Daily Links Archives: April, 2021

J.P. Morgan Asset Management is just one of the many money fund managers sending in comment letters ahead of the SEC's April 12 deadline for its "Request for Comment on Potential Money Market Fund Reform Measures in President's Working Group Report." In their letter on, "Potential Money Market Fund Reform Measures in President's Working Group Report (File No. S7-01-21)" CEO John Donohue writes, "J.P. Morgan Asset Management is pleased to respond to the Securities and Exchange Commission's request for comment on potential money market fund reform measures set forth in the December 2020 Report of the President's Working Group on Financial Markets. JPMAM is one of the largest managers of MMFs, with over $710B in assets under management globally. In the US, we manage over $460B in MMFs, across government and treasury MMFs (~$360B), institutional prime MMFs (~$77B), retail prime MMFs (~$11B), and tax-exempt MMFs (~$12B). Like many other MMFs, JPMAM's institutional prime and, to a lesser extent, tax-exempt funds saw meaningful redemptions in March 2020 as a result of the financial market's reactions to the coronavirus pandemic and government efforts to combat it. We are therefore supportive of the SEC's efforts to consider potential policy measures to improve the resilience of MMFs and short-term funding markets in the United States. We have considered each of the options set forth in the PWG Report, as well as additional ideas. To aid in our evaluation of policy options, we also conducted an informal survey of our largest clients to understand their considerations for managing their MMF holdings during the March volatility." The letter continues, "We believe that a number of incremental changes to Rule 2a-7 under the Investment Company Act of 1940, building on the SEC's prior reforms to MMFs in 2010 and 2014, can substantially enhance the resilience of MMFs while preserving the important role they play as intermediators of short-term borrowers and lenders. Conversely, we are concerned that some of the more far-reaching options under consideration could make prime and tax-exempt MMFs undesirable to investors and/or not cost-effective for sponsors to offer, which could have knock-on impacts to the financial markets globally. Below we provide a perspective on the importance of MMFs to the US markets; review the impacts of previous MMF reforms; describe JPMAM's experiences during March 2020; summarize feedback received from our clients; and offer observations on other areas of the short-term markets that bear examination. We then suggest incremental changes to Rule 2a-7 to enhance the resilience of prime and tax-exempt MMFs. Our recommendations include: Remove the tie between a MMF's weekly liquid assets (WLA) and the obligation for a board to consider imposing a fee or gate; Impose corrective requirements when MMFs fall below 30 percent WLA, to incentivize MMFs to maintain at least 30 percent WLA in the ordinary course while making it easier for them to utilize the WLA buffer when market conditions dictate; and Require MMFs to develop detailed policies and procedures that identify the circumstances under which a board should implement redemption fees (i.e., a 'playbook'). Finally, we review the other options set forth in the PWG Report and explain why we do not support them." JPMAM adds, "As an investment option, prime MMFs serve as an alternative to bank deposits for cash investors who value the same-day liquidity, diversification, and returns these funds offer. Banks frequently position MMFs with deposit customers as a means to help manage their balance sheets more effectively. Providing an alternative to deposits is likely to be even more important following the expiration, on March 31, 2021, of temporary changes to the Federal Reserve's supplementary leverage ratio rule (SLR) made during the crisis. The temporary relief had made it easier for banks to absorb substantial deposit growth driven by unprecedented monetary and fiscal expansion. With its expiration, banks may need to turn away customer deposits, or retain earnings or issue securities to raise additional capital. Prime MMFs will play an important role in absorbing and redirecting these assets. If these assets migrated solely to Government MMFs, the modestly negative interest rates seen today in the markets for repurchase agreements and treasuries would become more pervasive, which would necessitate further Fed action to keep short-term markets liquid and rates in the desired band (and not negative)."

Federal Reserve Chair Jerome Powell mentioned money market funds during his appearance on the TV show "60 Minutes" Sunday. He comments, "Most parts of the financial system made it through quite a stress test last year, when we lost 25 percent of GDP and 30 million jobs in the space of a couple of months. Now, some parts of the financial system had to be bailed out again, places like money market funds and things like that, where we had to step in again and provide liquidity.... There's a structural issue and we know this, and it really is time to address it decisively. And that just is sometimes there arises a situation where people want to take their money out, and it's difficult for money market funds to turn their assets into cash quickly enough. So, what's had to happen twice is the Fed came in and became a source of liquidity for money market funds." Powell added, "After the Global Financial Crisis when it happened the first time we did some reforms, those reforms worked a little bit, but they didn't really do the job because once again this time we had to step in to provide liquidity on behalf of the Government to bail out these private businesses. And when something has happened twice it really is time to fix it. Every private business ought to have the ability to deal with the range of plausible things that might happen to it and that's true of money market funds as it is for other businesses." Lastly, he added, "There are many ideas that are out there and they're all under discussion, by the way internationally as well. What it boils down to, is that money market funds are going to need to be resilient enough so that if they have a liquidity shock like this they can handle it."

Federal Reserve Bank of New York Executive Vice President Lorie Logan spoke Thursday at the Annual Primary Dealer Meeting on "Desk Operations: The New Normal." In a section on "Money Markets: The New Normal," she explained, "Many of the extraordinary measures taken to address dysfunction in dollar funding markets associated with the pandemic have also gradually wound down. The Desk's remaining term repo operations were phased out in February, the frequency of some central bank swap line operations was reduced last summer, and the lending authority of the 13(3) funding facilities related to money markets has expired. Nonetheless, the FOMC's ongoing asset purchases continue to lift bank reserves to new highs, and an environment of elevated reserves is likely to be the new normal for an extended period. Fortunately, the Federal Reserve's ample reserves framework is well-suited for managing short-term interest rates in environments associated with a wide range of reserve levels.... Most recently, the growth in reserves has contributed to a decline in overnight rates relative to interest on excess reserves (IOER). The effective federal funds rate and other overnight unsecured rates have softened modestly, while we have observed more pronounced downward pressure on overnight repo rates. The large size of secured market investors, such as government money market funds (MMFs) and government sponsored enterprises, combined with recent reductions in the investments available for these investors, such as Treasury bills, have put particular downward pressure on repo and bill rates." Logan continued, "In this environment, the overnight reverse repo (ON RRP) facility is likely to become an increasingly important element of our operating framework. The ON RRP facility helps place a floor on overnight rates by offering a broad range of money market investors an alternative risk-free investment option. The availability of this facility is especially important because nonbanks represent a substantial proportion of the U.S. financial system and money markets, but do not have access to interest-bearing reserves at the Federal Reserve. Additionally, the facility can alleviate downward pressure on money market rates associated with reserve growth by broadening the liabilities that support balance sheet expansion. The ON RRP has historically been an effective floor for the federal funds rate and has also supported other short-term interest rates, and we expect it will continue to do so in the future." She told the virtual event, "As a measure of prudent planning, the Desk recently conducted a review of key design features of the ON RRP to ensure that the facility supports effective policy implementation. Notably, assets under management at government MMFs -- a major group of money market investors -- have increased significantly and become more concentrated at the largest funds since the facility's $30 billion per-counterparty limit was set in 2014. In light of these changes, the FOMC recently increased the per-counterparty limit on ON RRP usage to $80 billion which restores the capacity of the facility relative to the assets under management at our MMF counterparties to roughly the level that existed when the $30 billion limit was established. Staff also reviewed access to the facility and concluded that the existing counterparty types are still representative of the universe of repo market investors. However, the review also presented an opportunity to consider potential adjustments in line with the New York Fed's broader efforts to ensure that our counterparty policies promote a fair and competitive marketplace.... Expanding counterparty eligibility can reduce barriers to entry and foster inclusivity by potentially making our operations accessible to smaller firms. A more vibrant and diverse marketplace could, in turn, strengthen the effectiveness of monetary policy implementation tools. In this regard, we expect in coming months to reduce the size and activity thresholds for ON RRP counterparty eligibility, which will help achieve these goals." Logan added, "This is part of the Federal Reserve's ongoing commitment to support diversity, inclusion, and opportunity, following the expanded counterparty access for certain 13(3) facilities and agency CMBS operations. Relaxing eligibility criteria helps bring a diverse set of firms by size, business model, and ownership into our counterparty base, and we look forward to leveraging these new business relationships to also broaden our market intelligence efforts. As a final note on money markets, in addition to ensuring that the ON RRP's terms continue to support effective policy implementation, the Federal Reserve may consider adjusting administered rates if undue downward pressure on overnight rates emerges, as noted in the minutes of the March FOMC meeting released yesterday. The Federal Reserve has adjusted administered rates within the target range on numerous occasions in recent years as conditions in overnight markets have changed. Such adjustments are purely technical steps to support effective policy implementation and to maintain the federal funds rate well within the target range."

The Investment Company Institute released its latest weekly "Money Market Fund Assets" report Thursday, which shows MMFs decreasing in the latest week, following last week's surge. The week following quarter-end and including the long Holiday weekend marks just the 2nd decrease in the last 9 weeks. Money fund assets are up $187 billion, or 4.4%, year-to-date in 2021. Inst MMFs are up $226 billion (8.1%), while Retail MMFs are down $38 billion (-2.5%). Over the past 52 weeks, money fund assets have increased by $11 billion, or 0.3%, with Retail MMFs falling by $51 billion (-3.5%) and Inst MMFs rising by $62 billion (2.6%). We review the latest asset totals below. ICI's "Assets" release says, "Total money market fund assets decreased by $12.64 billion to $4.48 trillion for the week ended Wednesday, April 7.... Among taxable money market funds, government funds decreased by $13.81 billion and prime funds increased by $1.04 billion. Tax-exempt money market funds increased by $126 million." ICI's stats show Institutional MMFs decreasing $7.6 billion and Retail MMFs decreasing $5.1 billion. Total Government MMF assets, including Treasury funds, were $3.873 trillion (86.4% of all money funds), while Total Prime MMFs were $512.2 billion (11.4%). Tax Exempt MMFs totaled $99.4 billion (2.2%). (Note that ICI's asset totals don't include a number of funds tracked by the SEC and Crane Data, so they're almost $400 billion lower than our asset series.) It explains, "Assets of retail money market funds decreased by $5.09 billion to $1.49 trillion. Among retail funds, government money market fund assets decreased by $3.10 billion to $1.15 trillion, prime money market fund assets decreased by $1.80 billion to $250.17 billion, and tax-exempt fund assets decreased by $194 million to $88.07 billion." Retail assets account for just over a third of total assets, or 33.2%, and Government Retail assets make up 77.3% of all Retail MMFs. ICI adds, "Assets of institutional money market funds decreased by $7.56 billion to $3.00 trillion. Among institutional funds, government money market fund assets decreased by $10.71 billion to $2.72 trillion, prime money market fund assets increased by $2.84 billion to $261.99 billion, and tax-exempt fund assets increased by $319 million to $11.37 billion." Institutional assets accounted for 66.8% of all MMF assets, with Government Institutional assets making up 90.9% of all Institutional MMF totals.

A press release entitled, "Vanguard Launches Ultra-Short Bond ETF," tells us, "Vanguard today introduced its first actively managed bond ETF, managed by its in-house fixed income team. Vanguard Ultra-Short Bond ETF (VUSB) offers a low-cost, diversified option for investors seeking income and limited price volatility. The ETF, which is listed on the Chicago Board Options Exchange (Cboe), has an expense ratio of 0.10%, compared with the average expense ratio for ultra-short-term bond ETFs of 0.22%." Kaitlyn Caughlin, Head of Vanguard Portfolio Review Department, comments, "Vanguard Ultra-Short Bond ETF offers the features of an ETF structure for investors seeking an option for anticipated cash needs in the range of 6 to 18 months.... An ultra-short strategy bridges the gap between money market funds offering a stable share price and short-term bond funds, which are meant for longer investment time horizons." The release continues, "Vanguard Ultra-Short Bond ETF offers a similar strategy to that of the $17.5 billion actively managed Vanguard Ultra-Short-Term Bond Fund, which debuted in 2015. Both the fund and the new ETF invest in diversified portfolios consisting of high-quality and, to a lesser extent, medium-quality fixed income securities, including investment-grade credit and government bonds. The ETF provides investors and advisors the flexibility to trade at intraday market prices and invest by buying one share. Vanguard adds, "Like the existing Ultra-Short-Term Bond Fund, the new ETF is co-managed by Samuel C. Martinez, CFA, Arvind Narayanan, CFA, and Daniel Shaykevich."

Please join us for Crane Data's next webinar, "ESG & Social Money Fund Update," which will take place April 22 (Thursday) at 2:00pm Eastern. (Register here for this free event.) For this webinar, Crane Data's Peter Crane and Morgan Stanley Investment Management's Scott Wachs will review recent developments in the ESG and Social money market fund space. We'll cover the history, growth and various types of entrants in the space, including ESG Prime MMFs, Social or Impact Govt MMFs and private labelled share classes, and Wachs will review Morgan Stanley's move into this growing market. The session will last 45 minutes and include a brief update on other major money fund issues. Crane will also give a brief overview of the CraneData.com website and preview a new version of Crane Data's Money Fund Wisdom database query system and product suite. Crane Data recently hosted its Bond Fund Symposium event (online), and pushed back the dates for our next live event, Money Fund Symposium, to Sept. 21-23, 2021 (in Philadelphia). So we've scheduled some webinars over the next several months to keep conference-goers busy. Mark your calendars for another webinar on "Handicapping Money Fund Reforms," which we'll be hosting May 20 (Thurs.) at 2:00pm EDT, and our "Asian Money Fund Symposium," which is scheduled for June 17 (Thurs.) at 10:00am EDT. (Note: Attendees and Crane Data subscribers can access the Powerpoints, recordings and conference materials at the bottom of our "Content" page and see the recent BFS materials via our Bond Fund Symposium 2021 Download Center.)

Bankrate writes about the "Best cash management accounts in April 2021." The piece tells us, "Cash management accounts can often be overlooked as a way to deliver value. If you're on the hunt for a great robo-advisor or online broker, don't forget the extra tangible benefits a good cash management account can provide. As fees decline, brokers and robo-advisors are competing increasingly on feature-rich services to differentiate themselves -- and that means value for you! Many top cash management accounts (CMAs) offer a ton of features and benefits. Some of the most popular or desirable features include: A competitive annual percentage yield (APY); Fee-free ATMs; A checking account; Debit card; No monthly fee; No overdraft fees; Early paycheck direct deposit; 'Round-up' investing; [and] A portfolio line of credit." BankRate explains, "The distinction between a brokerage account and a traditional bank account continues to collapse. Increasingly there are more and more financial institutions that do it all. So in many cases you could actually use the cash management account as a primary bank account even if you don't take advantage of the related investing features at all. And that's a reason to check out brokers and robo-advisors to see how they compete against a traditional bank and whether it might make sense to move at least some of your business there." Bankrate lists the best cash management accounts for the upcoming month as: Wealthfront, Interactive Brokers and Fidelity. The article concludes, "While you might be looking for a traditional bank account or even a popular fintech app, don't overlook the benefits of using a broker or robo-advisor for your cash management account. You often won't have to use the investing features, but they'll be there as your financial life grows."

A new comment letter has been posted to the SEC's "Comments on Request for Comment on Potential Money Market Fund Reform Measures in President's Working Group Report" page. This one, "The Case For Prime Money Market Mutual Fund Liquidity Insurance," was written by Jonathan Hartley (not the FHLB's Jonathan Hartley), a master's student at Harvard's Kennedy School and Visiting Fellow at the Foundation For Research on Equal Opportunity. He writes, "A year after the COVID-19 market meltdown, the first major debate on financial regulation under the Biden administration is shaping up to be about prime-money-market mutual funds. While banks held up well during the pandemic (demonstrating the success of Dodd-Frank capital rules), prime-money-market mutual funds (which invest in short-term government bills and commercial paper) experienced massive redemptions in March 2020. The withdrawals mirrored those during the 2008 financial crisis, despite U.S. money-fund reforms that went into effect in 2016. As with the bank runs of the Great Depression, money-market funds tend to see major redemptions when their net asset values (NAV) 'break the buck' (falling below $1) and investors race to pull their money to avoid taking a hit. In fact, there is a growing consensus that not only did the previous money-market-fund reforms implemented in 2016 fail to prevent runs but they may have made the money-market runs worse by requiring fund companies to impose gates and fees on investors when a money fund's assets decline by 30 percent. The reforms also attempted to get investors more comfortable with small losses by creating a 'floating NAV' (extending NAV quotes to four decimal places instead of two to allow investors to see small fluctuations in returns), but that seems to have had no effect on preventing runs. Now, prime-money funds (which act very much like bank-deposit accounts for institutional cash) face the possibility of being banned altogether." The letter adds, "Of the reforms under consideration, money-fund liquidity insurance is the simplest path, with operational and regulatory ease of allowing prime money funds to function largely the same way they do today but simply requiring them to pay small insurance premiums into an insurance fund. Some may argue that the insurance premiums would make prime money funds less viable. It would be essential to find the happy medium that's sufficiently small not to be disruptive while still paying for potential liquidity insurance needs during times of financial stress. Others might also argue that FDIC-like insurance might create moral hazard, that is, To what degree are you incentivizing money-market funds to invest in riskier securities by insuring losses? I would argue that if there are any moral-hazard risks, they already exist in the sense that the Fed money-market fund-liquidity programs of 2008 and 2020 are already providing de facto insurance. Despite the growth of administrative bloat in Washington over the past hundred years, the FDIC has been one of the most effective regulatory agencies, preventing bank runs that were all too common before the Banking Act of 1933. Likewise, a money-fund insurance program could foster more financial stability by preventing money-fund runs (which seem to have become a decadal event) while preserving an effective vehicle to provide short-term lending that supports economic growth." (This comment also appeared as "Treat Money-Market Funds Like Banks" in the National Review recently.)

A Prospectus Supplement filing for Transamerica Government Money Market tells us, "Effective at the close of business on March 31, 2021, Transamerica Government Money Market will be closed to most new investors. The following investors may continue to purchase Fund shares after the close date: existing Fund investors, asset allocation funds and other investment products in which the Fund is currently an underlying investment option, retirement plans in which the Fund is a plan option, and any plan that is or becomes a part of a multiple plan exchange recordkeeping platform that includes the Fund as a plan option. The Fund will remain closed until further notice. The Fund reserves the right to modify the foregoing terms of the closure at any time and to accept or reject any investment for any reason." It's unclear whether this indicates that a liquidation is pending or whether it's a temporary measure due to extremely low interested rates.