Daily Links Archives: May, 2017

With just 3 weeks to go until our big show, we're making final preparations for Crane's Money Fund Symposium, which takes place in Atlanta (June 21-23). We're still accepting registrations (which are $750), but the conference hotel, the Hyatt Regency Atlanta is now sold out. (See here for alternate hotels.) Money Fund Symposium is the largest gathering of money market fund managers and cash investors in the world. Last summer's event in Philadelphia attracted a record 575 attendees, and we expect a similar turnout for our upcoming show. Symposium participants include money fund managers, marketers and servicers, cash investors, money market securities dealers, issuers, and regulators. Visit www.moneyfundsymposium.com) for more details. (Click here to see the full brochure.) Also, mark your calendars for Crane's 5th annual "offshore" money fund event, European Money Fund Symposium, which will be held in Paris, Sept. 25-26, 2017, and for our next Money Fund University "basic training" event, which is scheduled for Jan. 18-19, 2018, in Boston. Watch www.cranedata.com in coming months for more details on these events, or visit the bottom of our "Content" page for past and future conference materials.

The South African website IOL writes (on South African money market funds), "When should you use a money market fund?" It says, "Money market unit trust funds have become synonymous with safe, secure and reliable investments, but under what circumstances should you use them?" The piece quotes Bekithemba Mafulela, business development manager at Allan Gray, "Understanding how money market unit trusts work can help you to use them effectively in your portfolio.... They are an effective 'parking place' for your money. They allow you to store money that you will use in the near future, while getting some returns." The article explains, "In simple terms, the money market is where companies, governments and banks raise money by getting short-term loans from investors. In practical terms, all transactions are done electronically through a network of buyers and sellers, sometimes in auctions run by the banks, and there is no central or physical location where the money market exists. Money market unit trusts are a good tool to use for money in transition or for short-term savings.... [Mafulela] says a money market fund is similar to a fixed deposit account at a bank, with some advantages. First, you can cash out whenever you want. "With most fixed deposit accounts, you are locked in for a specified period where you may not withdraw your money without penalties," he says. "A money market unit trust is more liquid, which is something you should consider when comparing its returns to a fixed deposit from a bank." The article adds, "The downside of money market investments is inflation, Mafulela says. The returns of a money market unit trust often do not keep up with inflation over the long term.... At the end of March, money market unit trust funds were giving yields of 7.04% to 8.23%, depending on the fund. The lowest minimum investment in such a fund is a lump sum of R2 000 or R200 a month."

We saw another liquidation in the money fund space this week, from Morgan Stanley Liquid Asset Fund. A Prospectus Supplement says, "On March 9, 2017, the Board of Directors of the Fund approved the redemption (the "Redemption") of all issued and outstanding shares of stock of the Fund. Prior to the Redemption, the Fund will suspend the offering of shares to all investors on or about March 31, 2017. The Redemption is expected to occur on or about May 31, 2017." See our Aug. 15, 2016 News, "Morgan Stanley Pulls Plug on Prime, Muni Sweeps; ignites on Strikes." The old article says, "Though at this point it appears everybody is selling or switching, brokerage sweep accounts continue to be the major contributor of the now over $500 billion shift from Prime and Muni into Government MMFs. As we hinted, shifts by Morgan Stanley money funds drove much of last week's flows. According to our Money Fund Intelligence Daily, which tracks daily asset flows, yields, MNAVs and WLA liquidity figures, Morgan Stanley Govt Sec Inst took in a massive $21.5 billion in the week through Thursday, while while MSIM's Prime and Municipal Active Assets, and Liquid Assets funds showed declines of $12.9 billion. While there is no official word that their retail Prime and Muni funds are liquidating, they did lose over half of their assets and are showing single-digit WAMs (often a sign of an imminent liquidation). We review a recent statement by Morgan Stanley brokerage on changes to their sweep program, and also quote from an ignites article on strike and cutoff times below. Though there is no mention of any liquidations in Active Assets' recent filings, a recent Morgan Stanley "Bank Deposit Program Disclosure Statement" says, "Under the Bank Deposit Program, free credit balances in your Active Assets Account ... will be automatically deposited into deposit accounts established for you by and in the name of Morgan Stanley Smith Barney LLC and Morgan Stanley Bank, NA, and Morgan Stanley Private Bank, NA ... and for free credit balances above $2 million, Morgan Stanley will sweep such balances into a Sweep Fund.")

The Federal Reserve's "Minutes of the Federal Open Market Committee, May 2-3, 2017" says, "Members generally judged that it would be prudent to await additional evidence indicating that the recent slowing in the pace of economic activity had been transitory before taking another step in removing accommodation.... Members expected that economic conditions would evolve in a manner that would warrant gradual increases in the federal funds rate. Members agreed that the federal funds rate was likely to remain, for some time, below levels that they expected to prevail in the longer run. However, they noted that the actual path of the federal funds rate would depend on the economic outlook as informed by incoming data." The FOMC's next meeting is June 13-14 and markets are estimating the odds of an increase at about 80%. See also, The Wall Street Journal's "Fed Minutes Signal Officials Ready to Raise Rates Again Soon." The article says, "Federal Reserve officials expected at their policy meeting this month that it would "soon be appropriate" to raise short-term interest rates, a signal the U.S. central bank could move in June at its next gathering. The Fed also moved toward a consensus on a proposal to start gradually shrinking its $4.5 trillion in holdings of Treasury and mortgage securities later in the year, according to minutes of the gathering released Wednesday. Under the approach discussed, they would allow increasing amounts of those securities to mature over time, without reinvesting the proceeds. Fed officials left their benchmark short-term interest rates unchanged within a range between 0.75% and 1% at the meeting May 2-3. Several Fed officials in recent weeks have said they believe the economy will still be strong enough to warrant two more quarter-percentage-point rate increases this year."

First American Funds recently celebrated its 35th Anniversary by posting a 35th Anniversary Video and sending gift boxes to some that included relics from 1982, including Michael Jackson's Thriller album. See their 35th Anniversary release here. The U.S. Bank-affiliated manager also put out a new update entitled, "First American Adjusts Ratings Coverage on Several Funds." It explains, "As part of First American Funds' prudent management of expenses, a decision was made to remove five separate ratings from four of the First American Funds. As a result, First American Funds requested that Standard & Poor's (S&P), Moody's Investors Service (Moody's) and Fitch Ratings (Fitch) remove the following ratings: Institutional Prime Obligations - Fitch AAAmmf rating withdrawn on March 17, 2017, S&P (AAAm) and Moody's (Aaa-mf) remain; US Treasury Money Market - Fitch AAAmmf rating withdrawn on April 20, 2017, S&P (AAAm) and Moody's (Aaa-mf) remain; Retail Prime Obligations - S&P AAAm rating withdrawn on April 13, 2017, Moody's Aaa-mf rating withdrawn on April 28, 2017; Retail Tax Free Obligations - S&P – AAAm rating withdrawn on April 13, 2017." The statement adds, "We believe this level of ratings coverage is consistent with the industry norm and meets or exceeds the needs of our customers for third party oversight by a Nationally Recognized Statistical Rating Organization. Nationally Recognized Statistical Rating Organizations (NRSRO) evaluate the creditworthiness of organizations that issue debt in public markets including corporations, nonprofit organizations and governments, and provide credit ratings that are used by investors as well as federal and state agencies. Generally, to be considered an NRSRO, the agency has to be “nationally recognized” in the U.S. and provide reliable and credible ratings. Also taken into consideration is the size of the credit rating agency, operational capability and its credit rating process. Three of the largest NRSROs are Standard & Poor's, Moody's Investors Service Inc. and Fitch Ratings. Triple-A Rating is the highest possible rating assigned to the bonds of an issuer by credit rating agencies."

The Wall Street Journal writes "Here's Why the Fed Will Stay Central to Markets. They say, "Federal Reserve officials grappling with the legacy of expansive stimulus would find it difficult to return to the central bank's precrisis role on the sidelines of financial markets, analysts and central-bank watchers say. A long list of programs adopted to help foster economic growth, along with changes in money markets and bank regulation, have vastly expanded the Fed's balance sheet and its involvement in markets. The Fed's assets now total $4.5 trillion, up from less than $1 trillion a decade ago. Since 2013 the central bank has become one of the largest traders with U.S. taxable money-market funds, according to Crane Data." The piece adds, "The ultimate size will be closely tied to which system the central bank decides to use to control interest rates in the future. A handful of Fed officials have already begun questioning the wisdom of returning to the blueprint for controlling rates that they used before the crisis, although they have more time to decide. At the center of the debate is a special investment program the Fed launched in 2013. Through the facility, it lends money-market funds and others Treasurys in exchange for cash, temporarily draining excess cash from money markets and discouraging lenders from lending at rates below the target range for interest rates. Initially, the central bank said it would reduce the capacity of this so-called reverse repo facility "fairly soon after" it had begun raising short-term rates in 2015. Today, the Fed has no current plans to do so. Mr. Dudley suggested in April the Fed likely wouldn't phase out the facility. Without the Fed repos, short-term rates could slip too low, and demand for Treasurys in the open market would surge, causing problems for money-market funds seeking alternative places to park cash overnight. Removing the program would "cause huge dislocations from a bond-market standpoint," said Debbie Cunningham, chief investment officer for global money markets at Federated Investors. A balance sheet that is smaller than today's, yet still substantial, would enable the Fed to keep the reverse repos around. It would also support the Fed's foreign repos for overseas accounts, where weekly balances have averaged $250 billion, up from $30 billion precrisis, as well as the $1.5 trillion in currency outstanding and changing cash-management policies at the Treasury Department."

Wells Fargo Securities writes in its latest "Daily Short Stuff, "The weekly SIMFA index reset at 78 basis points this week, 14 basis points less than the 92 basis point high reached about a month ago. The 92 basis point level reached four weeks ago was the highest level for this index over an eight year timeframe. Now that tax season has passed, the index has continued to inch lower, as expected. Commercial paper outstanding grew by $5.0 billion, ending the week at $986.6 billion on a seasonally adjusted basis. Nonfinancial CP and asset-backed CP outstanding fell while financial commercial paper increased. Nonfinancial commercial paper ended the week at $280.8 billion, a $0.9 billion reduction WoW, with domestic issuers falling by $2.3 billion and foreign issuers adding $1.4 billion. Asset-backed CP closed the week at $249.0 billion, a $2.6 billion drop in comparison to the prior week. And lastly, financial CP closed the week at $455.8 billion, an $8.5 billion increase from the prior week. Domestic financial issuers added $2.7 billion and foreign financial issuers added an additional $5.9 billion."

ICI's new "Money Market Fund Assets" report shows Prime assets rising for their fourth week in a row. They gained $1.1 billion, after increasing $1.9 billion last week and $5.5 billion the week before, when they broke over the $400 billion barrier. Year-to-date, Prime MMF assets are up by $27.8 billion, or 7.2%. ICI says, "Total money market fund assets decreased by $5.13 billion to $2.64 trillion for the week ended Wednesday, May 17, the Investment Company Institute reported today. Among taxable money market funds, government funds decreased by $6.50 billion and prime funds increased by $1.09 billion. Tax-exempt money market funds increased by $278 million." Total Government MMF assets, which include Treasury funds too, stand at $2.109 trillion (79.7% of all money funds), while Total Prime MMFs stand at $406.6 billion (15.4%). Tax Exempt MMFs total $129.6 billion, or 4.9%. It explains, "Assets of retail money market funds decreased by $2.10 billion to $963.13 billion. Among retail funds, government money market fund assets decreased by $1.86 billion to $588.25 billion, prime money market fund assets decreased by $410 million to $251.16 billion, and tax-exempt fund assets increased by $174 million to $123.72 billion." Retail assets account for over a third of total assets, or 36.4%, and Government Retail assets make up 61.1% of all Retail MMFs. The release continues, "Assets of institutional money market funds decreased by $3.03 billion to $1.68 trillion. Among institutional funds, government money market fund assets decreased by $4.64 billion to $1.52 trillion, prime money market fund assets increased by $1.50 billion to $155.47 billion, and tax-exempt fund assets increased by $104 million to $5.86 billion." Institutional assets account for 63.6% of all MMF assets, with Government Inst assets making up 90.4% of all Institutional MMFs.

A release entitled, "Moody's Assigns Aaa-mf Rating to HSBC Australian Dollar Liquidity Fund," tells us, "Moody's Investors Service ... has today assigned a Aaa-mf rating to HSBC Australian Dollar Liquidity Fund (a sub-fund of HSBC Global Liquidity Funds PLC), a soon-to-be launched prime constant net asset value money market fund domiciled in Ireland managed by HSBC Global Asset Management (Hong Kong) Limited.... The rating reflects Moody's view that the Fund will have a very strong ability to meet the dual objectives of providing liquidity and preserving capital. This view is supported by the portfolio's very high scores for each of the key rating factors, including credit quality, asset profile, liquidity and exposure to market risk. The analysis was performed on a model portfolio provided by the fund sponsor. The rating agency expects the Fund to be managed in line with the model portfolio. However, Moody's noted that if the Fund's investment portfolio deviates materially from the model portfolio, the Fund's rating could be changed." Moody's adds, "We expect the investments held in the Fund will be of high credit quality as they must be rated P-1 at the time of purchase. The Fund's assets are expected to be primarily invested in short-dated commercial paper and deposit securities as well as short-dated bonds from government, agency, corporate and financial issuers. The rating also benefits from the expectation that the Fund will maintain a short weighted average maturity (WAM) in line with a score of '1' and an asset concentration below 30%, which results in a score of '2' for this factor. While the Fund's shareholder base is likely to exhibit some higher shareholder concentrations until the Fund grows, our expectation is that the Fund will maintain a strong liquidity profile supported by high levels of overnight and near-term liquidity in the portfolio. Overnight liquidity will typically be in the form of overnight deposits and securities with one business day to maturity. The institutional investor base for this Fund will primarily be made of Asia-based entities from multinational corporations, insurance companies, and sovereign wealth funds."

Website Law360 writes "EU Waves Through E1T Money Market Fund Rules." The article explains, "Tough new rules covering the €1 trillion ($1.07 trillion) money market funds sector were formally adopted by European Union lawmakers on Tuesday, bringing greater oversight to areas of shadow banking. The EU’s General Affairs Council, made up of foreign ministers and member states, adopted the regulations without discussion, after the European Parliament voted overwhelmingly in support of the proposals in April." The piece quotes Malta's Minister and current European Council President Edward Scicluna, "These rules will go a long way in improving supervision and regulation of a largely unregulated sector. Whilst money market funds are vital to investors and issuers alike, the crisis showed us that they can also be vulnerable to shocks." Law360 adds, "The new rules, which will come into force 12 months after being adopted, set out investment requirements for the funds. MMFs must be invested in a diverse pool of assets with good credit quality to restrict the funds' risk levels. The rules also introduce common standards for all MMFs, to increase their liquidity and ensure they do not collapse when faced with a sudden surge of redemption requests. In addition, the regulation prohibits sponsor support from third parties, including banks." (For more, see our April 5 News, "HSBC's Curry Talks on Pending European Money Fund Reform, LVNAV.")

Wells Fargo Money Market Funds asks, "Why should we care about the Fed normalizing its balance sheet?" in its latest "Portfolio Manager Commentary." They explain, "The majority of Americans probably shouldn't and won't care about this topic as it is unlikely to affect them, either directly or indirectly, in many ways. For those of us active in the markets, it is important. It is impossible to overstate the influence the Fed has in these markets as a regulator, a policymaker, and an investor. Its portfolio is enormous, weighing in at approximately 23% of our gross domestic product (GDP) and about 12% of the privately held Treasury market. It is the single-largest repo counterparty in the markets, lending over 55% of Treasury collateral and about 38% of both Treasury and MBS collateral. In fact, its repo book alone is bigger than the sum of all other Treasury repo providers combined. The Fed is, in short, a behemoth capable of profoundly changing the face of the money markets, as it has done in the past. So the idea that its largest tool, and the money markets' largest investment, could go away could have profound supply implications for money market funds.... With fewer banks needing reserves, trading in the federal funds market became thinner and less relevant. To restore balance to the money markets and strengthen its control over the federal funds rate, the Fed created its RRP program, which provided a floor under money market rates by offering a practically unlimited supply of what were considered risk-free assets -- repos collateralized by Treasury securities held in its SOMA."

A press release entitled, "Federated Investors, Inc. Founder John F. Donahue Dies at Age 92" said Friday, "With deep sadness, Federated Investors, Inc. today announced the passing of John F. Donahue, who founded the company in 1955 and served as chairman emeritus until his death at age 92 on May 11, 2017. Donahue served Federated for more than 60 years, playing a pivotal role in shaping the company and the investment management industry as a tireless advocate for the value of mutual funds to everyday investors. Federated's position as a leader in innovative investment management solutions and services reflects Donahue’s entrepreneurial spirit." Federated President & CEO J. Christopher Donahue, "My father was a remarkable business leader and a man of tremendous faith who dedicated his life to building Federated and his community. He was also a wonderful husband, father, grandfather and great-grandfather who made faith the center of our family. While he will be deeply missed by all who knew him, his entrepreneurial spirit will continue to encourage and inspire us all." Jack Donahue's Obituary says, "The late 1970s brought a new and innovative product to Federated, the money market mutual fund, which led to fast and enormous growth. Thanks to money funds and Mr. Donahue's leadership, Federated by the early 1980s had grown to become the second-largest mutual fund company in the country as it focused sales efforts on bank trust departments using mutual funds to manage their cash assets. Today, Federated manages more than $360 billion in equity, fixed-income and cash products for investors in the U.S., Canada, Latin American, Great Britain, Ireland, Germany and Asia." The Pittsburgh Post Gazette wrote the article, "Federated Investors co-founder John 'Jack' Donahue dies; firm pioneered money market funds." They say, "John F. "Jack" Donahue, co-founder of Federated Investors, philanthropist, and energetic believer in the Catholic faith, died at his Naples, Fla., home Thursday. He was 92. Mr. Donahue, a United States Military Academy graduate and former pilot for the Strategic Air Command, founded Federated Investors in 1955 with Central Catholic High School graduates Richard B. Fisher and the late Thomas J. Donnelly. The Downtown firm pioneered offerings of money market funds and today manages $362 billion from offices in the United States, Canada, Latin America, Great Britain, Ireland, Germany and Asia. Federated began offering money market mutual funds in the 1970s as a way for banks to manage their cash more effectively. The innovation spurred growth that attracted the attention of Aetna Life & Casualty, which acquired Federated in 1982 for about $256 million. Federated's managers bought controlling interest in the company back in 1989, with Aetna retaining a 25 percent that Federated subsequently bought out in 1996. Federated became a publicly traded company in 1998 and today has a market value of $2.6 billion."

ICI's new "Money Market Fund Assets" report shows Prime assets rising for their third week in a row. They gained $1.9 billion, after increasing $5.5 billion last week, when they broke over the $400 billion barrier. Year-to-date, Prime MMF assets are up by $29.2 billion, or 7.8%. ICI says, "Total money market fund assets increased by $6.16 billion to $2.65 trillion for the week ended Wednesday, May 10, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $3.91 billion and prime funds increased by $1.89 billion. Tax-exempt money market funds increased by $370 million." Total Government MMF assets, which include Treasury funds too, stand at $2.115 trillion (79.8% of all money funds), while Total Prime MMFs stand at $405.5 billion (15.3%). Tax Exempt MMFs total $129.3 billion, or 4.9%. It explains, "Assets of retail money market funds decreased by $3.94 billion to $965.23 billion. Among retail funds, government money market fund assets decreased by $3.44 billion to $590.11 billion, prime money market fund assets decreased by $410 million to $251.57 billion, and tax-exempt fund assets decreased by $100 million to $123.55 billion." Retail assets account for over a third of total assets, or 36.4%, and Government Retail assets make up 61.1% of all Retail MMFs. The release continues, "Assets of institutional money market funds increased by $10.10 billion to $1.68 trillion. Among institutional funds, government money market fund assets increased by $7.34 billion to $1.52 trillion, prime money market fund assets increased by $2.30 billion to $153.96 billion, and tax-exempt fund assets increased by $460 million to $5.75 billion." Institutional assets account for 63.6% of all MMF assets, with Government Inst assets making up 90.5% of all Institutional MMFs.

The Federal Reserve Bank of New York's Liberty Street Economics blog writes, "Which Dealers Borrowed from the Fed's Lender-of-Last-Resort Facilities?" They tell us, "During the 2007-08 financial crisis, the Fed established lending facilities designed to improve market functioning by providing liquidity to nondepository financial institutions -- the first lending targeted to this group since the 1930s. What was the financial condition of the dealers that borrowed from these facilities? Were they healthy institutions behaving opportunistically or were they genuinely distressed? In published research, we find that dealers in a weaker financial condition were more likely to participate than healthier ones and tended to borrow more.... In response to the difficulties dealers faced in borrowing in short-term funding markets, the Fed created two lender-of-last-resort (LOLR) facilities—the Term Securities Lending Facility (TSLF) and the Primary Dealer Credit Facility (PDCF)." The piece also says, "Borrowing from the TSLF grew quickly, from an initial Schedule 2 auction size of $75 billion in March 2008 to a peak of $200 billion (Schedules 1 and 2 combined) after the crisis intensified with the Lehman bankruptcy in September 2008.... Demand for TSLF borrowing declined as private funding markets improved, and then dropped to zero after the July 16, 2009, auction. The last TSLF auction was held January 7, 2010, and authorization for lending officially expired on February 1, 2010." It adds, "Central banks limit borrowing by establishing standards for collateral quality, by charging a penalty rate, and by monitoring borrowers' financial health. However, in a crisis, when financial conditions change rapidly, regulators face the difficult challenge of knowing which signals to rely on. Our results show that market signals of financial health (such as equity prices) predicted how much dealers borrowed from the Fed's liquidity facilities during the crisis and that financially weaker firms, rather than opportunistic ones, were the heaviest users."

Bloomberg writes "JPMorgan Tells Banks to Partner Up as U.S. Deposit Drain Looms". It explains, "JPMorgan Chase & Co. has some advice for regional banks: A deposit drain is coming, so merge while you can. The company's investment bankers are warning depository clients that they may begin feeling the crunch in December, thanks to a byproduct of how the U.S. Federal Reserve propped up the economy after the financial crisis, according to a copy of a confidential presentation obtained by Bloomberg News and confirmed by a JPMorgan spokesman. JPMorgan argues that some midsize U.S. banks -- those with $50 billion in assets or less -- could face a funding problem in coming years as the Fed goes about shrinking its massive balance sheet, according to the 19-page report the New York-based bank has begun sharing with clients." The article continues, "The Fed's bond-buying spree from 2009 to 2014, dubbed quantitative easing, inadvertently left the industry flush with deposits. Investors took money they got selling mortgage-backed bonds and Treasury securities to the Fed and parked it in U.S. retail and commercial bank accounts. This created some $2.5 trillion in excess bank deposits, according to JPMorgan. It estimates that 60 percent, or $1.5 trillion, of that money will trickle out of banks in the next four to five years if the Fed follows through with recent guidance and begins reversing quantitative easing in December.... JPMorgan's presentation, titled "Core Deposits Strike Back" illustrates how this process will sap bank deposits.... A "deposit is destroyed" if the "Fed does not reinvest," the presentation states. JPMorgan estimates that a quantitative easing-related deposit-drain could result in loan growth lagging deposit growth by $200 billion to $300 billion a year. That could be particularly problematic for banks that rely on deposit products that tend to roll over swiftly, such as brokered accounts bought from third parties, large commercial banking accounts and high-interest savings accounts for wealthy customers."

A new filing for the Janus Government Money Market Fund and Janus Money Market Fund says, "Effective May 8, 2017, the following replaces the corresponding information for each of Janus Government Money Market Fund and Janus Money Market Fund (each, a "Fund") as noted below.... The following replaces in its entirety the corresponding information found under "Management" in the Fund Summary section of Janus Government Money Market Fund's Prospectuses: Portfolio Manager: Garrett Strum is Portfolio Manager of the Fund, which he has managed since May 2017.... The following replaces in its entirety the corresponding information in the "Investment Personnel" section of the Prospectuses related to the portfolio management of each Fund: Garrett Strum is Portfolio Manager of Janus Government Money Market Fund, which he has managed since May 2017. He is also Portfolio Manager of other Janus accounts and performs duties as an analyst. Mr. Strum joined Janus Capital in 2003 as an investment accounting administrator. He holds a Bachelor of Science degree in Business with concentrations in Finance and Real Estate from Colorado State University. Effective May 8, 2017, references to J. Eric Thorderson are deleted in the Funds' prospectuses." We wish Thorderson the best in his retirement!

Citi's Steve Kang writes on "SEC approved DTCC repo clearing" in his latest "Short-End Notes." He says, "The DTCC announced that the SEC approved two rule changes to expand central clearing of repo: 1. Centrally Cleared Institutional Tri-party (CCIT). Under CCIT, non-RICs (like corporates, SMAs) would be able to lend within their centralized platform.... We continue to expect minimal impact on GC repo rates as lenders would still be selective on borrowers, given that the design of the loss waterfall and netting benefits for dealers are likely to be marginal. 2. Sponsored DVP repo service. In the current design, dealers can sponsor RICs (such as 2a7, mutual funds) and sponsored entities can lend cash in DTCC's cleared platform through dealers. The new rule would allow non-RICs (such as hedge funds and REITs) to be sponsored by a member dealer but also more importantly, RICs/non-RICs alike would be able to borrow cash through a sponsoring dealer. The sponsoring dealer in turn can net the borrowing/lending with other DTCC transactions, therefore could pass-through netting benefits to end users. The netting aspect may bring tightening pressure in GC repo going forward. However, the dealer's appetite for sponsoring borrowers is unclear. For one, netting members contribute to capped contingency liquidity facility (CCLF) to cover a dealer default.... Though this is a good first step towards repo CCP, we reiterate our view that we expect minimal impact on repo spreads (GC to 2a7 repo rate) for now. This is because the economics of sponsorship may not be commercially viable given the cost of liquidity and resources. It is possible for borrowers to leverage their other businesses with dealers to get sponsorship from dealers. We will keep a close eye on further developments."

ICI's latest "Money Market Fund Assets" report shows Prime assets with their strongest showing since MMF reforms, rising $5.5 billion and breaking over the $400 billion barrier. It says, "Total money market fund assets increased by $1.63 billion to $2.64 trillion for the week ended Wednesday, May 3, the Investment Company Institute reported today. Among taxable money market funds, government funds decreased by $5.01 billion and prime funds increased by $5.52 billion. Tax-exempt money market funds increased by $1.12 billion." Total Government MMF assets, which include Treasury funds too, stand at $2.111 trillion (79.8% of all money funds), while Total Prime MMFs stand at $403.7 billion (15.3%). Tax Exempt MMFs total $128.9 billion, or 4.9%. It explains, "Assets of retail money market funds increased by $2.90 billion to $969.17 billion. Among retail funds, government money market fund assets increased by $1.84 billion to $593.55 billion, prime money market fund assets increased by $340 million to $251.98 billion, and tax-exempt fund assets increased by $720 million to $123.64 billion." Retail assets account for over a third of total assets, or 36.7%, and Government Retail assets make up 61.2% of all Retail MMFs. The release continues, "Assets of institutional money market funds decreased by $1.27 billion to $1.67 trillion. Among institutional funds, government money market fund assets decreased by $6.85 billion to $1.52 trillion, prime money market fund assets increased by $5.18 billion to $151.67 billion, and tax-exempt fund assets increased by $400 million to $5.29 billion." Institutional assets account for 63.3% of all MMF assets, with Government Inst assets making up 90.6% of all Institutional MMFs.

The Federal Reserve's latest FOMC Statement tells us, "Information received since the Federal Open Market Committee met in March indicates that the labor market has continued to strengthen even as growth in economic activity slowed.... Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term.... In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 3/4 to 1 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation. In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation.... The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data." Markets continue to expect another Fed hike later in June when the Fed meets again, but the odds appear to have lessened slightly.

CNBC writes "Trump's 'tax holiday' could be a windfall for these stocks," which tells us, "Apple may be famous for keeping cash overseas, but many other companies stand to benefit if President Donald Trump gets his way with a tax holiday. The tech giant's quarterly results Tuesday are expected to show overall cash reserves of more than $250 billion, with the vast majority stockpiled offshore.... Unlike Apple, most companies do not report overseas cash breakdowns. But regulations do require that they report money that will be reinvested overseas and thus exempted from U.S. taxation. For many companies, that figure will include a substantial cash element.... The one-page tax plan outline released by the Trump administration last week indicated that Trump is pushing for a "one-time tax on trillions of dollars held overseas," as well as a "territorial tax system to level the playing field for American companies." The piece adds, "Since the first holiday, companies have seen their off-shore holdings swell to $2.6 trillion. The largest stockpiles belong to many of the same companies that took advantage of the 2004 program -- big names like Pfizer, Merck, Johnson & Johnson, IBM and PepsiCo. While it is unclear which of many forms the final tax will take, companies could stand to save billions.... Apple may have the largest overall stockpile, but plenty of other countries could also see substantial gains from a repatriation holiday. Pfizer, for example, had $197 billion in unrepatriated income abroad last year."

Federated Investors' Deborah Cunningham writes in her latest "Month in Cash: Finally able to catch our breath, "Political brinkmanship dominated the news cycle and impacted stocks and bonds in April, but it was in many ways the first calm month in some time for cash managers. After two Federal Reserve rate hikes in three months, the aftermath of money market fund reform and the always interesting year-end and quarter-end, it seemed even the occasional April shower was gentle and warm." She adds on all the political and economic activity, "It's enough to make your head spin, but the Treasury yield curve has had none of that, flattening over April. That led us in the middle of month to shorten our weighted average maturity (WAM) by five days for our prime funds, bringing it in line with our government funds' WAM of 35-45 days. There was simply no reason to go further out the curve as relative value just wasn't there and spreads had tightened. We still think floaters are attractive, though not as much as in the first quarter of this year. Our purchases of fixed-rate paper in April were on the short side, as well, mostly in the 2- and 3-month space. We would rather keep some dry powder for when the curve steepens. And we hope it would be due to the economy, not politics. One final point: assets are slowly flowing back into institutional prime funds after the exodus that took place due to the reform in late 2016. From an industry perspective, total prime assets under management grew 5.8% in the first-quarter, according to iMoneyNet. Because of the relatively small asset base, the equivalent dollar growth of only $21 billion is not terribly impressive. But the inflows show that more institutional investors are now considering prime's potential yield advantage over government funds and bank deposits."

A release entitled, "Fitch Updates Global Money Market Fund Rating Criteria," explains, "Fitch Ratings has updated its global criteria for rating money market funds (MMFs) and other cash management vehicles. The review is part of our normal criteria review process. No rating changes are expected. Previous versions of the criteria have been retired. The criteria remain 'principles-based' focusing on the ability of MMFs and other liquidity management products to preserve principle and maintain liquidity through managing credit, market and liquidity risks. Since the focus is on key portfolio risk attributes, the criteria is applicable to constant net asset value (CNAV) funds, variable NAV (VNAV) funds, as well as the European Union's recently proposed Low Volatility NAV (LVNAV) funds, provided the portfolio risk attributes align with Fitch's criteria." (See Fitch's new "Global Money Market Fund Rating Criteria" here.) The release explains, "Changes to the criteria include: Clarification with respect to agency exposures, i.e. Federal Home Loan Banks et. al. Specifically, all exposures above the 35% concentration threshold should have a maximum maturity of 90 days or less; Reference to Fitch's Derivative Counterparty Ratings assigned to banks, where relevant; More detailed language on Fitch's approach for unrated repo counterparties; The addition of French, U.K. and Dutch sovereign bonds as eligible repo collateral, subject to normal counterparty ratings and overcollateralization criteria; Agency securities must be denominated in the fund's base currency to be eligible to portfolio weekly liquidity, on top of previously-defined features; Clarifications on derivatives usage, defining maximum aggregate derivative risk exposure and subject to unhedged weighted average maturity (WAM) being in line with maximum WAM levels set in the criteria; Addition of a section detailing the approach for determining whether public sector entities qualify as government agencies under the criteria; and, Consolidation of national scale MMF rating criteria into the global MMF rating criteria."