Daily Links Archives: April, 2017

A statement from the Treasury's Office of Financial Research says, "The OFR posted a new website page today, entitled, "LIBOR Alternatives." LIBOR is an interest rate benchmark used as a reference rate. This reference rate reflects the general cost of large banks' borrowing that is not backed by collateral. U.S. dollar LIBOR plays a central role in the U.S. financial markets and economy. It is used to set interest rates on financial products such as mortgages and private student loans. The Federal Reserve Board and the Federal Reserve Bank of New York convened the Alternative Reference Rates Committee (ARRC) to identify an alternative to LIBOR. The OFR is a member of ARRC and is collaborating with the Federal Reserve to explore alternative reference rates. The ARRC is considering two potential LIBOR alternatives: a secured repurchase agreement (repo) rate, and the Overnight Bank Funding Rate. The selection of an alternative reference rate is expected in 2017. The OFR is involved in the planning for the alternative reference rate and will play a role in its implementation." See also, Institutional Investors' odd "The New Risk Facing Money Market Funds."

The FT writes "Chinese money market fund becomes world's biggest," which says, "A money market fund set up by a Chinese tech company as a repository for leftover cash from online spending has emerged as the world’s biggest, with $165.6bn under management. Alibaba's four year old Yu'e Bao fund -- the name translates as leftover treasure -- has overtaken JPMorgan's US government money market fund, which has $150bn.... The growth of Yu'e Bao comes as other money market funds are under pressure from low interest rates. In the US, government debt funds such as JPMorgan's swelled in size last year because of regulatory changes that encouraged money to move from "prime" money market funds that invest in corporate debt. But that trend has abated in recent months, while Yu'e Bao's inflows have remained strong." The piece adds, "Rachel Wang, director of manager research in China for Morningstar, which ranks Yu'e Bao as the seventh biggest fund overall, added that it is subject to credit and liquidity risk. "Considering the huge size of Yu'e Bao, the liquidity risk may be even higher than other funds," she said. Other tech companies in China have also entered the market. Tencent's wealth platform Licaitong has joined financial institutions to offer money market funds and other wealth management products alongside smartphone maker Xiaomi."

Northern Trust reported Q1'17 earnings, saying, "Northern Trust Corporation today reported first quarter net income per diluted common share of $1.09, compared to $1.03 in the first quarter of 2016 and $1.11 in the fourth quarter of 2016. Net income was $276.1 million, compared to $245.4 million in the prior-year quarter and $266.5 million in the prior quarter. Return on average common equity was 11.6%." Frederick Waddell, Chairman & CEO, comments, "Northern Trust's first quarter revenue increased 8% compared to one year ago, reflecting strong growth in trust, investment and other servicing fees and net interest income. Assets under custody/administration and assets under management ended the quarter up 13% and 11%, respectively, compared to a year ago, primarily driven by higher markets and our continued success in winning new business." The release says of "Q1 2017 vs. Q1 2016," "Trust, investment and other servicing fees increased primarily due to favorable equity markets, new business, and lower money market mutual fund fee waivers, partially offset by the unfavorable impact of movements in foreign exchange rates." Fee waivers here decreased from $1.7 million a year ago to nothing in Q1'17. The release adds about "Q1 2017 vs. Q1 2016," "C&IS custody and fund administration fees increased primarily due to new business and favorable equity markets, partially offset by the unfavorable impact of movements in foreign exchange rates. C&IS investment management fees increased primarily due to the favorable impact of equity markets and lower money market mutual fund fee waivers. C&IS other fees increased primarily due to new business related to investment risk and analytical services." Fee waivers here decreased by 97%, dropping from $6.0 million a year ago to $0.2 million in Q1'17.

We missed their release last week, but Charles Schwab & Co. reported record earnings, and it appears money fund fees were a big driver. CFO Joe Martinetto commented in their release, "Schwab's strong first quarter financial performance was driven by ongoing success in building our client base, sustained improvement in the economic environment, and the Federal Reserve's actions to lift interest rates, along with focused expense management. Net interest revenue grew 30% to $1 billion as a result of larger client cash sweep balances and the subsequent increase in interest-earning assets, as well as higher interest rates across the yield curve. Asset management and administration fees increased 18% to $823 million largely due to continued improvement in net money fund revenue from rising rates and growing balances in advisory solutions, mutual funds, and ETFs. Trading revenue declined 17% to $192 million, primarily reflecting the impact of lower trade pricing. In total, first quarter revenue grew 18%, surpassing the $2 billion mark, and once again demonstrating the Schwab formula of solid asset growth driving solid revenue growth.... In addition, Other expense rose mainly due to deposit insurance assessments driven by larger balances and surcharges." He added, "We also transferred approximately $1.1 billion of Schwab One balances to Schwab Bank, which has greater flexibility than the broker dealer in investing client cash sweep balances. Our current plans call for transferring approximately $500 million to $1 billion in sweep money fund balances to the Bank during the second quarter." Note: Federated Investors reports earnings late Thursday and hosts its quarterly earnings conference call on Friday a.m.

Fidelity Investments writes "Rates Expected to Gradually Move Higher in 2017." It explains, "For a data-dependent Federal Reserve (Fed), first quarter economic reports, primarily related to the labor markets and inflation, provided the basis for a second rate hike in three months. Prominent Fed officials, including Chair Yellen and New York Fed President William Dudley, had telegraphed the intention to raise rates during multiple speeches leading up to the meeting. And indeed, the Fed raised the target range for the federal funds rate from 0.75% to 1.00% in mid-March." Authors Michael Morin and Kerry Pope explain, "While year over year the overall level of money market fund assets remained stable, the influence of 2016 money market fund reform and the significant movement of money market assets from prime funds into institutional government funds continued to be evident in the first quarter. The average spread between institutional prime and government money market funds grew to 34 basis points (bps) by March 28.... The widening of spreads contributed to an increase in prime assets of approximately $22 billion, to $396 billion. While the increase is below industry estimates, there are several factors contributing to the very slow return of assets. Floating NAVs and the potential for gates and fees require additional operational, tax, and liquidity considerations for many institutional investors. Given the list of priorities for corporate treasurers, it may take a tax holiday or another U.S. debt-ceiling crisis before prime money market funds and conservative, ultra-short bond funds make it to the top of the priority list.... As the Fed continues to raise rates, prime money market fund spreads to government money market funds and bank products could continue to widen. In a total-rate-of-return environment, prime money market funds may represent value to those institutional investors that maintain strategic liquidity above and beyond their operating cash balances."

The Bank of New York Mellon mentioned money market funds and its "portal" in a couple of places during its first quarter earnings call. Chairman & CEO Gerald Hassell says, "In Investment Management, we had a good quarter with revenue up 8% and pretax income, excluding intangibles, up 24%. Our adjusted pretax operating margins rose to 34% helped by increased revenues and various expense actions. Overall, asset management flows improved to their highest level in several years. Of note, our cash business [was] above the industry trend of outflows and in the quarter, we added $13 billion in assets inflows." CFO Thomas Gibbons explained, "First, we experienced solid revenue growth in Investment Services fees and Investment Management and performance fees, both were up 4%. Second, while our net interest revenue and our net interest margin benefited from the rate increases, both results were a little lighter than we anticipated due to the slightly smaller balance sheet. Now the dynamics of that I'll discuss later in a little more detail. I will also provide with you some additional color on how additional rate increases are expected to benefit both NIR and the NIM.... Clearing services fees increased 7% year-over-year and 6% sequentially, primarily driven by higher money market and mutual fund fees.... With regard to short-term flows, as Gerald noted, we added $13 billion in cash and we did that by focusing both on the performance as well as increasing distribution through our liquidity portals. This was in contrast to the cash industry which experienced overall outflows.... Regarding fee waivers, we have recovered nearly all of the pretax income related to the interest rate sensitive fee waivers."

Deutsche Government Series: Cash Reserve (Govt and Govt Inst Shares) is the latest fund to liquidate. A Prospectus Supplement filing for Deutsche Government Series tells us, "Upon the recommendation of Deutsche Investment Management Americas Inc. (the "Advisor"), the Board of Deutsche Government Series (the "Fund") has approved the liquidation and termination of the Fund, effective on or about April 21, 2017 (the "Liquidation Date"). The Fund will redeem all of its shares outstanding on the Liquidation Date. The cost of the liquidation, including the mailing of notification to shareholders, will be borne by the Fund, subject to any applicable voluntary or contractual undertaking, then in effect, by the Advisor to waive or reimburse certain operating expenses of the Fund. Shareholders who elect to redeem their shares prior to the Liquidation Date will receive the net asset value per share (normally, $1.00) on such redemption date for all shares they redeem. Shareholders whose shares are redeemed automatically on the Liquidation Date will receive the net asset value per share (normally, $1.00) for all shares they own on the Liquidation Date. In conjunction with approving the liquidation of the Fund, the Board of the Fund further approved closing the Fund to investments for new accounts effective March 6, 2017. The Fund will, however, continue to accept subsequent investments and dividend reinvestments for existing accounts until the Liquidation Date, except that subsequent investments made by check, Automated Clearing House debit entries or pursuant to any automatic investment plan will no longer be accepted by the Fund beginning two weeks prior to the Liquidation Date. Shareholders who redeem shares using the checkwriting redemption privilege offered by the Fund are advised to stop using this privilege at least two weeks prior to the Liquidation Date to ensure that any redemption checks are presented to the Fund for payment on or prior to the Liquidation Date since any such redemption checks presented to the Fund after the Liquidation Date will not be honored."

The Investment Company Institute released its latest monthly "Money Market Fund Holdings" summary (with data as of March 31, 2017) yesterday. This release reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds. The MMF Holdings release says, "The Investment Company Institute (ICI) reports that, as of the final Friday in March, prime money market funds held 29.4 percent of their portfolios in daily liquid assets and 44.3 percent in weekly liquid assets, while government money market funds held 61.2 percent of their portfolios in daily liquid assets and 74.6 percent in weekly liquid assets." Prime DLA rose from 24.2% last month and Prime WLA rose as well from 43.7% last month. It explains, "At the end of March, prime funds had a weighted average maturity (WAM) of 30 days and a weighted average life (WAL) of 67 days. Average WAMs and WALs are asset-weighted. Government money market funds had a WAM of 39 days and a WAL of 91 days." Prime WAMs were down three days from the prior month, and WALs were were unchanged. Govt WAMs decreased by 2 days and WALs decreased by 3 days as well. Regarding Holdings By Region of Issuer, ICI adds, "Prime money market funds' holdings attributable to the Americas rose from $165.11 billion in February to $172.80 billion in March. Government money market funds' holdings attributable to the Americas rose from $1,796.33 billion in February to $1,863.92 billion in March." The Prime Money Market Funds by Region of Issuer table shows Americas-related holdings at $172.8 billion, or 43.6%; Asia and Pacific at $82.7 billion, or 20.9%; Europe at $136.4 billion, or 34.4%; and, Other (including Supranational) at $4.0 billion, or 1.0%. The Government Money Market Funds by Region of Issuer table shows Americas at $1.863 trillion, or 87.7%; Asia and Pacific at $80.3 billion, or 3.8%; and Europe at $179.5 billion, or 8.5%.

Waltham Partners' David Castle writes, "Treasury Notes No. 7 - Money Market Funds, Shifting Sands." It explains, "The shifting sands of the money market industry as a source of liquidity for bank and financial issuers over recent years has been driven by regulation that impacts both issuer and investors. Most recently the U.S. Money Fund rules prompted a dramatic shift from Prime to Government assets as the reform agenda influenced risk and liquidity profiles. Coupled with this issuers have taken a more conservative stance in accessing this source of funding as Basel III liquidity rules prompt an ever more granular and diverse approach to funding plans. In this edition of Treasury Notes we explore the changing Money Fund landscape, looking at fund types, asset mix, geographic changes and issuer activity to see if we can identify trends that may provide risk or opportunity for Treasury." The piece continues, "U.S. Prime and Liquidity funds have historically been a ready source of wholesale liquidity for Bank Issuers of Commercial Paper, Certificates of Deposit or Short Bonds. The financial crisis of 2008-2009 brought into stark focus the potential pit falls of over reliance on this source of funding, saw some issuers retrench and an increased move by investors toward high quality issuer names. Pete Crane, President of Crane Data LLC, summarises the changing shape of the U.S. MMF industry, 'While U.S. money fund balances had been surprisingly stable for a number years following the financial crisis, we saw an unprecedented $US1.1 trillion shift from Prime funds into Government money funds in 2016 due to money fund reforms.' In a remarkable throwback to the early 1990s the bank issuer market to MMFs is now dominated by Japanese, Scandinavian, Aussie, Canadian and a select few European names. While there have been cyclical changes to this mix, and some have always been there, the concept of 20 or so 'on the run' issuers who both support money managers and are in turn supported by them seems to have taken hold again. The changing shape of the Money Fund complex where assets have shifted towards government products in the U.S. has re-focused managers on relationships with issuers who can provide consistent service and will be liquid in times of need."

The Investment Company Institute released its latest weekly "Money Market Mutual Fund Assets" yesterday, which shows that money fund assets were down slightly in the latest week. It says, "Total money market fund assets decreased by $4.12 billion to $2.64 trillion for the week ended Wednesday, April 12, the Investment Company Institute reported today. Among taxable money market funds, government funds decreased by $6.26 billion and prime funds increased by $2.22 billion. Tax-exempt money market funds decreased by $80 million." Total Government MMF assets, which include Treasury funds too stand at $2.114 trillion (80.0% of all money funds), while Total Prime MMFs stand at $399.4 billion (15.1%). Tax Exempt MMFs total $130.2 billion, or 4.9%. It explains, "Assets of retail money market funds decreased by $5.45 billion to $978.98 billion. Among retail funds, government money market fund assets decreased by $4.25 billion to $599.76 billion, prime money market fund assets decreased by $760 million to $254.04 billion, and tax-exempt fund assets decreased by $450 million to $125.18 billion." Retail assets account for over a third of total assets, or 37.0%, and Government Retail assets make up 61.3% of all Retail MMFs. The release continues, "Assets of institutional money market funds increased by $1.33 billion to $1.66 trillion. Among institutional funds, government money market fund assets decreased by $2.01 billion to $1.51 trillion, prime money market fund assets increased by $2.98 billion to $145.40 billion, and tax-exempt fund assets increased by $370 million to $4.97 billion." Institutional assets account for 63.0% of all MMF assets, with Government Inst assets making up 91.0% of all Institutional MMFs.

Capital Advisors published, "Revisiting Bank Deposits as a Liquidity Solution." The piece says, "The search for liquidity management solutions reached a new level of significance when institutional prime money market funds were required to float net asset values (NAVs) last fall. While treasury organizations may consider bank deposits as a fallback liquidity solution, regulatory changes, interest rate dynamics and other external factors demand a refresher course. In our previous whitepapers, we discussed the transformation of corporate deposits as liquidity vehicles and reduced appetite of large systemically important banks (SIBs) for overnight deposits. Banks do not appear to have benefitted from the recent money market fund (MMF) reform through deposit inflows. Instead, asset declines in prime funds were met with almost identical increases in government fund assets. Still, treasury organizations generally maintain deposit relationships, often with multiple banks, for liquidity, savings, escrow, trade, business relationships or other reasons. Institutional deposits tend to be greater than $250,000, and not protected by the FDIC deposit insurance. Some are placed with US branches of foreign banks under different sets of banking rules than those of the US financial authorities. In this update, we review recent deposit growth among institutional liquidity accounts, issues surrounding the earnings credit rate (ECR), and the lagging yield effect of deposits in a rising interest rate environment." The paper adds, "For as long as the history of modern banking, bank accounts were the primary, and often only, liquidity tool for businesses and other institutional entities. This reliance started to change with the introduction of money market mutual funds in the 1970s. The Federal Reserve's Flow of Funds reports ... show that 79% of the liquid balances at non-financial firms in the United States were in checking accounts or cash in 1970, with another 8% in time and savings deposits. Commercial paper investments (12%) made up the rest."

Wells Fargo Money Market Funds' latest "Overview, strategy, and outlook" comments on the "Municipal sector," "It took some time but the municipal money market eventually responded with higher benchmark yields following the Fed's interest-rate policy move on March 15. Although the taxable markets already had begun to gradually price in a rate hike in advance of the FOMC meeting, the tax-exempt markets followed its usual wait-and-see path. The net result was that tax-exempt yields began to underperform relative to taxable equivalents, particularly in the overnight and weekly variable-rate demand note (VRDN) and tender option bond (TOB) sectors. Following the Fed move, the tax-exempt space was forced to play catch-up and responded quickly with rapidly rising interest rates on the short end of the curve. The Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Index, which had lingered at a year-to-date low of 0.62% prior to the FOMC meeting, quickly began to ratchet higher through the remainder of the month. The index ultimately would rise to a multiyear high of 0.91% at month-end, firmly reestablishing itself at an attractive 95% ratio to one-week LIBOR in order to attract the support of marginal crossover buyers." Regarding what's "On the horizon," they add, "Without the prospect of impending reform, we anticipate April should be a fairly quiet month for the money markets -- unlike last year. About the only notable event on the horizon is tax day on April 18. If this year is like normal years, we should expect some volatility in the markets around that date as balances in MMFs build prior to the deadline and then decline shortly after the deadline as corporations and individuals make their payments. Ultimately, the sum total of money market assets at the end of April is likely to be lower than at the beginning of April, which may help push the overall level of interest rates marginally higher. But all this should be the result of supply and demand dynamics and not due to regulatory or legislative actions -- a welcome change, indeed."

In an article entitled, "For money market investors, things are looking up a bit," The Boston Globe writes, "One percent may not seem like much to cheer about. But after a decade of suffering with paltry earnings on money market accounts, investors are starting to do slightly better, with the top-paying funds pressing through the 1 percent mark in recent days. The Federal Reserve's three small rate hikes since December 2015 -- each just a quarter percent -- have breathed some life back into these vehicles, billed as safe places to park cash. But the returns are still a long way from the 5 percent investors could get on money markets in 2007, before the economy fell off a cliff.... The highest return offered last week, 1.06 percent on Fidelity's Money Market Portfolio, would provide a $106 payout on $10,000 -- a figure that should grow modestly if the central bank continues to raise rates, as predicted, at least twice more this year. But while savers are still mostly collecting pocket change from their money market accounts, the managers running the funds are once again reaping big profits." "It's billions of dollars that those three Fed hikes have delivered to money funds," said Peter G. Crane, president of Crane Data in Westborough and publisher of Money Fund Intelligence. The large money market fund managers, led by Boston-based Fidelity Investments, had dramatically cut the expenses they charge, in order to retain customers after the financial crisis, making the business far less profitable. The rising rates of late, Crane said, mean "hundreds of millions for Fidelity." The piece adds, "The good news for beleaguered savers also marks a big turnaround for the money market industry. Industrywide, Crane said, firms have been collecting $7.5 billion in annualized monthly revenue from money market funds so far this year. That's more than double the $3.5 billion in revenue in 2014, and $1 billion higher than last year's take."

FTSE Global Markets writes "European parliament passes Money Market Fund (MMF) regulation". The article explains, "New rules to make money market funds (MMFs) more resistant to crises and market turbulence were approved on Wednesday by MEPs. MFFs supply easily accessible liquid assets to business start-ups and small and medium-sized enterprises (SMEs), but can be vulnerable to panic runs on their money. To improve stress resistance, the new rules require them MMFs to diversify their asset portfolios, invest in higher-quality assets, meet liquidity and concentration requirements and have in place sound stress testing processes conducted at least quarterly. MMFs assets will have to be valued at least once a day and the result should be published daily on the MFF's website. The regulation will change the MMF landscape for investors in EU-domiciled MMFs, providing new categories of funds and criteria by which they have to abide. Now that the regulation is finalised, the European Securities and Markets Authority (ESMA) will draft subsidiary guidelines to clarify technical details." The piece quotes Rapporteur Neena Gill, "I believe this is a win-win deal for both major European MMF sectors, variable and constant net asset value MMFs (VNAVs and CNAVs) respectively. The key aims of preventing future systemic risks and runs on funds have been addressed. I am particularly pleased that we found a viable operational model for low volatility net asset value MMFs, which was included at the European Parliament's initiative." See also, "EU OKs Law Making E1 Trillion In Money Market Funds Safer," which says, "The European Parliament voted by a wide majority Wednesday to pass tough new rules covering the €1 trillion ($1.07 trillion) money market funds sector, bringing more oversight to areas of shadow banking after more than three years of hard negotiating among European Union members. The rules were adopted by the parliament with 514 votes in favor, 109 against and 71 abstentions, four months after representatives of the European Council, the 28-nation bloc's political arm, rubber-stamped them."

The "Minutes of the Federal Open Market Committee, March 14-15, 2017" were released yesterday, and they indicated that more rate hikes are coming. The Minutes say, "policymakers discussed the likely level of the federal funds rate when a change in the Committee's reinvestment policy would be appropriate. Provided that the economy continued to perform about as expected, most participants anticipated that gradual increases in the federal funds rate would continue and judged that a change to the Committee's reinvestment policy would likely be appropriate later this year.... Almost all participants saw the incoming data as consistent with an increase of 25 basis points in the target range for the federal funds rate at this meeting. They judged that, even after an increase in the target range, the stance of monetary policy would remain accommodative, supporting some additional strengthening in labor market conditions and a sustained return to 2 percent inflation. With their views of the outlook for the economy little changed, participants generally continued to judge that a gradual pace of rate increases was likely to be appropriate to promote the Committee's objectives of maximum employment and 2 percent inflation.... Several participants remarked that risk-management considerations still argued for a gradual removal of accommodation because the proximity of the federal funds rate to the effective lower bound placed constraints on the ability of monetary policy to respond to adverse shocks. Moreover, the neutral real rate--defined as the real interest rate that is neither expansionary nor contractionary when the economy is operating at or near its potential--still appeared to be low by historical standards. Furthermore, uncertainty about current and prospective values of the neutral real rate reinforced the argument for a gradual approach to removing monetary policy accommodation over the next few years.... Members agreed that, in determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee would assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation."

Barron's writes "Where to Find Safe Yields Above 1%." It says, "Now that the Federal Reserve has hiked interest rates three times in the past 16 months—including twice in the past four months -- the interest that investors can earn on their cash is starting to get real. There are now plenty of options for earning safe yields above 1% for investors who hunt around. The best interest rates are most readily available from banks, but there are some high-minimum money-market funds, such as Fidelity Money Market Portfolio (ticker: FMPXX), that yield above 1%." "They are going to get more company in next couple of months," as the impact of the recent Fed hike is fully realized and the Fed prepares to hike again, says Peter Crane, of money-fund research firm Crane Data. "Things look better for cash investors than they have in a decade." The article adds, "For investors, a money-market fund makes more sense as a place to stash "dry powder" that can be readily deployed. Yield gains, however, have trailed Fed rate hikes. The largest money funds have an average yield of 0.6%, just 10 basis points (or 0.1 percentage point) more than before the Fed's mid-March 25-basis-point rate hike. Many funds hold 30-day securities, and the rate hike is just two weeks old. "Ten more basis points will come through," Crane says. "Whether we ever get the other five is unclear." Fund companies have used recent rate hikes to restore fees that were waived to keep money-fund yields from going negative when rates were near zero. Still, many money-market funds meant for individual investors are getting close to the 1% threshold. Vanguard Prime Money Market fund (VMMXX) has a 0.87% yield. Its tax-exempt cousin, Vanguard Municipal Money Market fund (VMSXX), has a yield of 0.7%, which is more than 1% on a tax-equivalent basis for many. The next Fed rate hike could come as soon as June, and Crane thinks that short-term debt markets will start to price it in ahead of time."

Dreyfus' latest "Tax Exempt Money Market Commentary" says, "The Federal Reserve raised short-term interest rates a quarter percentage point on March 15 and continues to project additional rate increases for this year, thus moving the central bank into a new, more aggressive phase. The Federal Open Market Committee will carefully monitor inflation and employment developments. The next meeting is scheduled for May 2-3, 2017. The municipal market began 2017 with demand picking up, with limited new issuance enabling rates to drift slightly lower. We continue to maintain short and liquid portfolios, positioning the funds to take advantage of higher rates. We will continue to assess our current asset base and regularly communicate with our clients while anticipating their future cash management and liquidity needs." Director of Tax-Exempt Strategies Colleen Meehan explains, "As we move into the second quarter, we expect to see an increase in both variable-rate demand note (VRDN) and fixed-rate note issuance. This, combined with a rising rate environment, should see yields on tax-exempt money market funds increase. The Financial Markets Association (SIFMA) index continues to be range-bound since October as asset flows stabilized after the implementation of money market reform. The SIFMA index is a weekly high grade market index comprised of seven-day tax-exempt VRDNs produced by Bloomberg LLP. We expect these levels to remain attractive compared to similar taxable investments as outstanding VRDNs exceed total tax-exempt money market fund assets. As expected, one-year rates have backed up as funds continue to stay short and liquid with higher rates on the horizon."

J.P. Morgan Asset Management posted a brief, entitled, "Understanding Floating Net Asset Value (FNAV): calculate, disclose, transact." It explains under, "Charting a steady course through any market cycle," "Under the SEC's amendments to Rule 2a-7, effective October 14, 2016, institutional prime and municipal MMFs must now transact at a market-based NAV, rounded to four decimal places (e.g. USD 1.0000). This means that small fluctuations above or below the purchase price will affect shareholders, leading to the potential for small realized gains or losses over time when shares are sold. It's critical to understand the relationship between income, price movement and total return, as shown in the case study below." The paper asks, "How Can MMF Managers Seek to Limit FNAV Volatility?" They explain, "Despite volatile market conditions since 2010, MMF share values have generally remained very stable. This is partly because of the SEC's strict requirements for MMFs to hold very short-term, high-quality securities, with: A maximum weighted average maturity of 60 days, A maximum weighted average life2 of 120 days, A minimum of 10% of total assets represented by daily liquid assets, and A minimum of 30% of total assets represented by weekly liquid assets. Additionally, a rigorous focus on risk management and credit analysis can also play a critical role in keeping the movement of FNAV to a narrow band, and in keeping our interests firmly aligned with those of our clients.... Between the beginning of 2013 and September 30, 2016, the JPMorgan Prime Money Market Fund kept its market-based NAV between USD 1.0001 and USD 0.9999. Since its move to FNAV on October 1, 2016, ahead of the SEC deadline, our robust controls have successfully kept FNAV within a narrow band." Finally, a sidebar explains, "What Drives FNAV Movement? Fluctuations in FNAV -- above or below USD 1.0000 -- can be common, but have typically been small. These movements can be caused by: changes in market interest rates, changes in credit spreads, inflows and outflows, and other credit-specific events."

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