "Although MMF reform in Europe is more than two years from full implementation, with final rules still undecided, we find it valuable to understand the market backdrop and the potential changes coming out of reform. The majority of fixed NAV funds in Europe are actually USD and GBP denominated (about 50% of the E1tn total EU MMF AUM), suggesting that investors in these markets should be cognizant of the path to EU reform. To the extent that prime AUM, which makes up the bulk of the fixed NAV EU market, moves to government funds, demand for short-term financial paper will decline even further. That said, the proposed structure of EU reform is slightly different than in the US. Prime funds will similarly have to mark-to-market, though there will be a new category of fund (termed 'low volatility NAV')." The piece adds, "The important point to note is that unlike in the US, the European market already has a significant share of floating NAV funds, which may make regulatory transition away from fixed NAV funds less of a shock. However, most of these funds are 'standard' MMFs, which can own assets with up to 2y maturities and have max WAMs/WALs of 6 months/12 months (rather than the traditional 397-day max maturity and 60-day/120-day WAM/WAL limits for 'short-term' Euro funds and all US funds). Based on ECB data, the majority of these VNAV funds are domiciled in France, though the relative proportion of these funds has shrunk. This is likely the result of AUM moving to foreign-currency-denominated CNAV funds, where investors don't need to contend with negative money market rates permeating the Eurozone and limiting EUR-denominated MMF returns. The actual balance of EUR-denominated CNAV funds is quite small, particularly in the current environment where investors are generally forced to realize negative yields through share redemptions (the NAV remains fixed but the number of shares the investor holds declines to pay for the negative yield). While the US MMF industry is close to $3tn, the EU domiciled industry is around a third of that, at E1tn. Much of the Euro area domiciled MMF AUM is in USD and GBP funds vs. US MMFs which can only invest in dollar assets (about 85% of fixed NAV Euro area-domiciled funds are USD or GBP denominated). There is traditionally significant AUM in Euro area variable NAV (VNAV) funds, which is not the case in the US (about 45%). There is an additional category of VNAV MMF in Europe (termed 'standard' MMFs) that can have longer average durations than 'short-term' Euro MMFs whose regulations are in line with those of US MMFs." (Note: European-domiciled money market funds will be the focus of Crane Data's 4th annual European Money Fund Symposium next month, Sept. 20-21, in London at the London Tower Bridge Hilton.)

Friday afternoon, CNBC interviewed the WSJ's Ken Brown on his "$500 billion stampede in money markets" story. The Journal writes in its "Wealth Adviser Daily Briefing: Money-Market Funds and Pessimistic Millennials" Blog, "New rules reverberate across money-market industry. New rules governing cash parked in money-market mutual funds in 401(k)s or similar plans are set to hit in October. But the $2.7 trillion money-market industry is already being upended as nearly $500 billion has moved into, out of and among these funds, writes WSJ's Unhedged columnist Ken Brown. The new rules are meant to prevent another run on the industry, which occurred after a fund that held Lehman Brothers debt collapsed. Money-market funds were never supposed to lose money, and in the ensuing panic, investors pulled nearly $150 billion from the industry in a week. That move choked off cash for U.S. companies and global banks, threatening to deepen the crisis. The rules will cause two big changes: Prime funds have to hold more super-short-term debt, and they can no longer claim that investors won't lose money. More than $420 billion has been pulled out of prime money-market funds this year, dragging assets below $1 trillion for the first time since 1999, Mr. Brown writes, citing data from the industry trade association Investment Company Institute. The money has flowed into government money-market funds, which have grown from $991 billion to $1.5 trillion." (See our News Friday at the bottom for more on this WSJ article.)

Money fund assets jumped in the latest week, but Prime MMF assets continued their deep slide. Prime assets fell below $1 trillion for the first time in almost 20 years last week and total declines since late 2015 are now approaching $500 billion. Government MMF assets skyrocketed, increasing by twice the size of the Prime fund decline. ICI's weekly "Money Market Fund Assets" report shows all MMFs increasing $24.0 billion in the latest week. Prime funds fell $22.8 billion -- their 11th decline out of the last 12 weeks (-$213.5B). (Govt funds continue to be the recipient of these assets.) Since Oct. 29, 2015, just prior to Fidelity Cash Reserves' huge conversion, Prime assets have fallen by a massive $491.2 billion, or 33.7%. Govt MMFs have increased by $573.4 billion during this same time while Tax Exempt MMFs have fallen by $60.7 billion. YTD in 2016, Prime MMFs are down by $316.6 billion, or 24.7% while Govt MMFs are up by $366.1 billion, or 30.0%. Government fund assets moved ahead of Prime assets in February 2016 for the first time ever, and they haven't looked back. The shift was initially fueled by the conversion of over $300 billion of Prime funds into Govt funds, but since June appears to be driven by investors and investor segments shifting from Prime funds into Govt MMFs. ICI's latest weekly says, "Total money market fund assets increased by $24.03 billion to $2.74 trillion for the week ended Wednesday, August 3, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $45.70 billion and prime funds decreased by $22.82 billion. Tax-exempt money market funds increased by $1.16 billion." Government assets, including Institutional and Retail (and Treasury and Government), which broke above the $1.5 trillion level for the first time ever 2 weeks ago, stand at $1.587 trillion, while Prime assets, which dipped below the $1.0 trillion level for the first time in almost 20 years, are at $967 billion. The release explains, "Assets of retail money market funds increased by $2.59 billion to $958.40 billion. Among retail funds, government money market fund assets increased by $15.32 billion to $476.54 billion, prime money market fund assets decreased by $12.20 billion to $341.47 billion, and tax-exempt fund assets decreased by $540 million to $140.39 billion.... Assets of institutional money market funds increased by $21.44 billion to $1.78 trillion. Among institutional funds, government money market fund assets increased by $30.38 billion to $1.11 trillion, prime money market fund assets decreased by $10.63 billion to $625.70 billion, and tax-exempt fund assets increased by $1.69 billion to $44.22 billion."

Bloomberg writes "Obscure Rule to Fix $2.7 Trillion Market Draws Tireless Opponent," which says, "It's an obscure rule that few people understand, but its backers hope it will correct a crucial flaw in a $2.7 trillion market whose collapse in 2008 froze financial transactions around the world. There's one snag: the relentless bulldogs at Federated Investors Inc. The family-run investment manager that oversees $367.2 billion in assets has outlasted larger firms like BlackRock Inc. and Fidelity Investments in the fight to persuade Congress that the regulation should never take effect. Federated has built a sophisticated lobbying operation, bankrolling lawmakers' political campaigns and recruiting state officials to press its case." The piece adds, "While the effort faces long odds, the push has produced successes. Congress is currently considering bipartisan legislation to reverse one of the most sweeping post-crisis financial reforms -- one governing money-market mutual funds. There's some urgency, as the rule is set to go on the books in October." Bloomberg quotes Peter Crane of Crane Data, "This is a bill for one company: Federated.... This fight has gone on for years, but they're the only ones still lobbying." The article adds, "Pittsburgh-based Federated, the fourth-biggest U.S. money-market firm, spent $960,000 on lobbying this year and $1.37 million last year on lobbyists inside and outside the company, the most in at least a decade, according to public filings. Republican Senator Patrick Toomey introduced legislation last year that would reverse the SEC rule. He's locked in a close race in Federated's home state of Pennsylvania and has been the firm's top recipient of campaign cash, according to data from the Center for Responsive Politics. Federated was Toomey's third-biggest contributor the last five years, the data show.... The unique part of Federated's lobbying strategy is the company's role in building a network of state officials to press its case. Many of them are members of the Coalition to Protect Investor Choice, which advocates for legislation to reverse the money-fund rules. The alliance gets funding from Federated and has spent $148,500 on federal lobbying since its inception in November." For more, see Crane Data's March 8 News, "Long Shot Legislation Could Keep All Money Funds Stable, Ban Bailouts."

The Wall Street Journal features an article entitled, "T. Rowe Price Prime Money Fund Switches to Government Focus," which says, "Another big prime money market fund has changed its stripes. The T. Rowe Price Prime Reserve Fund became the T. Rowe Price Government Money Fund effective Monday. Scores of prime money market funds, which invest in low-risk short-term debt securities and repurchase agreements, have either changed to government money market funds or liquidated this year, according to Crane Data LLC, which tracks the industry. The changes come in advance of new Securities and Exchange Commission rules that take effect on October 14. The new requirements call for certain funds, including institutional prime and tax-exempt money market funds, to allow their net asset values, or NAVs, to fluctuate instead of effectively fixing them at $1 a share, as they currently do." The piece adds, "Peter Crane, president of Crane Data, said the difference in yield between prime institutional funds, which recently yielded 0.23%, and government money market funds that invest in Treasuries, yielding 0.12%, is less than half its historical spread of 25 hundredths of a percentage point. Assets held by prime money market funds fell to $990 billion for the week ended July 27, the first time since September 1999 that the total has fallen below $1 trillion, according to a spokeswoman for the Investment Company Institute, a fund industry trade group. The total is down $18 billion from a week earlier." (See our June 24 News, "June MFI Profile: T. Rowe Price's Lynagh on Lineup; First Do No Harm.") The Journal also wrote yesterday, "It's Called Financial Repression, and Governments Around the World Are Doing It: Countries are adopting policies to encourage or require savings to be lent cheaply to the government." This article says, "Financial repression is on the rise, but savers still can avoid it. Prime money-market funds might look less attractive under the new rules, but the economic reality of what they own remains unchanged, as do the risks. Just because a fund can now suspend withdrawals or impose a fee in a crisis doesn’t mean that under the old rules money would have magically been available."

The New York Fed's William Dudley spoke Sunday on "The U.S. Economic Outlook and the Implications for Monetary Policy." He said, "All three of these reasons -- evidence that U.S. monetary policy is currently only moderately accommodative, the fact that U.S. financial conditions have been influenced by economic and financial market developments abroad, and risk management considerations -- argue, at the moment, for caution in raising U.S. short-term interest rates. So, directionally, the movement in investor expectations towards a flatter path for U.S. short-term interest rates seems broadly appropriate. That said, to my eye, market expectations derived from futures prices -- which price in about one 25 basis point rate hike through the end of 2017 -- appear to be too complacent. If the incoming information validates my view of the outlook, then I believe that U.S. monetary policy will likely need to move at a faster pace than implied by futures prices towards a more neutral posture as the labor market tightens further and U.S. inflation rises. Moreover, market expectations may be putting insufficient weight on the possibility that the economy could outperform our expectations, that financial conditions could ease, or that the risks to growth from Brexit and other international developments could fade away. If such events were to occur, this might necessitate a faster pace of adjustment. For these reasons, I think it is premature to rule out further monetary policy tightening this year. As I said before, it depends on the data, broadly defined, and, as we all know, that is not something one can predict with any accuracy."

The Wall Street Journal's CFO Journal wrote a story late last week, entitled, "Investors Pulling Money out of Prime Money Funds." It says, "Assets in money market funds that invest in short-term corporate debt securities have fallen to 17-year lows, according to new data from the Investment Company Institute, a fund industry trade group. Investors are pulling their money from the investment vehicles ahead of money market fund reform due to take effect in October. Assets held by prime money market funds fell to $990 billion for the week ended July 27, the first time since September 1999 that the total has fallen below $1 trillion, said an ICI spokeswoman. The total is down $18 billion from a week earlier.... The withdrawals are starting to have an effect on borrowing rates. The money fund managers had invested corporate money in commercial paper, but the threat of more redemptions ahead of the reforms has made them less willing to invest for periods extending past Oct. 14. That in turn is causing some issuers, particularly banks, to pay to borrow in the commercial paper market for longer periods. The increased investment has started to push up the London Interbank Offered Rate, or Libor, as a consequence. While some companies have begun moving their funds out of money market funds, others are still waiting, which is increasing uncertainty in that market. "Most of the big money managers are not getting clear answers from their investors," said one banker. "The companies are keeping their cards close to their chest.""