Daily Links Archives: January, 2022

A press release entitled, "Treasury Industry Recognizes ICD with Best Portal Technology Solution Award," explains, "Treasury practitioners and other industry judges have named ICD Best Portal Technology Solution in Treasury Management International (TMI) magazine's 2021 Innovation and Excellence awards. The award recognizes ICD's continuous technology innovation and proactive client service in support of independent research, trading, analysis and reporting of money market funds and other short-term investments." ICD Chief Executive Officer Tory Hazard comments, "This award is a testament to our founding principle of focusing solely on the needs of the treasury community. It highlights the active role our clients take in co-innovation, which, over the past two decades, has led to many industry-advancing solutions." The release says, "ICD's innovation over the past year includes dashboard enhancements that improve data visualization for better decision-making and communication, API integrations with technology partners that streamline cash and investment workflows and improve data quality, new sweep functionality to minimize uninvested cash balances, a new screening and filtering tool that helps investors better understand how various fund providers designate their SRI/ESG products, and other innovations." TMI Publisher Robin Page adds, "Treasury practitioners continue to praise ICD over its technology and service. The ICD team richly deserve this recognition for consistently delivering a best-in-class product to the market."

A Bloomberg editorial published in the Washington Post, entitled, "Money Market Funds Need This Fix From the SEC," opines, "Yet again, the Securities and Exchange Commission is aiming to address one of the weakest links in the U.S. financial system: money market mutual funds, the object of at least two reform efforts and two major federal rescues in as many decades. This time around, regulators might actually be getting it right. Money market funds emerged in the 1970s as a relatively unregulated alternative to banks, which at the time faced limits on the interest they could pay depositors.... The 2008 financial crisis exposed the charade, when the Reserve Primary Fund -- among the largest in the industry -- 'broke the buck,' dropping the dollar-a-share fiction amid losses on defaulted bonds.... This episode inspired two rounds of reforms. In 2010, the SEC increased the amount of easy-to-sell 'liquid' assets that money market funds must keep on hand to satisfy redemptions. In 2016, it required institutional prime funds (as well as those that invest in tax-exempt municipal bonds) to value their shares in line with their underlying securities, rather than at $1. In case this didn't eliminate the incentive to run, the SEC also allowed funds to charge penalties or even pause withdrawals if their liquid assets fell below a certain level." Bloomberg continues, "In 2020, the Covid-19 pandemic put the new approach to the test, with disastrous results. As it turned out, floating share prices alone weren't enough to prevent runs. Investors still had an incentive to get out while funds had liquid assets to sell, leaving others to suffer the losses that would come when they tried to unload more thinly traded securities such as commercial paper and corporate bonds. The threat of penalties and pauses exacerbated the problem: Investors pulled more money from funds that were closer to their minimum liquidity thresholds. As a result, prime funds lost some 30% of their assets in just two weeks, before the government again stepped in." They add, "Now, regulators have proposed yet another reform: swing pricing, a mechanism already used widely in Europe. Instead of allowing first movers to get out with little or no price impact, it would require funds to adjust their share prices to reflect transaction costs and -- during periods of particularly heavy withdrawals -- the effect of selling less-liquid assets.... This would make investors think twice about pulling out and, if they nonetheless did, make them bear the losses that they would otherwise impose on remaining shareholders. U.S. money market funds don't love the idea. It will require them to change how they do business and to come up with difficult estimates, such as what the hypothetical price effect of selling a cross-section of their assets would be. That said, the funds are already adept at making such calculations, and the European experience suggests that swing pricing is feasible, effective and even performance-enhancing. If the prospect of getting back less than $1 per share causes some investors to switch to bank deposits, that's merely the salutary effect of recognizing true risks."

Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics Tuesday, which track a shifting subset of our monthly Portfolio Holdings collection. The most recent cut (with data as of Jan. 21) includes Holdings information from 70 money funds (up from 62 a week ago), which represent $2.378 trillion (up from $2.147 trillion) of the $5.020 trillion (47.4%) in total money fund assets tracked by Crane Data. (Our Weekly MFPH are e-mail only and aren't available on the website. See our Jan. 12 News, "Jan. MF Portfolio Holdings: Repo Soars to Almost 50%, Led by Fed RRP," for more.) Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Repurchase Agreements (Repo) totaling $1.109 trillion (up from $1.017 trillion a week ago), or 46.6%; Treasuries totaling $916.7 billion (up from $843.0 billion a week ago), or 38.5%, and Government Agency securities totaling $136.8 billion (up from $112.8 billion), or 5.8%. Commercial Paper (CP) totaled $71.6 billion (up from a week ago at $59.7 billion), or 3.0%. Certificates of Deposit (CDs) totaled $47.5 billion (up from $39.4 billion a week ago), or 2.0%. The Other category accounted for $71.9 billion or 3.0%, while VRDNs accounted for $25.2 billion, or 1.1%. The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $916.7 billion (38.5% of total holdings), the Federal Reserve Bank of New York with $697.1B (29.3%), Federal Home Loan Bank with $56.2B (2.4%), BNP Paribas with $56.1B (2.4%), Fixed Income Clearing Corp with $51.9B (2.2%), RBC with $50.5B (2.1%), Federal Farm Credit Bank with $49.6B (2.1%), Sumitomo Mitsui Banking Corp with $22.3B (0.9%), Bank of Montreal with $21.3B (0.9%) and Mitsubishi UFJ Financial Group Inc with $21.1B (0.9%). The Ten Largest Funds tracked in our latest Weekly include: JPMorgan US Govt MM ($243.9B), Goldman Sachs FS Govt ($215.3B), Morgan Stanley Inst Liq Govt ($149.5B), Federated Hermes Govt Obl ($134.4B), Allspring Govt MM ($130.8B), Dreyfus Govt Cash Mgmt ($128.1B), Fidelity Inv MM: Govt Port ($127.6B), Goldman Sachs FS Treas Instruments ($116.4B), JPMorgan 100% US Treas MMkt ($100.1B) and First American Govt Oblg ($92.4B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary, or our Bond Fund Portfolio Holdings data series.)

In the first legitimate feedback posted to the SEC under the "Comments on Money Market Fund Reforms" page, Patrick McHenry of the House Committee on Financial Services, and Pat Toomey of the Senate Committee on Banking, Housing, and Urban Affairs submitted a letter to SEC Chair Gensler which comments, "We are concerned that the Securities and Exchange Commission (SEC) rulemakings under your tenure have consistently provided unreasonably short comment periods, which will harm the quality of public comment and may run afoul of the Administrative Procedure Act. The SEC should remedy this disturbing and unprecedented pattern -- which contradicts executive orders from both Democratic and Republican administrations meant to encourage deliberative rulemakings -- by extending the comment period of all proposed rulemakings that have been released during your time at the SEC. The notice-and-comment process is critical to effective SEC rulemaking. The opportunity to comment on proposed rulemakings ensures the public can provide substantive analysis, warn of unintended negative consequences, and suggest alternative approaches with rationale for the SEC to consider. This commentary helps refine and improve adopted rulemakings -- and in some cases provides a basis for the SEC to rethink or scrap imprudent rulemakings entirely." It continues, "`Moreover, properly scrutinizing a proposed rulemaking often requires a significant investment of time and resources. This is especially true when a proposal consists of several hundred pages and is intended to interact with complicated financial markets and existing securities laws. Truncated comment periods pose particular difficulties -- and are of particular concern -- when overlapping with holidays, year-end operational or regulatory obligations, or other times when commenters' staff are expected to manage other deadlines. `President Obama's White House appropriately recognized that public comment periods on most rulemakings should be at least 60 days. Extended comment periods, for example, for 90 days or 120 days, are also appropriate when taking up particularly complex rulemakings or when numerous rulemakings are simultaneously outstanding. The Administrative Conference of the United States, an independent federal agency within the executive branch charged with recommending improvements to administrative process and procedure, similarly endorses a comment period of at least 60 days for significant regulatory actions. Despite these recommended practices, the majority of SEC proposals put forward under your chairmanship have thus far allowed less than 60 days for public comment. Two proposals provide 60-day comment periods, three proposals provide 45-day comment periods, and six proposals provide 30-day comment periods. Moreover, several of these proposals with shorter comment periods coincide with federal holidays (Christmas, New Year's Day, and/or Martin Luther King Jr. Day) yet do not allot extra days in light of those holidays. While the money market fund reform proposal from last month provides a 60-day comment period, that is still an insufficient amount of time for such significant revisions to money market fund rules." Toomey and McHenry add, "We urge you to immediately extend all comment periods for the SEC's proposed rules of significance to at least 60 days, including reopening the comment filing for those rulemakings with shorter comment periods that have closed prematurely. Finally, we request that you extend the comment period on the money market fund rule revisions to at least a 90-day comment period, consistent with the process for the most recent prior significant substantive revisions to the money market fund rule. We request that you respond in writing to these requests by January 24, 2022. Included in your response should be an explanation of how you intend to take corrective action. Thank you in advance for your attention to this important matter."

Northern Trust Corporation (NTRS), the 9th largest manager of money market mutual funds with $212.6 billion, released its Q4 2021 Earnings last week, and also discussed money market fund fee waivers. CEO Michael O'Grady comments, "Within Asset Management, we continued to see strong organic growth across key strategic areas of focus, highlighted by our money funds surpassing $330 billion in AUM during the quarter, our FlexShares ETFs reaching $20 billion in assets and ESG strategies growing to more than $165 billion in assets. During the year, we also benefited from growth in our multi-manager strategies and our outsourced Chief Investment Officer services." He explains, "Investment management fees in C&IS of $113 million were down 9% year-over-year and were flat sequentially. The year-over-year performance was driven by higher money market fund fee waivers, partially offset by new business and favorable markets.... Fee waivers in C&IS totaled $50.9 million in the fourth quarter compared to $49.9 million in the prior quarter and $11.4 million in the prior year quarter. Fee waivers in Wealth Management totaled $30.2 million in the current quarter compared to $26.7 million in the prior quarter and $12.2 million in the prior year quarter. Within the regions, the year-over-year growth was driven by favorable markets and new business, partially offset by higher fee waivers.... Within Global Family Office, the year-over-year performance was driven by favorable markets and new business being more than offset by higher fee waivers. The sequential decline was mainly related to higher fee waivers." Northern says, "Net interest income was $371 million in the quarter and was up 7% from the prior year. Earning assets averaged $149 billion in the quarter, up 13% versus the prior year. Average deposits were $136 billion and were up 18% versus the prior year, while loan balances averaged $40 billion and were up 20% compared to the prior year. On a sequential quarter basis, net interest income grew 4%. Average earning assets grew 3% and average deposits grew 5%, while average loan balances were up 4%. The net interest margin increased 1 basis point sequentially. Trust, investment and other servicing fees grew 9% in 2021. The growth during the year was primarily driven by new business and favorable markets, partially offset by the impact of money market fee waivers. Net interest income declined 4%. Average earning assets during the year increased by 16%, while the net interest margin declined 20 basis points, driven by lower average interest rates." During the Q&A, CFO Jason Tyler responds, "Now that the first [Fed] lift, it also gets to waivers.... And we've talked about the fact that our money market mutual fund family is -- it's priced much more institutionally, so it only takes one lift to work fully through.... `As you know, this past quarter, we waived $80 million and run rate on that is lower now." Tyler adds, "We were at something like $215 billion in AUM pre-crisis and then we ended 2020 at $272 billion. We ended 2021 at $333 billion. And I can tell you, as we sit day before yesterday, we're at $324 billion [in MMFs]. So it came down a little, but we have gained market share by any measure that we look at. And that's not ... accidental. We did a lot of things related to cutoff times and the investment performance has been exceptional in those funds. So we think we've earned higher market share there. And I think it's tough to tell. There's not just what happens as clients unwind, but there's also the prospect of regulation in the 2a-7 fund industry. And as you know, in Europe, there's much more of a demand for large institutional clients to use balance sheet as opposed to funds. And we'll see what happens here if there's a shift. And it's one of the reasons why we've done other things to try to launch new products to help our clients on liquidity to be able to provide other services and to be a third-party repo provider and to launch new funds that are more appealing with better cutoff times. So we'll see what comes there. But the best defense we can have in the short run is having a good liquid balance sheet and have availability to bring on deposits if our clients want to, which is one of the reasons we always leave room to try and to bring more on to the balance sheet. That's why our leverage ratios have tended to be strong."

ICI's latest weekly "Money Market Fund Assets" report shows assets falling sharply again in the latest week, their third straight week of declines which brings the drop to $88.5 billion. This followed 8 straight weeks of gains at year end where assets rose by $150.6 billion. Year-to-date, MMFs are down by $89 billion, or -1.9%. Over the past 52 weeks, money fund assets have increased by $312 billion, or 7.2%, with Retail MMFs falling by $55 billion (-3.6%) and Inst MMFs rising by $367 billion (13.2%). ICI's release says, "Total money market fund assets decreased by $57.93 billion to $4.62 trillion for the week ended Wednesday, January 19, the Investment Company Institute reported.... Among taxable money market funds, government funds decreased by $55.12 billion and prime funds decreased by $1.97 billion. Tax-exempt money market funds decreased by $839 million." ICI's stats show Institutional MMFs decreasing $60.0 billion and Retail MMFs decreasing $6.9 billion in the latest week. Total Government MMF assets, including Treasury funds, were $4.088 trillion (88.6% of all money funds), while Total Prime MMFs were $441.0 billion (9.6%). Tax Exempt MMFs totaled $87.4 billion (1.9%). ICI explains, "Assets of retail money market funds decreased by $6.94 billion to $1.48 trillion. Among retail funds, government money market fund assets decreased by $5.20 billion to $1.19 trillion, prime money market fund assets decreased by $815 million to $203.57 billion, and tax-exempt fund assets decreased by $917 million to $77.40 billion." Retail assets account for just under a third of total assets, or 32.0%, and Government Retail assets make up 81.0% of all Retail MMFs. They add, "Assets of institutional money market funds decreased by $50.99 billion to $3.14 trillion. Among institutional funds, government money market fund assets decreased by $49.91 billion to $2.89 trillion, prime money market fund assets decreased by $1.16 billion to $237.39 billion, and tax-exempt fund assets increased by $77 million to $9.97 billion." Institutional assets accounted for 68.0% of all MMF assets, with Government Institutional assets making up 92.1% of all Institutional MMF totals. (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 Crane's asset series.)

The Federal Reserve Bank of New York posted two more briefs to its "Liberty Street Economics" blog recently. The first, "How the Fed Adjusts the Fed Funds Rate within Its Target Range," tells us, "At its June 2021 meeting, the FOMC maintained its target range for the fed funds rate at 0 to 25 basis points, while two of the Federal Reserve's administered rates -- interest on reserve balances and the overnight reverse repo (ON RRP) facility offering rate -- each were increased by 5 basis points. What do these two simultaneous decisions mean? In today's post, we look at 'technical adjustments' -- a tool the Fed can deploy to keep the FOMC's policy rate well within the target range and support smooth market functioning." The article adds, "As noted in the first post of this series, the FOMC chooses the target range for the fed funds rate to communicate the stance of monetary policy. The goal of monetary policy implementation is then to make sure that the effective federal funds rate (EFFR) remains in that range.... In the current framework, the Fed's main implementation tools are interest on the reserve balances (IORB) that banks hold overnight in their accounts at the Fed, and the rate offered at the ON RRP facility to a broad set counterparties including money market funds and government-sponsored enterprises." The second piece is entitled, "The Fed's Latest Tool: A Standing Repo Facility." It begins, "As noted in earlier posts in this series, under the Fed's current monetary policy implementation framework the supply of reserves is sufficiently large to ensure that the Fed's administered rates -- the interest on reserve balances (IORB) and overnight reverse repurchase agreement (ON RRP) rates -- influence the federal funds rate and other short-term interest rates. In July 2021, the Fed added to its implementation toolkit, announcing the establishment of a domestic standing repurchase agreement (repo) facility (SRF). The SRF serves as a backstop in money markets to support the effective implementation of monetary policy and smooth market functioning. It does so by limiting the potential for occasional pressures in overnight interest rates to push the effective federal funds rate (EFFR) above the FOMC's target range." The piece continues, "Through the SRF, the Fed offers overnight repos each day, effectively allowing counterparties to obtain funds from the Fed against U.S. Treasuries, agency debt, and agency mortgage-backed securities (MBS). Primary dealers are SRF counterparties, and, since the beginning of October, banks have been able to express interest in becoming SRF counterparties, with the first three banks added as SRF counterparties in mid-December.... The SRF is positioned as a backstop tool. As such, the facility's minimum bid rate should be set above rates in overnight repo markets under normal market conditions, so as not to unduly influence price discovery in short-term funding markets on most days, while still providing effective control of the fed funds rate. The SRF rate currently is set at 25 basis points, the top of the FOMC's target range."

K&L Gates recently published a "U.S. Asset Management and Investment Funds Alert," entitled, "SEC Proposes Swing Pricing for Institutional Money Market Funds." It explains, "On 15 December 2021, the Securities and Exchange Commission proposed amendments to Rule 2a-7 under the Investment Company Act of 1940, as amended, which governs the structure and operation of money market funds. One key element of the Proposed Rule is a requirement that institutional prime and institutional tax-exempt money market funds (Institutional MMFs) adopt swing pricing policies so that redeeming investors bear the liquidity costs of their redemptions. The Proposed Rule reflects the SEC's concern over market stresses experienced in response to the Covid-19 Pandemic in March 2020 and it is the SEC's belief that such measures will improve the resiliency of Institutional MMFs." The update continues, "Swing pricing is a process of adjusting a fund's current net asset value (NAV) such that the transaction price effectively passes on costs stemming from shareholder redemptions to redeeming shareholders. As the SEC notes in its proposing release, fund trading activity associated with meeting redemptions may impose costs, including trading costs and costs associated with depleting a fund's daily or weekly liquid assets. These costs are currently borne by the remaining investors in the fund, diluting these investors' interests in the fund. In the SEC's view, this potential for dilution can create incentives for shareholders to redeem quickly to avoid losses, particularly in times of market stress." It adds, "The SEC now proposes to require Institutional MMFs to adopt swing pricing policies and procedures to adjust a fund's current NAV per share by a 'swing factor,' which would be expressed as a percentage discount to a fund's NAV. Swing pricing policies and procedures would have to be approved by a majority of the fund's independent directors and reviewed annually. The swing factor would be implemented by a board-designated 'swing pricing administrator' who must be reasonably segregated from the portfolio management of the Institutional MMF and make annual reports to the board.... The swing pricing administrator would also be responsible for the Proposed Rule's record keeping requirements.... Finally, each Institutional MMF would be required to report, in its Form N-MFP filing, the number of times the fund applied a swing factor over the course of the reporting period, and each swing factor applied. In any event, swing pricing, if implemented, will likely result in fundamental changes to the operations and services provided by Institutional MMFs. Most notably, as the ICI stated in its response to the White Paper, swing pricing would present significant operational hurdles to Institutional MMFs being able to continue to offer multiple settlements per day and same-day settlement. A comprehensive overview of the broader impacts of the Proposed Rule on MMFs can be found in our prior client alert entitled 'SEC Proposes Another Round of Money Market Fund Reforms that was published on 17 December 2021."

Barron's asks, "Could the SEC's New Regs Kill Prime Money Market Funds?" The article comments, "To the untrained eye, the debate over the Securities and Exchange Commission’s proposed new money market fund regulations may seem like a fight over nothing. But it is causing a dustup between regulators and fund providers all the same. And it could have big ramifications for investors. Money market funds have undergone a tremendous transformation since the financial crisis of 2008-09, but interest rates have been so low for so many years -- you're lucky to get 0.1% -- that most investors don't give these funds much thought. One of the biggest changes was breaking them into two categories: government and prime. Government money funds have $4.1 trillion in assets; they buy Treasury bills and other short-term government securities. Prime money funds own corporate debt; today, they're primarily used by institutions and have $831 billion in assets." It explains, "Swing pricing is widely used in Europe, but not in the U.S., although it was authorized by the SEC in 2016 for regular mutual funds. Basically, it allows a fund's manager to lower its NAV when outflows of securities exceed some threshold. The reason to do this is so the first investors to exit a fund don't get better prices as managers sell off their most liquid securities, while the remaining shareholders are stuck with an illiquid portfolio that trades at fire-sale prices. Pricing and liquidity can be especially problematic with debt investments, which don't change hands constantly like stocks. 'Money markets don’t trade like other markets,' says Peter Crane, CEO of money fund tracker Crane Data. 'Almost everything in the money fund space is buy-and-hold. You don't get a whole lot of people selling a one-month T-bill because they need the money in two weeks. But when that does happen, you get these odd price distortions.' The new rule would require prime funds to adjust their net asset values by a 'swing factor' reflecting trading costs on days when funds have redemptions." Barron's adds, "Money fund managers say such calculations are too difficult. 'What swing pricing does is take the place of the [money fund redemption] fees, but does it in a way that is operationally almost impossible,' says Deborah Cunningham, Federated Hermes' chief investment officer of Global Liquidity Markets. 'It takes away the capability of funds to be able to do same-day transactions, because you can't price [a money fund's portfolio] until you know clearly, at the end of the day, what your redemptions have been.' The industry's solution to such liquidity crunches would be to keep fund exit fees, but make them more flexible. 'We actually liked the concept of liquidity fees,' says Jane Heinrichs, associate general counsel at the Investment Company Institute, a fund industry trade group that has petitioned the SEC not to require swing pricing. 'But it would be better if they were at the discretion of the board, rather than tied to a specific [liquid asset] number.'"

ICI's latest weekly "Money Market Fund Assets" report shows assets falling sharply in the latest week, after inching lower last week. This followed 8 straight weeks of gains at year end where assets rose by $150.6 billion. Year-to-date, MMFs are down by $31 billion, or -0.7%. Over the past 52 weeks, money fund assets have increased by $361 billion, or 8.4%, with Retail MMFs falling by $52 billion (-3.4%) and Inst MMFs rising by $413 billion (14.9%). ICI's release says, "Total money market fund assets decreased by $28.11 billion to $4.67 trillion for the week ended Wednesday, January 12, the Investment Company Institute reported.... Among taxable money market funds, government funds decreased by $25.69 billion and prime funds decreased by $1.98 billion. Tax-exempt money market funds decreased by $437 million." ICI's stats show Institutional MMFs decreasing $24.6 billion and Retail MMFs decreasing $3.5 billion in the latest week. Total Government MMF assets, including Treasury funds, were $4.143 trillion (88.6% of all money funds), while Total Prime MMFs were $442.9 billion (9.5%). Tax Exempt MMFs totaled $88.2 billion (1.9%). ICI explains, "Assets of retail money market funds decreased by $3.48 billion to $1.48 trillion. Among retail funds, government money market fund assets decreased by $2.55 billion to $1.20 trillion, prime money market fund assets decreased by $1.28 billion to $204.39 billion, and tax-exempt fund assets increased by $357 million to $78.32 billion." Retail assets account for just under a third of total assets, or 31.7%, and Government Retail assets make up 80.9% of all Retail MMFs. They add, "Assets of institutional money market funds decreased by $24.64 billion to $3.19 trillion. Among institutional funds, government money market fund assets decreased by $23.14 billion to $2.94 trillion, prime money market fund assets decreased by $699 million to $238.55 billion, and tax-exempt fund assets decreased by $794 million to $9.89 billion." Institutional assets accounted for 68.3% of all MMF assets, with Government Institutional assets making up 92.2% of all Institutional MMF totals. (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 Crane's asset series.)

Barclays Joseph Abate writes on "Swinging NAVs" in his latest "Interest Rate Research." He tells us, "Last month, the SEC released a series of money fund reform proposals. The most significant was a swing price requirement for institutional prime funds. We review the proposal, its complications, and consider its effects on funding markets.... Money fund reform returned to regulators' policy agendas in the aftermath of the surge in prime fund redemptions in March 2020 that caused the CP market to freeze up. Over a 1m period, institutional balances in prime funds fell by nearly $130bn or more than 20%. Although they had different causes, the rush to redeem early was similar to that which followed the Lehman bankruptcy in September 2008.... This is despite two intervening rounds of reforms meant to prevent investor runs by shifting institutional prime funds to floating NAVs and imposing minimum overnight and weekly liquidity buffer requirements." The piece continues, "These reform proposals all share similar features, which reflects the fact that many of these ideas are modifications of past reforms or retreads of earlier, rejected approaches. There does not seem to be a strong consensus among the SEC commissioners about all of these reforms -- two of the five commissioners noted their opposition to swing pricing last month. But one of these opponents is resigning at the end of this month. Thus, although we think there is a strong chance that the next round of money fund reforms will include measures to reduce investors' propensity to run, it is not clear if this will take the form of swing pricing. The SEC laid out an expected timeline for its proposals. Once the rule becomes effective (perhaps by next summer), some of the rule changes will take immediate effect. Others, such as the minimum liquidity buffers and swing pricing, will be adopted after a transition period of 6m and 12m, respectively." Abate adds, "But while swing pricing would change investor behavior and reduce the propensity for investors to run, the mechanism depends critically on expert judgment made under difficult circumstances in which there is no (or very little) data. As proposed, swing pricing relies on liquid secondary market prices in order to calculate the market impact factor. Under normal conditions the assets that prime funds buy are typically purchased at a discount and held to maturity (at par). As a result, there is little secondary market liquidity for CP and wholesale time deposits. Secondary liquidity dries up in periods of market stress. This is compounded by the fact that the amounts the money funds hold and could wish to sell in a stress event far outstrip the balance sheet capacity of intermediating banks and dealers. As became apparent in March 2020, there may not be any bid for these assets. So how would a 'good faith estimate' of the market impact factor be determined, and could it be defended from angry investors seeking to redeem and faced with very steep NAV haircuts? The SEC acknowledges the difficulty involved in accurately determining market impact factors for swing pricing. As an alternative, it is also asking about using a dynamic liquidity fee framework. The liquidity fee would be similar to the swing price. Funds would be required to impose a fee on redemptions when they exceeded a pre-determined trigger threshold (such as 4% during a pricing period)."

The Federal Reserve Bank of New York posted "How the Fed's overnight Reverse Repo Facility Works" on its Liberty Street Economics blog. They write, "Daily take-up at the overnight reverse repo (ON RRP) facility increased from less than $1 billion in early March 2021 to just under $2 trillion on December 31, 2021. In the second post in this series, we take a closer look at this important tool in the Federal Reserve's monetary policy implementation framework and discuss the factors behind the recent increase in volume. In yesterday's post, we presented a stylized view of the Fed's implementation framework for monetary policy, in which (i) the Federal Open Market Committee (FOMC) communicates the stance of monetary policy through a target range for the federal funds rate, (ii) interest on reserve balances (IORB) is a key tool, and (iii) an ample supply of reserves ensures that the interest rate paid on banks' reserve balances maintains the effective federal funds rate (EFFR) within the target range. However, in the United States, banks are only a part of the money market ecosystem -- nonbank financial institutions make up a significant share of lending activity." The piece continues, "As a result, the FOMC employs another tool called the ON RRP facility, which is available to a wide range of money market lenders. This facility is particularly important for monetary policy implementation in periods when reserves are elevated. As reserves grow, banks' willingness to take on additional reserves diminishes, and they reduce the rates they pay for deposits and other funding. In this environment, market rates trade below the IORB rate because nonbank lenders are willing to lend at such rates. For example, the Federal Home Loan Banks (FHLBs), which are important lenders in the fed funds market and not eligible to earn IORB, are willing to lend at rates below the IORB rate rather than leave funds unremunerated in their accounts at the Fed. To provide a floor under the fed funds rate, the FOMC introduced the ON RRP facility.... In concept, the ON RRP facility acts like IORB for a set of nonbank money market participants. Through the ON RRP facility, eligible institutions -- money market funds, government-sponsored enterprises, primary dealers, and banks -- can invest overnight with the Fed through a repurchase agreement (repo). By setting the ON RRP rate, the FOMC establishes a floor on the rates at which these institutions are willing to lend to other counterparties. The floor improves these institutions' ability to negotiate rates on private investments above the ON RRP rate and provides an alternative investment when more attractive rates are not available. In periods when the EFFR is close to or above the IORB rate, we would not expect the ON RRP facility to see much take-up as money market participants have access to alternative investments at more favorable rates.... In contrast, when reserves are plentiful and the EFFR moves closer to the bottom of the fed funds target range, the rate offered at the ON RRP facility becomes more attractive relative to alternative investments and we would expect to see an increase in take-up at the ON RRP facility.... At such times, the ON RRP facility is particularly important for the control of the EFFR. This is indeed what happened from 2013 through 2017, and in 2021 as well. As reserves have reached unprecedented levels over the last year, so has take-up at the facility." The blog adds, "An ON RRP transaction -- which is economically similar to a secured loan -- does not change the size of the Fed's balance sheet but does shift the composition of the Fed's liabilities. For instance, when a money market fund reduces overnight deposits with a bank and directs those funds to the ON RRP facility, the increase in the ON RRP facility decreases reserve balances held by banks at the Fed. The ON RRP facility, thus, allows the Fed's liabilities to be more broadly distributed among money market participants. To circle back to the beginning of the post, in the recent environment of abundant reserves, the ON RRP facility is working as expected. It is providing a floor under the fed funds rate and moderating the growth in reserve balances as the Fed continues to provide support to the U.S. economy."

Bloomberg wrote on year end, "Fed Repo Facility Use Jumps to Record High on Final Day of 2021." They explain, "The amount of money that investors are parking at a major Federal Reserve facility climbed to yet another all-time high on the final trading day of the year as funds sought out places to stash short-term cash. More than 100 participants on Friday put a total of $1.905 trillion at the Fed's overnight reverse repurchase agreement facility, in which counterparties like money-market funds can place cash with the central bank. The previous record, set on Dec. 20, was $1.758 trillion. Friday's $208 billion leap was the biggest one-day increase in usage since June 17 after the central bank increased the offering yield to 0.05%. That compares to the last trading day of 2020 when a mere 15 counterparties tapped the facility for $9.65 billion." The piece adds, "The current glut of cash in money markets -- and the resulting record use of the RRP facility -- stands in contrast to what has taken place in many years gone by.... Usage of the facility has exploded this year as investors need somewhere to park their short-term cash, and there is an imbalance in Treasury-bill markets that's been fueled in large part by a drawdown of the U.S. government cash balance and Fed asset purchases. Demand for the facility has also tended to surge at the end of each quarter as dealers curtail their activity in the market for repurchase agreements in order to shore up their balance sheets for regulatory purposes."

Fitch Ratings posted the press release, "SEC Money Fund Proposals Credit Positive But May Result in Outflows." It says, "The SEC recently proposed amendments to Rule 2a-7 of the Investment Company Act of 1940 governing U.S. money market funds (MMFs) in an effort to address resiliency and liquidity concerns arising from the market volatility in March 2020 amid the pandemic fallout. The credit implications for MMFs will depend on the final form of the regulation. Fitch Ratings believes the proposals could be incrementally credit positive and that most amendments are likely to be supported by market participants. That said, swing pricing will face strong industry pushback over the 60-day comment period and could lead to large outflows or closure of institutional prime funds." Fitch continues, "Proposals include the elimination of liquidity fees and redemption gates, an increase to daily and weekly minimum liquidity requirements, mandatory swing pricing for institutional prime and tax-exempt MMFs, amendments to regulatory reporting and calculation requirements and proposals for increased transparency.... The proposed increases to minimum liquidity requirements are supportive of credit, with minimum daily liquid assets (DLA) moving from 10% to 25%, and minimum WLAs moving from 30% to 50%.... However, elevated liquidity in institutional prime funds may compress excess yields relative to treasury and government MMFs, reducing investor appetite for prime funds over time. The current low-yield environment exacerbates this issue since spreads are compressed. The implementation of swing pricing would require adjusting a fund's net-asset value (NAV) by a swing factor equal to the estimated costs of selling a pro-rata or vertical slice of the portfolio during each net redemption pricing periods. This would likely entail significant operational complexity, which could discourage investors from buying the funds, and managers from operating them." Fitch also published a "Stablecoin Dashboard: 3Q21." It explains, "Fitch Ratings estimates the stablecoin market grew by around 445% to around USD155 billion in the year to 13 December 2021, with the majority referenced to US dollars. Nonetheless, the approximate 20% growth in 3Q21 was behind that of 2Q21 (around 80%) and 1Q21 (around 120%). The market is concentrated, with the two largest stablecoins, Tether and USDCoin, accounting for around three quarters of total assets as of end-3Q21."

ICI's latest weekly "Money Market Fund Assets" report shows assets inching lower after 8 straight weeks of gains. Over the past 9 weeks, money fund assets have increased by $148.1 billion, and over the past 11 weeks assets they are up $184.7 billion. Over the past 52 weeks, money fund assets have increased by $393 billion, or 9.1%, with Retail MMFs falling by $66 billion (-4.3%) and Inst MMFs rising by $443 billion (16.0%). ICI's release says, "Total money market fund assets decreased by $2.58 billion to $4.70 trillion for the week ended Wednesday, January 5, the Investment Company Institute reported today. Among taxable money market funds, government funds decreased by $6.51 billion and prime funds increased by $1.88 billion. Tax-exempt money market funds increased by $2.06 billion." ICI's stats show Institutional MMFs decreasing $20.0 billion and Retail MMFs increasing $17.4 billion in the latest week. Total Government MMF assets, including Treasury funds, were $4.169 trillion (88.7% of all money funds), while Total Prime MMFs were $444.9 billion (9.5%). Tax Exempt MMFs totaled $88.7 billion (1.9%). ICI explains, "Assets of retail money market funds increased by $17.41 billion to $1.49 trillion. Among retail funds, government money market fund assets increased by $16.29 billion to $1.20 trillion, prime money market fund assets increased by $548 million to $205.67 billion, and tax-exempt fund assets increased by $570 million to $77.96 billion." Retail assets account for just under a third of total assets, or 31.6%, and Government Retail assets make up 80.9% of all Retail MMFs. They add, "Assets of institutional money market funds decreased by $19.99 billion to $3.22 trillion. Among institutional funds, government money market fund assets decreased by $22.80 billion to $2.97 trillion, prime money market fund assets increased by $1.33 billion to $239.25 billion, and tax-exempt fund assets increased by $1.49 billion to $10.69 billion." Institutional assets accounted for 68.4% of all MMF assets, with Government Institutional assets making up 92.2% of all Institutional MMF totals. (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 Crane's asset series.)

Five years ago, we wrote in our "Link of the Day," "Internal and Private Money Funds Revealed; TDAM Changes to TD; TRP," which reviewed the addition of a number of money market funds to Crane Data's collections. Our Jan. 5, 2017 piece said, "Since the SEC began publicly disclosing its Form N-MFP filings without a 2-month delay in April 2016, Crane Data has been parsing and integrating this new trove of data into our existing collections and products. Beginning with the January 2017 issue of our Money Fund Intelligence newsletter and MFI XLS performance spreadsheet (which will ship on 1/9), we will add a number of private and internal money market funds previously unreported to our listings. We've been offering these full fund listings in "beta" format in our "fundsnmfp" file (available to Money Fund Wisdom subscribers via our "Content" center) for a number of months now, and we've listed several of these in our Money Fund Portfolio Holdings collections for awhile, but watch for more inclusion in the coming months. We review the largest of these and our latest fund additions below.... The largest of these internal and private money funds include: Vanguard Market Liquidity Fund ($49.6 billion), Fidelity Cash Central Fund ($34.6B), DFA Short Term Investment Fund ($26.4B), Fidelity Securities Lending Cash Central Fund ($20.4B), Franklin U.S. Government MMP ($18.3B), Prudential Institutional MMF ($13.9B), Columbia Short-Term Cash Fund ($11.3B), State Street Navigator Securities Lending Govt MMP ($11.0B), TIAA-CREF Money Market Account ($11.1B), MFS Institutional Money Market Portfolio ($5.5B), JNL Money Market Fund ($3.8B), T. Rowe Price Treasury Reserve Fund ($3.2B), Vanguard Municipal Cash Management Fund ($2.4B), Fidelity Municipal Cash Central Fund ($2.1B), and Fidelity Money Market Central Fund ($1.8B). (Note that most of these do not have ticker symbols and many don't include the advisor name in their official filing names.) The 15 funds above total $219.7 billion, while the 10 Prime funds among these total $178.3 billion. We'll be adding approximately just over half of the assets this month ($110.3 billion), with most of the remainder added over the first half of 2017. (So be wary of these asset distortions in the coming months.) Note that these funds, and those listed in our Form N-MFP files (and on the SEC's site) are all true "money market mutual funds" -- if they report as money funds, they're money funds -- but most aren't available to outside investors. These additions don't, however, include private or internal "pools" that aren't registered as MMFs. (We're still slowly attempting to locate and identify many of these too. Contact us if you'd like to see our latest "fundsnmfp" list.) For more information on internal and private money funds and other pools, see our June 29, 2016 News, "UBS Liquidates Sweeps, Goes Govt; Vanguard Floats Internal Money Fund," our April 4, 2016 News, "Prudential Core MMF Goes Bond; BlackRock, BofA Approved; Calamos," and our July 10, 2015 News, "OFR Sheds Light on Liquidity Funds, STIFs, Managed Accts in Form PF."

Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics Tuesday, which track a shifting subset of our monthly Portfolio Holdings collection. The most recent cut (with data as of Dec. 31) includes Holdings information from 78 money funds (up from 73 two weeks ago), which represent $2.498 trillion (down from $2.671 trillion) of the $4.971 trillion (50.3%) in total money fund assets tracked by Crane Data. (Our Weekly MFPH are e-mail only and aren't available on the website. See our Dec. 10 News, "Dec. MF Portfolio Holdings: Repo Jumps, Led by FICC; Treasuries Drop," for more.) Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Repurchase Agreements (Repo) totaling $1.223 trillion (down from $1.281 trillion two weeks ago), or 49.0%; Treasuries totaling $951.0 billion (down from $1.053 trillion two weeks ago), or 38.1%, and Government Agency securities totaling $145.8 billion (down from $151.0 billion), or 5.8%. Commercial Paper (CP) totaled $68.9 billion (up from two weeks ago at $63.2 billion), or 2.8%. Certificates of Deposit (CDs) totaled $45.3 billion (up from $41.5 billion two weeks ago), or 1.8%. The Other category accounted for $37.6 billion or 1.5%, while VRDNs accounted for $26.0 billion, or 1.0%. The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $952.1 billion (38.1% of total holdings), the Federal Reserve Bank of New York with $763.0B (30.5%), RBC with $66.1B (2.6%), Fixed Income Clearing Corp with $64.4B (2.6%), Federal Home Loan Bank with $59.8B (2.4%), Federal Farm Credit Bank with $50.7B (2.0%), BNP Paribas with $48.6B (1.9%), Sumitomo Mitsui Banking Corp with $30.2B (1.2%), Canadian Imperial Bank of Commerce with $23.1B (0.9%) and Bank of Montreal with $23.0B (0.9%). The Ten Largest Funds tracked in our latest Weekly include: JPMorgan US Govt MM ($259.9B), Goldman Sachs FS Govt ($225.2B), Morgan Stanley Inst Liq Govt ($153.0B), Allspring Govt MM ($139.7B), Federated Hermes Govt Obl ($134.5B), Fidelity Inv MM: Govt Port ($133.0B), Dreyfus Govt Cash Mgmt ($128.1B), Goldman Sachs FS Treas Instruments ($106.0B), JPMorgan 100% US Treas MMkt ($100.3B) and First American Govt Oblg ($91.9B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary, or our Bond Fund Portfolio Holdings data series.)

Federated Hermes' Deborah Cunningham titled her latest monthly commentary, "Onward and upward: Three things to watch in 2022." She tells us, "If the Federal Reserve abides by its own projections for 2022, it will be the latest multi-billionaire to liftoff. While Covid threatens to delay that launch, the reduction of accommodation is the most prominent of our three key things to watch in liquidity this year." Cunningham comments, "Desiring to communicate better with the public, the Fed almost overshares its intentions. That made its recent policy pivot remarkable. After spending months preparing the markets for the onset of reducing its monthly asset purchases in November, officials gave short notice they likely would double that pace. That increase was announced in mid-December, along with accelerated projections for the first hike of the fed funds target range. A quarter-point hike could arrive as early as March, with possibly two more this year. That's a considerable jump -- as much as 75 basis points higher than September's dot plot." Federated writes, "Even if economic growth is slowed by the omicron variant, the Fed's concerns about inflation should be enough to keep tightening on track. Government, prime and tax-free money market yield curves have already responded by steepening, and we expect that to continue. While the front end of the Treasury curve will stay anchored, the Fed's reverse repo rate should rise in lockstep with the hikes. That would be great news for cash managers and investors." Cunningham also says, "We anticipate a strong year for the industry. In a rapidly rising-rate environment, money market funds and similar vehicles can lose assets because individual securities respond faster to hikes. But if the tightening is measured, as we expect, the industry could see inflows as the lag in the yield differential should shorten. When returns are similar, the liquidity provided by actively managed products can be the deciding factor for investors, who also may see a delay in the rise of administered yields of deposit products." Finally, she adds, "At its most recent meeting, the SEC had a high-level discussion about new proposals for money market funds. We were pleased to see that the regulator is proposing the removal of mandatory consideration of gates and fees. Federated Hermes sees this as beneficial to fund shareholders because it eliminates a potential redemption trigger and allows the fund's board and advisor more flexibility. But we view the proposal of swing pricing as unworkable. It would require substantial reconfiguration of current distribution and order-processing practices, eliminate the existing ability of pricing shares on an intraday basis and eradicate same-day liquidity, one of the hallmark utilities of a money fund. While the commissioners discussed other potential changes, we look forward to examining the full proposal in greater detail as part of the regulatory rulemaking process."

ICI's latest weekly "Money Market Fund Assets" report shows assets rising for the 8th week in a row and the 9th week out of the past 10. Over the past 8 weeks, money fund assets have increased by $150.6 billion, and over the past 10 weeks assets they are up $187.2 billion. Money fund assets are up by $408 billion, or 9.5%, YTD in 2021. (This follows a gain of $665.0 billion, or 18.3%, in 2020.) Inst MMFs are up $465 billion (16.8%), while Retail MMFs are down $57 billion (-3.7%). Over the past 52 weeks, money fund assets have also increased by $408 billion, or 9.5%, with Retail MMFs falling by $57 billion (-3.7%) and Inst MMFs rising by $465 billion (16.8%). ICI's release says, "Total money market fund assets increased by $38.98 billion to $4.71 trillion for the week ended Wednesday, December 29, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $38.67 billion and prime funds increased by $507 million. Tax-exempt money market funds decreased by $197 million." ICI's stats show Institutional MMFs increasing $39.0 billion and Retail MMFs increasing $6.4 billion in the latest week. Total Government MMF assets, including Treasury funds, were a record $4.175 trillion (88.7% of all money funds), while Total Prime MMFs were $443.0 billion (9.4%). Tax Exempt MMFs totaled $86.6 billion (1.8%). ICI explains, "Assets of retail money market funds increased by $6.43 billion to $1.47 trillion. Among retail funds, government money market fund assets increased by $5.82 billion to $1.19 trillion, prime money market fund assets increased by $456 million to $205.12 billion, and tax-exempt fund assets increased by $154 million to $77.39 billion." Retail assets account for just under a third of total assets, or 31.2%, and Government Retail assets make up 80.8% of all Retail MMFs. They add, "Assets of institutional money market funds increased by $32.55 billion to $3.24 trillion. Among institutional funds, government money market fund assets increased by $32.85 billion to $2.99 trillion, prime money market fund assets increased by $51 million to $237.92 billion, and tax-exempt fund assets decreased by $351 million to $9.20 billion." Institutional assets accounted for 68.8% of all MMF assets, with Government Institutional assets making up 92.4% of all Institutional MMF totals. (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 Crane's asset series.)