Daily Links Archives: June, 2021

The Financial Stability Oversight Council for the U.S. Department of the Treasury met Friday and discussed money market mutual fund reforms briefly at the start of the meeting. (LIBOR was also a big topic of discussion.) A "Readout of Financial Stability Oversight Council Meeting" says, "U.S. Treasury Secretary Janet L. Yellen today convened a meeting of the Financial Stability Oversight Council (Council) in executive and open sessions by videoconference. During the executive session, the Council heard an update from Securities and Exchange Commission (SEC) staff on money market fund reform, including a discussion of public comments received in response to reform options proposed by the President's Working Group on Financial Markets. The Council also heard an update from Treasury Department staff regarding the progress made on Council priorities, including: 1) vulnerabilities in nonbank financial intermediation, 2) climate change, and 3) Treasury market resilience. In the open session, the Council voted to approve a statement highlighting the importance of money market fund reform and supporting the SEC's engagement on this important issue. `The Council also received an update from the Federal Reserve Board on the importance of accelerating the financial sector's transition from LIBOR and using reference rates for derivatives and capital markets products that have sufficient underlying volumes compared to contracts referencing the rate." At his first FSOC meeting as SEC Chair, Gary Gensler commented, "I am honored to be here rejoining the Financial Stability Oversight Council meeting, today for the first time as Chair of the Securities and Exchange Commission. I believe in this Council's mission to identify and respond to financial stability risks and to better promote market discipline. Financial stability is also a part of my remit as Chair of the SEC. Last spring, we witnessed system-wide issues affecting critical parts of our short-term funding markets, including money market funds, commercial paper, and the treasury repo markets. We also saw challenges in the treasury repo markets in the fall of 2019. Let me turn to money market funds, which are an important part of our markets and source of wholesale funding for many issuers. The SEC sought to address structural issues in these funds in reforms adopted in 2010 and 2014. Based on the events of last spring, the SEC, this Council, and the President's Working Group have engaged in a review of how we can make further progress to enhance the resiliency of these funds." He added, "The events brought particular focus to prime money market funds, and their interrelationship with investments in commercial paper and certificates of deposit. CP and CD have limited liquidity in good times, and in critical weeks of stress last spring, virtually disappeared. It's important to ensure the resiliency of money market funds. I am directing SEC staff to look into these issues, in coordination with other federal agencies, and to consider any further reforms needed." See the FSOC's "Statement on Money Market Fund Reforms" here, and watch for more coverage from the meeting and discussions on pending reforms in coming days.

The Investment Company Institute's latest weekly "Money Market Fund Assets" report shows MMFs decreasing for the first time after 4 straight weeks of increases. The release says, "Total money market fund assets decreased by $6.90 billion to $4.61 trillion for the week ended Wednesday, June 9.... Among taxable money market funds, government funds decreased by $3.82 billion and prime funds decreased by $2.39 billion. Tax-exempt money market funds decreased by $698 million." ICI's weekly "Assets" release shows money fund assets up $308 billion, or 7.2%, year-to-date in 2021. Inst MMFs are up $400 billion (14.4%), while Retail MMFs are down $103 billion (-6.8%). ICI's stats show Institutional MMFs decreasing $4.3 billion and Retail MMFs decreasing $2.6 billion in the latest week. Total Government MMF assets, including Treasury funds, were $4.019 trillion (87.3% of all money funds), while Total Prime MMFs were $492.8 billion (10.7%). Tax Exempt MMFs totaled $93.4 billion (2.0%). Over the past 52 weeks, money fund assets have decreased by $113 billion, or -2.4%, with Retail MMFs falling by $138 billion (-8.8%) and Inst MMFs rising by $15 billion (0.5%). (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 $2.59 billion to $1.43 trillion. Among retail funds, government money market fund assets decreased by $990 million to $1.12 trillion, prime money market fund assets decreased by $1.08 billion to $232.93 billion, and tax-exempt fund assets decreased by $513 million to $82.09 billion." Retail assets account for just under a third of total assets, or 31.1%, and Government Retail assets make up 78.0% of all Retail MMFs. ICI adds, "Assets of institutional money market funds decreased by $4.31 billion to $3.17 trillion. Among institutional funds, government money market fund assets decreased by $2.83 billion to $2.90 trillion, prime money market fund assets decreased by $1.30 billion to $259.90 billion, and tax-exempt fund assets decreased by $185 million to $11.27 billion." Institutional assets accounted for 68.9% of all MMF assets, with Government Institutional assets making up 91.4% of all Institutional MMF totals.

The Wall Street Journal writes, "Banks to Companies: No More Deposits, Please," in its CFO Journal. The article says, "U.S. companies are holding on to billions of dollars in cash. Their banks aren't sure what to do with it. When the coronavirus pandemic hit last year, corporate executives rushed to raise money. Banks have been holding that cash ever since, and because companies are reluctant to borrow from them, they can't turn it into income-generating loans. That has weighed on banks' profit margins, and some have started pushing corporate customers to spend the cash on their businesses or move it elsewhere. Bankers say they thought the improving economy would reduce companies' desire for holding cash, but deposit inflows have continued in recent weeks. Chief financial officers and treasurers, many still wary of the pandemic's impact, say they aren't ready for big changes, even if they earn little or nothing on their deposits." It tells us, "Companies flooded U.S. banks with deposits at the start of the pandemic. In March 2020, the Federal Reserve lowered interest rates to near zero and launched bond-buying programs, which enabled many companies to raise funds at low costs. The Treasury Department also made loans, including to airlines. Bank deposits have continued to surge this year. Between late March and May 26, they rose by $411 billion to $17.09 trillion, according to the latest available data from the Federal Reserve." The Journal adds, "In recent months, banks including BNY Mellon have focused on moving clients from deposits into money-market funds, which are common cash-like investments. Assets in money-market accounts, even ones run by the same bank, are treated differently under bank capital rules, alleviating some of the regulatory pressure. Flows into U.S. money-market funds have surged in recent months, pushing the total assets held in such funds to $4.61 trillion, just shy of the record set in May 2020, according to the Investment Company Institute."

Please join us for Crane Data's next webinar, "Asian Money Fund Symposium," which will take place June 17 (Thursday) from 10am-12pm Eastern. (Register here for this free event.) This 2-hour webinar on money market funds in Asia will be hosted by Crane Data's Peter Crane and feature a panel discussion with J.P. Morgan Asset Management's Aidan Shevlin and Goldman Sachs Asset Management's Pat O'Callaghan, as well as presentations by Fitch Ratings' Alastair Sewell and S&P Global's Andrew Paranthoiene. While the focus will be on Chinese money funds, we'll also briefly discuss the `latest cash developments in Japan, Korea, India, Taiwan and Australia. Also, mark your calendars for our next webinar, "Money Fund Wisdom Product Training," which is scheduled for July 20 (Tues.) from 2pm-3pm EDT. We'll give a preview of our new Money Fund Wisdom database query system and product suite, and we'll review features and tips for using our Money Fund Intelligence product lineup and data sets. Crane Data is thrilled to resume live events this fall. Our big show, Crane's Money Fund Symposium, is scheduled for Sept. 21-23, 2021, at The Loews Hotel, in Philadelphia, Pa. The latest agenda is available and registrations are now being taken. Registration is $750, and discounted hotel reservations are available. Visit the MF Symposium website for more details. We hope you'll join us in person in Philadelphia! Finally, we're cancelling our live European Money Fund Symposium in Paris, France and moving this to September 2022. But we will host a virtual European MFS on Oct. 21, 2021. Stay tuned for details. Let us know if you'd like more information on any of our events, and we hope to see you at an upcoming webinar, or live in Philadelphia or Paris later this year! (Attendees and Crane Data subscribers can access the Powerpoints, recordings and conference materials at the bottom of our "Content" page, and see the materials from our last webinar, Handicapping Money Fund Reforms in our Money Fund Webinar 2021 Download Center.)

Fidelity Institutional's latest "Fixed Income Monthly Commentary" explains in its "Money Market Review," that "Yields on Short-Term Credit Instruments are at or Near All-Time Lows. The front-end of the credit markets yield curve is feeling the effects of the growing money market supply and demand imbalance. The Bloomberg 3-Month Short Term Bank Yield Index fell 5 basis points over the past month to close out the month of May at 0.09%. The yield on 1-month and 3-month LIBOR finished the month of May at an all-time low. 1-month LIBOR fell 2 basis points to 0.09% and 3- month LIBOR closed the month at 0.13%, falling 5 basis points since the end of April." The piece continues, "In response to limited investment options in the front end of the curve, balances at the Fed's overnight reverse repurchase agreement facility surged to $485 billion on Thursday, May 27th; this represents the highest balance on record, surpassing the previous record of $474 billion set at the end of 2015." Fidelity explains, "Given the increase in reserves, combined with limited supply, it is possible that the Fed may make a technical adjustment to its administered rates at the June FOMC meeting, with such an adjustment possibly including both the interest rate that the Fed offers on reserve balances as well as the rate it offers via its overnight reverse repurchase (RRP) agreement facility. By doing so, the Fed would be seeking to maintain the fed funds effective rate within the corridor of their current targeted policy rate range of 0.00–0.25%." They add, "Assets in taxable money market funds increased by $80.3 billion in the month of May and are higher by $287.8 billion year-to-date. Year-to-date, through May 28th, Prime MMF assets have decreased by $48.8 billion, Government and Agency MMF assets are higher by $236.8 billion, and Treasury MMF assets have increased by $99.8 billion."

Western Asset, the 19th largest manager of U.S. money market funds with $31.3 billion, has announced plans to liquidate a number of its smaller funds and share classes. A Prospectus Supplement filing for Legg Mason Partners Money Market Trust and Legg Mason Partners Premium Money Market Trust says, "The Fund's Board of Trustees has determined that it is in the best interests of the Fund and its shareholders to terminate and wind up the Fund. The Fund is expected to cease operations on or about August 6, 2021 or such earlier or later date as determined by management. In preparation for the termination of the Fund, the assets of the Fund will be completely liquidated and the Fund will cease to pursue its investment objective. Shareholders of the Fund who elect to redeem their shares prior to the completion of the liquidation will be redeemed in the ordinary course at the Fund’s net asset value per share. Any shareholders who do not elect to redeem their shares prior to the completion of the liquidation will receive a liquidating distribution equal to the aggregate net asset value of the shares of the Fund that they hold when the Fund completes its liquidation." It adds, "In the interim, effective July 30, 2021, the Fund will be closed to new purchases and incoming exchanges, except that dividend reinvestment will continue until the Fund is terminated. Shareholders are encouraged to consider options that may be suitable for the reinvestment of their liquidation proceeds, including exchanging into another fund within the Legg Mason mutual fund complex, if available to your class of shares. Shareholders should be aware that if they redeem shares, exchange them into another fund, or receive liquidation proceeds upon the termination of the Fund, it is generally considered a taxable event." The funds involved include: Western Asset Prem Liq Res A (CIPXX, $13M), Western Asset Prem US Treas Res A (CIMXX, $110M), Western Asset US Treas Res N (CISXX, $201M), Western Asset NY Tax Free Res A (LNAXX, $107M), Western Asset NY Tax Free Res N (CIYXX, $14M) and Western Asset Tax Free Res A (LWAXX, $78M).

Barron's writes "11 ESG Money-Market Funds That Can Replace Your Regular One," which tells us, "The rush toward sustainable equity funds has overshadowed the humble sustainable money-market fund. Money funds -- where you might park your cash while waiting for the market to offer some tempting bargains -- don't get much respect these days, given rock-bottom yields. You don't have to give up yield, however, to be in a sustainable one that practices environmental, social, and governance, or ESG, investing." The article explains, "On the theory that investors need [ESG] cash options, too, Barron's used Morningstar Direct to screen for money-market funds that Morningstar identifies as sustainable. We ranked by fund size, and where possible, included the fund share class with the lowest minimum investment.... The universe of sustainable money-market funds is a small one -- and the screen includes a variety of funds, such as taxable money-market, tax-free money-market, and prime money-market. (A prime money fund owns floating-rate debt and commercial paper of non-Treasury assets, such as corporations.)" Note that the article and screen includes funds that incorporate overall ESG in their credit analysis (but aren't "ESG" specific). If you'd like to see Crane Data's latest table of ESG and Social MMFs, e-mail us at info@cranedata.com.)

The Financial Times published the article, "US money market funds struggle as short-term rates near negative territory." They write, "A sector of the US finance industry that looks after $4tn of savings [sic] for individuals and businesses has come under severe strain as US markets flirt with negative interest rates. Money market funds investing in short-term government debt have taken in hundreds of billions of dollars of new money from savers in recent months. But there is stiff competition to tap a dwindling supply of low-risk assets that generate positive returns. The result has been a squeeze that has driven the yields on some debt below zero, rendering swaths of the industry unprofitable and setting up a challenge for the Federal Reserve, which analysts say may have to weigh in to keep US interest rates positive. If government money market funds have to keep investing at zero per cent, the economics of the industry 'breaks down', said Christopher Tufts [of] JPMorgan Asset Management.... 'I wouldn't be surprised if funds start to limit investor subscriptions or close outright to new [money].'" The piece also quotes `Federated Hermes' Deborah Cunningham, "It's definitely not a pleasant place to operate at this red-hot moment in time.... There's really not much value anywhere." It continues, "The downward drift in short-term interest rates has grown more acute in recent weeks as more cash has flowed into the financial system.... In some cases, investors have effectively had to pay for the privilege of lending to the US government, since Treasury bills maturing within one month recently yielded below zero.... Peter Crane, publisher of Crane Data, estimated the average seven-day yield for top-tier government money market funds now hovers around 0.02 per cent, well below the 1.39 per cent level seen at the end of 2019. Most money market funds have waived fees for investors, given that they would eat up the yield on offer. Despite the meagre returns, government money market fund assets swelled above $4tn for the first time in the week ending May 26, according to data from the Investment Company Institute. Some of these inflows stem from the banks which have been urging large corporate clients to direct cash into money market funds rather than deposit it in their accounts." The article adds, "Money market fund managers with few good investment options have increasingly been turning to the Fed, which offers select banks and investment groups a place to stash cash overnight through its reverse repo programme (RRP) facility at an interest rate of zero per cent. A record $485.3bn was steered there last week, earning nothing, and according to Doug Spratley, head of the cash management team at T Rowe Price, it has become 'crucial' for the industry. 'If we need collateral for the day, and we are getting negative rates from the street or zero rates even from the street, we will go to the Fed and consider it to be the right trade for the day,' said Federated Hermes' Cunningham.... Richard Mejzak [of] BlackRock's cash management group, expects an increase in both the RRP rate and the interest the Fed pays banks on reserves they hold at the central bank -- perhaps as soon as the next monetary policy meeting this month. Without some relief, the 'longevity' of the money fund industry could be at risk, warns Mark Cabana, a rates strategist at Bank of America. 'Money funds have already waived fees, and they are earning virtually zero,' he said. 'There are questions about how long money funds can remain viable as lossmaking entities.'"

Bloomberg asks in an Opinion piece, "Can a Cryptocurrency Break the Buck." Author Timothy Massad, a research fellow at Harvard's JFK School, writes, "Disruptions in a stablecoin's value could wreak havoc on the broader crypto market unless regulators step in. One such stablecoin is Tether. With a market capitalization close to $60 billion, it is almost as big as the Reserve Fund was in 2008. Each Tether token is pegged to be equivalent to $1. But, as with the Reserve Primary Fund, the true value of those tokens depends on the market value of Tether's reserves -- the portfolio of investments made with the fiat currency it receives." He tells us, "Tether recently disclosed that as of March 31, only 8% of its assets were in cash, Treasury bills and 'reverse repo notes.' Almost 50% was in commercial paper, but no detail was provided about its quality. 'Fiduciary deposits' represented 18%. Even more troubling: 10% of total assets were in 'corporate bonds, funds & precious metals,' almost 13% were in 'secured loans (none to affiliated entities),' and the remainder in 'other,' which includes digital tokens." The Opinion adds, "So perhaps Gary Gensler, the new chairman of the SEC, should explore regulating stablecoins in a similar fashion to money-market funds: The issuance of a stablecoin should be conditioned on following risk-limiting practices designed to ensure that the tokens are in fact worth that price. These should limit investments of reserves to those of minimal credit risk and short maturity. There should be liquidity requirements as well. The SEC is about to revisit the adequacy of its regulations on money-market funds because the reforms it imposed following the 2008 financial crisis were not sufficient. When financial markets became highly stressed in March 2020, a run on money-market funds was prevented only by the extraordinary interventions of the Federal Reserve. Let's hope regulators look more closely at stablecoins before we experience the crypto version of breaking the buck." (Tether's CP holdings were first mentioned in J.P. Morgan's May 21 "Short-Term Market Outlook & Strategy," in a brief entitled, "Cryptocurrency: A growing money market connection.")

FDIC Chairman Jelena McWilliams spoke recently before the House Committee on Financial Services and said, "Our nation's banks have withstood the initial economic and financial market volatility of 2020, reflecting their strength going into the pandemic -- including strong asset quality and robust capital and liquidity positions. After weathering the initial shock, banks became instrumental in supporting individuals and businesses through lending and other financial intermediation and by distributing financial support provided by the federal government. In contrast to the high number of bank failures during the last financial crisis, only three banks failed during the pandemic, and none were due to the pandemic or the ensuing economic stress." She explained, "When I last appeared before the Committee, I reported that the banking system had accommodated a sharp increase in customer demand for deposits that far exceeded any deposit growth the FDIC had seen in the past. Deposit growth accelerated in the fourth quarter, reflecting persistently high savings rates and lower spending. The deposit trend in the first quarter of this year appears generally consistent with last year's deposit growth, due primarily to continued fiscal support for the economy.... The low interest rate environment coupled with economic uncertainties will continue to challenge the banking sector, placing downward pressure on revenue and the net interest margin. However, as noted above, the banking sector maintains strong capital and liquidity levels, which can mitigate potential future losses." She adds, "The Deposit Insurance Fund (DIF) balance was $117.9 billion on December 31, up $1.5 billion from the end of the third quarter and the highest level ever. However, the reserve ratio declined one basis point to 1.29 percent because of strong insured deposit growth, and not as the result of losses to the DIF. In September 2020, the FDIC adopted a Restoration Plan to restore the reserve ratio to at least the statutory minimum of 1.35 percent within eight years, absent extraordinary circumstances, as required by the Federal Deposit Insurance Act. In accordance with the Restoration Plan, FDIC staff continues to monitor closely the factors that affect the reserve ratio." Discussing "Brokered Deposits," McWilliams tells Congress, "At the end of 2020, the FDIC Board approved a final rule updating our brokered deposits regulations, the first meaningful update to the brokered deposits regulations since the rules were first put in place approximately 30 years ago. As the banking sector transformed over those decades, the FDIC received many questions regarding whether specific deposit arrangements were brokered or not. The agency typically responded on a one-off basis, resulting in a fragmented legal framework. Meanwhile, many types of deposit arrangements that bear little resemblance to the brokered deposits of the 1980s were categorized as brokered under the regulation. The new rule is intended to encourage innovation in how banks offer services and products to customers by removing regulatory hurdles to certain types of innovative partnerships between banks and fintechs. The final rule accomplishes this by tailoring the scope of deposits captured to align more closely with the types of deposits Congress intended to capture when the restrictions were first put in place. The rule also creates a more transparent and consistent regulatory approach by providing a clearer description of the criteria for meeting the 'facilitation' prong of the deposit broker definition and establishing a consistent process for application of the primary purpose exception. `The final rule became effective on April 1, with an optional extended compliance date of January 1, 2022. The FDIC created a dedicated webpage that contains information relevant to the regulation, including filing instructions for the notice and application process. Although the new framework represents an important step forward, the brokered deposits statute will continue to present inevitable implementation challenges. In 2019, I suggested that Congress consider replacing Section 29 of the Federal Deposit Insurance Act, the section imposing restrictions on brokered deposits, with a simple restriction on asset growth for troubled institutions. This would be a far simpler regime for the FDIC and industry to administer, and would more directly address the problem Congress was trying to tackle in the original legislation. I continue to believe that a simple restriction on asset growth for troubled institutions would be a superior approach in the long run."