​

The Association of Financial Professionals issues a press release entitled, "AFP Urges Fed to Expand Commercial Paper Program, which is subtitled, "Tier 2 Companies Would Benefit from New Opportunities to Enhance Liquidity." The release says, "Today, in a letter to the Board of Governors of the Federal Reserve, Association for Financial Professionals President and CEO Jim Kaitz requested that the Federal Reserve extend the Commercial Paper Funding Facility (​CPFF) to Tier 2 commercial paper issuers."

AFP explains, "The Tier 2 commercial paper market is approximately $​80 billion in size and includes such household names as FedEx, Kraft, Kroger, Safeway, and Time Warner." "​Cash and credit continue to be extremely tight while the Fed continues to restrict CPFF credit to Tier 1 companies. The Fed needs to act quickly and extend credit to Tier 2 companies," says Kaitz.

The release adds, "Since the Commercial Paper Funding Facility (​CPFF) became operational in October 2008, the program has been successful in enhancing the liquidity of the Tier 1 commercial paper market. By providing a liquidity backstop, the Federal Reserve has provided greater assurance to both issuers and investors that firms will be able to roll over their maturing Tier 1 commercial paper."

Finally, it says, "​To the degree the CPFF is opened to Tier 2 issuers, the demand for bank credit on the part of Tier 2 issuers should decrease. This would increase the ability of banks to lend to other companies and individuals because Tier 2 companies will not have to draw as much on bank lines of credit for capital."

The Investment Company Institute recently advised that money funds not be allowed to invest in "​Tier 2" securities, recommending in its recent Working Group Report, "​Raise the credit quality standards under which money market funds operate. This would be accomplished by requiring a '​new products' or similar committee; encouraging advisers to follow best practices for determining minimal credit risks; requiring advisers to designate the credit rating agencies their funds will follow to encourage competition among the rating agencies to achieve this designation; and prohibiting investments in '​Second Tier Securities.'"

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Sunday'​s Washington Post writes "​Overhaul Targets Money Market", which discusses last week'​s Congressional testimony by Treasury Secretary Timothy Geithner. The article reveals a few previously unknown details, including the number of funds participating in the Treasury'​s Money Market Guarantee Program, and it contains a hint from Treasury that the program will be extended until Sept. 18.

The Post writes of Geithner'​s proposed changes, "​For individual investors, a few features are discernible based on the details released so far. Money-​market mutual funds are likely to be better protected against runs and panics." It explains, "​Money-​market funds, in particular, were highlighted in the plan Geithner outlined last week. Investors have traditionally seen money-​market funds as safe places to park cash, with a higher return than an insured bank account, without having to lock up the money for a long time. If you put in a dollar, you could always withdraw your dollar."

Reporter Elizabeth Razzi continues, "But when Lehman Brothers went into bankruptcy in September, the ripple effects caused one large money-​market fund, Reserve Primary Fund, to '​break the buck,' meaning its net asset value dipped below one dollar a share and investors would lose some of their principal. That sparked a run on money-​market funds." The article quotes Schwab'​s Liz Ann Sonders, "All of a sudden, there was risk where people had assumed risk not to exist."

It continues, "The Treasury Department squelched the run by announcing a temporary guaranty program to cover money that people already had on deposit with money-​market funds. More than 1,​900 funds have chosen to participate in the Treasury'​s voluntary program. The run may have been stopped, but the underlying risk still hasn'​t been addressed. The Treasury'​s protection covers only money that was already on deposit as of Sept. 19, 2008, and the program is set to expire on April 30. A Treasury spokesman said the department is considering an extension through Sept. 18."

Finally, the Post explains, "Although money-​market funds are already regulated by the Securities and Exchange Commission, Geithner has proposed that those regulations be strengthened to reduce the credit and liquidity risk of the funds. The industry itself is advocating changes that would boost the liquidity and credit of money-​market funds. Earlier this month, the Investment Company Institute'​s money-​market working group recommended boosting funds' liquidity -- their ability to turn assets into cash -- by requiring that at least 5 percent of a fund'​s net assets be held in securities that can be tapped within one day, and that at least 20 percent of its net assets could be turned into cash within seven days. The group also advocated new measures to analyze the real credit risks of new investments held by money-​market funds."

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U.​S. Treasury Secretary Tim Geithner, testifying at a House Financial Services Committee Hearing yesterday morning, discussed failures, financial regulatory reform, and "​new requirements for money market funds to reduce the risk of rapid withdrawals." He says, "To address these failures will require comprehensive reform -- not modest repairs at the margin, but new rules of the road. The new rules must be simpler and more effectively enforced and produce a more stable system, that protects consumers and investors, that rewards innovation and that is able to adapt and evolve with changes in the financial market."

In a written statement, under "New Requirements for Money Market Funds to Reduce the Risk of Rapid Withdrawals," Geithner says, "In the wake of Lehman Brothers' bankruptcy, we learned that even one of the most stable and least risky investment vehicles -- money market mutual funds -- was not safe from the failure of a systemically important institution. These funds are subject to strict regulation by the SEC and are billed as having a stable asset value -- a dollar invested will always return the same amount. But when a major prime MMF "​broke the buck," the event sparked a run on the entire prime MMF industry. The run resulted in severe liquidity pressures, not only on prime MMFs but also on financial and non-​financial companies that relied significantly on MMFs for funding."

He continues, "In response, we commit to strengthening the regulatory framework around money market funds. We believe that the SEC should strengthen the regulatory framework around MMFs in order to reduce the credit and liquidity risk profile of individual MMFs and to make the MMF industry as a whole less susceptible to runs."

Separately, U.​S. Securities and Exchange Commission Chairman Mary L. Schapiro in "Testimony Concerning Enhancing Investor Protection and Regulation of the Securities Markets before the Senate Committee on Banking, Housing and Urban Affairs. says on the topic of "Regulation of Mutual Funds and Other Pools of Investor Money," "A particular focus of the Commission in coming weeks will be proposals to enhance the standards applicable to money market mutual funds, which are widely used by both retail and institutional investors as a cash management vehicle. The SEC has been closely monitoring money market funds and their investments, since we permitted the first money market fund in the early 1970s. Over that time, we have built up significant money market fund expertise. We will bring that expertise to bear as we act quickly this spring to strengthen the regulation of money market funds by considering ways to improve the credit quality, maturity, and liquidity standards applicable to these funds. These efforts will be aimed at shoring up money market fund investments and mitigating the risk of a fund experiencing a decline in its normally constant $​1.​00 net asset value, a situation known colloquially as '​breaking the buck'."

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On Monday at the Investment Company Institute'​s 2009 Mutual Funds and Investment Management Conference, ICI President & CEO Paul Schott Stevens gave an address entitled, "Meeting the Challenges of Financial Crisis," a major portion of which addressed money market mutual funds.

Stevens said in Palm Desert, Calif., "First, money market funds: More than a year into the credit crisis, and after an unprecedented string of failures and government interventions, a single money market fund succumbed. Last September 16, the Reserve Primary Fund saw its net asset value fall below $​1.​00, becoming only the second money market fund in history to '​break a dollar.' By the end of that week, the Federal Reserve and the Treasury stepped in, taking several actions to shore up the money market in general and to calm money market fund investors in particular, including the Temporary Guarantee Program for Money Market Funds. This episode raised new questions about how the money market operates and how money market funds should be regulated within that market."

He continues, "​As you probably know, ICI'​s Executive Committee formally chartered a Money Market Working Group, composed of senior industry executives, last November. We did not act out of any concern that money market funds pose a significant challenge to the stability of the financial system--​quite to the contrary. In the 25-​year history of Rule 2a-​7, one-​third of a quadrillion dollars has flowed in and out of money market funds. In that quarter of a century, until September of 2008, only one small fund had ever broken a dollar. But the events of last fall tested money market funds severely, with many sponsors offering support for their funds. So we had a responsibility to examine those events and to propose ways to make money market funds even stronger."

"Vanguard'​s Chairman Jack Brennan led an intensive examination of these issues. The Working Group'​s challenge was daunting: It had to preserve the characteristics that make money market funds so valuable to investors, to issuers, and to the economy, while increasing their resilience so that these funds can better withstand even the most adverse market conditions. It was an exhaustive effort. Supported by industry practitioners and ICI staff, the Working Group consulted broadly, with advisers to funds and other pooled investment vehicles, issuers, regulators, academics, institutional investors, and advisers to individual investors. The Working Group considered a wide range of ideas, including proposals offered by outside commentators since last fall."

Stevens continues, "With a 224-​page report issued just last week, the Working Group literally '​wrote the book' on money market funds. We believe that they also have written the blueprint for the future of this vitally important product. The Report offers new and heightened standards for the operation of money market funds in every key area, including liquidity, credit quality, maturity, client concentration, and transparency. For example, the Working Group proposes imposing, for the first time in the history of Rule 2a-​7, daily and weekly minimum liquidity requirements on money market funds.... The proposals would tighten limits on portfolio maturity by reducing the maximum weighted average maturity from 90 days to 75 days.... The Working Group also proposes barring money market funds from investing in Second Tier Securities. Significantly, the Report addresses a risk that current regulations overlook: '​client risk.'"

Finally, he says, "As these recommendations are adopted, tomorrow'​s money market fund investors will face even less risk than today'​s do. But the Working Group went further, to look at how to treat all investors in a fund fairly if that fund should break a dollar in a future financial crisis. They propose that the Securities and Exchange Commission authorize a money market fund'​s board to suspend redemptions of fund shares temporarily if the fund is facing a cascade of redemptions that it is unable to meet--​and permanently for funds preparing to liquidate, in order to treat all shareholders fairly."

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As we warned last week, we could be excerpting information from the ICI'​s recently-​released "​Report of the Money Market Working Group" for weeks. Today, we take a look at the report'​s discussion of "Institutional Demand for Money Market Funds," which shows in a chart that "​U.​S. Nonfinancial Businesses' Holdings of Money Market Funds" hit a record 32 percent in 2008, up from 28 percent in 2007 and 24 percent in 2006.

Money funds' share of corporate short-​term assets has almost doubled in the past 10 years, rising from 17 percent in 1998, and has grown 7 times over since 1988 (​from mere 4 percent). ICI defines, "U.​S. nonfinancial businesses' short-​term assets consist of foreign deposits, checkable deposits, MMDAs, savings, certificates of deposit, money market funds, repurchase agreements, and commercial paper."

The MMWG report says, "Institutional investors [​in money funds] ... include large corporations, securities lending operations, bank trust departments, sweep programs, securities brokers, investment managers, and state and local governments, among others. At the institutional level, money market funds compete with a range of investment options, including bank deposits, trust accounts, short-​term offshore funds, local government investment pools, direct investments in money market instruments such as commercial paper and repurchase agreements, and bank sweep accounts."

ICI explains, "Institutions began to invest in money market funds during the 1970s, and their confidence in the product grew after the SEC adopted Rule 2a-​7 in 1983.... [​M]​oney market funds have been approved as investments for national banks by the Office of the Comptroller of the Currency; for state-​chartered banks by the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation; and for federal credit unions by the National Credit Union Administration. They have been approved as an investment vehicle for customer funds held in custody by futures commission merchants and futures clearing organizations by the Commodity Futures Trading Commission and for margin collateral by the Clearing Corporation, the New York Mercantile Exchange, the Chicago Mercantile Exchange, and the Options Clearing Corporation. State and municipal entities also hold money market funds. In addition, the SEC has approved investment of the prefunded portion of an asset-​backed issuance in money market funds."

Finally, the report says, "Accounting rules also have facilitated the use of money market funds for the investment of cash by institutional investors. Like other short-​term instruments, such as Treasury bills and commercial paper, money market funds are characterized as cash equivalents for financial reporting purposes and, as a result, have a simple, clear-​cut accounting treatment. Cash investments are carried at either face value (​e.​g., bank deposits and money market fund shares) or amortized cost (​e.​g., Treasury bills and commercial paper) on a firm'​s balance sheet, and as such are not marked to market. The reasoning is that the market value of a cash equivalent is not materially different from its face value or amortized cost. Under this accounting treatment, companies need not track realized or unrealized capital gains and losses on their cash-​equivalent positions, and thus can avoid the detailed recordkeeping required when there are any changes in the balances of these investments. This treatment is especially important for the many firms that use money market funds for daily transactions."

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Crane Data recently heard from a money fund industry veteran and former portfolio manager who has been reflecting on "Lessons Learned" from the money market turmoil over the past two years. We wanted to share these thoughts with other money fund professionals and investors, so we'​ve reprinted some of the list below. The manager asked to remain anonymous.

The first lesson is, says the former PM, "There is risk, albeit limited risk, in money market funds. The possibility of stepping on a landmine cannot be completely eliminated with even the best processes, people, and depth of resources. Under the right set of circumstances, even US Treasury MMFs can '​break the buck.'" Next, he says, "Issuer default overrides all other risks (​liquidity, pricing). The default of a single issuer assures '​breaking the buck' without external financial support."

He says also, "Frequent and quality internal communication is essential. Demand this communication and insist on total transparency. This includes communication between the portfolio management team and senior management, between portfolio management and credit research, between portfolio management and sales/​client service, between portfolio management and fund administration, and between portfolio management and internal audit/​legal/​risk control." He adds, "Communicate with senior management to establish dollar maximum per issuer exposures in addition to percentage diversification limits. The 2a-​7 guidelines establishing 5% per issuer maximum exposure is too high; 2.​5% to 3.​0% is a better maximum."

He suggests, "For prime portfolios, maintain at least 25% exposure to U.​S. Treasuries to protect against adverse market conditions, characterized by falling prices and illiquid conditions for non-​government obligations. Treasury holdings will experience stable/​rising prices and good liquidity during a flight to quality scenario." The former PM continues, "​Cultivate good working relationships and have a broad network established with direct issuers and broker/​dealers. Understand that while these relationships are essential to managing portfolios, at the end of the day counterparties will act in their own best interest which is likely in the worst interest of the portfolio manager. Trust no one."

Finally, he says, "Shareholder incentives are at odds with portfolio management interests. The portfolio manager must expect shareholder deposit/​withdrawal decisions and inquiries that make the achievement of protection of principal, provision of liquidity, and income generation more difficult." He adds, "The market is a cruel taskmaster. Only invest when satisfied with the answer to the question, '​What could go wrong and what is the likelihood of that occurring?'"

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As we noted last week, in addition to containing a series of recommendations designed "to make money market funds more resilient in the face of extreme market conditions," the Investment Company Institute'​s new Money Market Working Group Report includes a host of additional resources and statistics on money funds. Among these is a comprehensive, 26-​page "​History of Rule 2a-​7" (​Appendix E), which details in never-​before-​seen detail the birth and evolution of the regulations governing money funds. We excerpt from this below.

Appendix E'​s Introduction says, "Some have suggested that the regulation of money market funds is the single greatest success story in the history of financial services regulation. Money market funds serve as an important source of direct financing for governments, businesses, and financial institutions, and of indirect financing for households. Without these funds, financing for all these institutions and individuals would be more expensive and less efficient. Yet this product would never have achieved its full potential without the flexible and resilient regulatory structure created by the Investment Company Act of 1940."

It continues, "Many fundamental features of today'​s investment companies--​including some of the features essential to the success of money market funds--​are prohibited by the Investment Company Act.... [​T]​he Investment Company Act ... generally require mutual funds to calculate current net asset value (​NAV) per share by valuing their portfolio securities ... at market value.... Rule 2a-​7 under the Investment Company Act exempts money market funds from these provisions and permits the valuation of their shares at par. As detailed below, the history of Rule 2a-​7 could be characterized as a periodic rebalancing of the demand for a liquid, low-​fee, stable-​value investment against the credit and market risks that could result in a fund breaking a dollar. The trend has been a continual reduction in the risks permitted in the face of an increasing demand for the funds."

The MMWG Report says, "The first money market fund was offered to investors in 1971." It includes a chart citing the "principal reason for the early popularity of money market funds," "​From the introduction of money market funds through the mid-​1980s, the Federal Reserve'​s Regulation Q limited the maximum rate that could be paid on passbook savings accounts and prohibited the payment of interest on demand accounts." It adds, "Thus, the first decade following the introduction of money market funds provided almost ideal conditions for their growth. Although banks and thrifts eventually developed higher-​yielding products to compete with money market funds, none of their offerings could match the combination of yield, stability, and daily liquidity that these funds offered."

"​The growing popularity of money market funds led to an onslaught of exemptive orders seeking to create more funds. The SEC responded in 1982 by proposing an exemptive rule permitting money market funds to use either the amortized cost or penny-​rounding method to maintain a stable $​1.​00 NAV. The SEC adopted the exemptive rule.... Rule 2a-​7 largely codified the conditions of the previous exemptive orders with few substantive changes. For example, a money market fund was required to '​maintain a dollar-​weighted average portfolio maturity appropriate to its objective of maintaining a stable net asset value per share,' which could not exceed 120 days. The maximum maturity of individual portfolio securities was one year. All portfolio securities were required to be U.​S. dollar-​denominated and determined by the Board to present minimal credit risks," says the history.

Finally, the Appendix adds, "​Just as banks have continued to thrive for centuries notwithstanding periodic failures, so money market funds will continue to survive the failure of any particular funds, no matter how venerable. The resilience of money market funds is in no small measure attributable to Rule 2a-​7, under which the SEC imposes more substantive regulations on money market funds than on any other type of investment company."

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One of the recommendations of the ICI'​s recently released "Report of the Money Market Working Group is to "​Address market confusion about money market institutional [​investments] that appear to be -- but are not -- money market funds." The report says, "During the market crisis, a number of press reports incorrectly identified various types of cash management vehicles as money market funds. As Crane Data reported exhaustively during the start of the crisis in August 2007, the false reporting of LIBOR-​plus, enhanced cash, and other pools as "​money market funds" was likely instrumental in triggering the turmoil in the money markets.

The ICI report continues, "​Advisers to funds that are not registered under the Investment Company Act may hold themselves out in a manner that implies that they manage the funds to provide the same safety and stability as a money market fund. To address this regulatory gap, we recommend that the SEC adopt a rule under the Investment Advisers Act of 1940, applicable to advisers to unregistered funds, designed to reduce investor and market confusion about funds that appear to be similar to money market funds, but that are not required to comply with the risk-​limiting provisions applicable to money market funds."

Under the section entitled, "Anti-​Fraud Rule to Address Investor and Market Confusion," the ICI MMWG says, "The Working Group recommends that the SEC adopt another rule, providing that it would be a fraudulent or deceptive practice to advise a fund that is not registered under the Investment Company Act that either (​1) uses the word '​cash' (​or any variant of the word, such as '​money,' '​liquid,' etc.) in its name; or (​2) holds itself out as seeking to maintain a non-​fluctuating NAV of $​1.​00 per share, unless the fund also complies with the risk-​limiting provisions of Rule 2a-​7. The Investment Company Act contains two provisions that preclude registered investment companies from using names that could mislead investors into thinking that a fund is a money market fund when in fact it does not comply with the risk-​limiting provisions that govern such funds. Rule 2a-​7(​b) provides generally that it is an untrue statement of material fact for a registered investment company to hold itself out as a money market fund or the equivalent of a money market fund, unless it meets the risk-​limiting provisions of the rule."

The MMWG report says, "There is no corresponding prohibition on an unregistered fund, such as an enhanced cash fund, a bank collective fund, or other type of fund that holds itself out as maintaining a non-​fluctuating NAV of $​1.​00 per share, from using a name that could lead an investor to believe that it was investing in a money market fund, or something that was designed to provide the same safety and stability as a money market fund. We believe that this gap could cause investors to be misled about the exact nature of their investments. As discussed in Section 6 of this Report, a number of enhanced cash funds dissolved, even before the events of September 2008. Securities lending pools similarly have experienced difficulties maintaining a market value of $​0.​995 per share or better, as money market funds are required to do under shadow pricing provisions."

"Our recommendation is designed to bridge the gap, to the extent possible under current law, between the protections afforded investors in money market funds under the Investment Company Act, which has clear limitations on how registered funds can represent themselves to the public, on the one hand, and the ways advisers to unregistered pools can represent their activities on behalf of the pool, on the other. We recognize that even this proposed rule would not completely mitigate investor confusion, as banks and bank holding companies are excluded by statute from the definition of investment adviser ... and the SEC has no authority over state employees managing state funds.... Congress may wish to consider whether managers of these pools similarly should be subject to this antifraud standard," says the report.

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We could spend weeks excerpting pieces of the ICI'​s new "​Report of the Money Market Working Group", the comprehensive 215-​page blueprint for changes to money market mutual funds released yesterday. But first we'​ll focus on the recommended changes to money fund portfolios, which we expect funds to begin implementing almost immediately. ICI says of the recommendations, "[​R]​ecent market events, although painful, afford the money market fund industry the opportunity to assess the regulations that govern its operations, and the more stringent practices adopted by some money market funds that go beyond those regulations.... Our recommendations ... are numerous, but are primarily designed to address two themes: (​1) that money market funds should be better positioned to sustain prolonged and extreme redemption pressures; and (​2) that if a '​run' should strike a money market fund, it must be stopped immediately, and with all shareholders treated fairly."

The report says, "​After much deliberation and many meetings with market participants, investors, and regulators, and taking into account the need to strengthen the safeguards of money market funds, the Working Group has made recommendations that generally would: - Impose for the first time daily and weekly minimum liquidity requirements and require regular stress testing of a money market fund'​s portfolio. - Tighten the portfolio maturity limit currently applicable to money market funds and add a new portfolio maturity limit. - Raise the credit quality standards under which money market funds operate. - This would be accomplished by requiring a '​new products' or similar committee; encouraging advisers to follow best practices for determining minimal credit risks; requiring advisers to designate the credit rating agencies their funds will follow to encourage competition among the rating agencies to achieve this designation; and prohibiting investments in '​Second Tier Securities.'

The recommendations also would: - Address '​client risk' by requiring money market fund advisers to adopt '​know your client' procedures and requiring them for the first time to disclose client concentrations by type of client and the potential risks, if any, posed by a fund with a client base that is strongly concentrated. - Enhance risk disclosure for investors and the market and require monthly website disclosure of a money market fund'​s portfolio holdings. - Assure that when a money market fund proves unable to maintain a stable $​1.​00 NAV, all of its shareholders are treated fairly. For this purpose, a money market fund'​s board of directors, or a committee of the board, would be authorized to suspend redemptions and purchases of fund shares temporarily under certain situations, and permanently for funds preparing to liquidate, in order to ensure that all shareholders are treated fairly. - Enhance government oversight of the money market by developing a nonpublic reporting regime for all institutional investors in the money market, including money market funds, and encouraging the SEC staff to monitor higher-​than-​peer performance of money market funds. - Address market confusion about money market institutional investors that appear to be -- but are not -- money market funds."

Finally, ICI says, "Our recommendations seek to (​1) respond directly to potential weaknesses in money market fund regulation that were revealed by the recent abnormal market climate; (​2) identify potential areas for reform that, while not related to recent market events, are consistent with improving the safety and oversight of money market funds; and (​3) provide the government detailed data to allow it to better discern trends and the role played by all institutional investors, including money market funds, in the overall money market, and invite greater surveillance of outlier performance of money market funds that may indicate riskier strategies."

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The Investment Company Institute said today that its "Board of Governors has received a report from the Money Market Working Group and has unanimously endorsed the Group'​s recommendations concerning new regulatory and oversight standards for money market funds." No major changes were proposed, and, unsurprisingly, the report opposes floating NAVs, insurance and capital reserves for money funds. Suggestions of note include adding a 5% 1-​day and 20% 7-​day liquidity mandate, reducing the WAM maximum from 90 to 75 days, adding monthly client concentration and portfolio holding disclosures, eliminating investment in "​Second Tier" securities, and implementing stess-​testing of portfolios. ICI will host a conference call this morning at 11:​00 a.​m. (​call 888-​950-​8045, passcode 6623219) to discuss the report, which is available here.

Paul Schott Stevens, President and CEO of ICI, says in the report, "Drawing on the difficult experience of the last year and a half, we also have developed a series of recommendations designed, among other things, to make money market funds more resilient in the face of extreme market conditions such as those encountered in September 2008.... It should be the goal of all money market funds to substantially implement these recommendations by September 18, 2009, when authorization for the Treasury Temporary Guarantee Program for Money Market Funds expires. This will provide additional assurance to money market investors and help facilitate an orderly transition out of the Guarantee Program." He adds, "​I am extremely proud of this Report and the efforts of the Working Group. We look forward to working with regulators and other policymakers in the months ahead as they consider how to best address these issues."

John J. Brennan, Chairman of the Money Market Working Group and Chairman of The Vanguard Group, says "The recommendations respond directly to weaknesses in current money market fund regulation, identify additional reforms that will improve the safety and oversight of money market funds, and will position responsible government agencies to oversee the orderly functioning of the money market more effectively." He adds, "​Money market funds are a key component of the money market, relied upon by individuals and institutions alike. We strongly believe that taken as a whole, these recommendations will greatly increase the resiliency of money market funds to the benefit of both investors and markets."

The ICI release says, "​In a resolution adopted March 17, 2009, the Institute'​s governing body called for prompt implementation by all money market fund complexes of those practices recommended in the Report of the Money Market Working Group that do not require prior regulatory action. ICI formed the Money Market Working Group last fall to develop recommendations to improve the functioning and regulation of the money market and money market funds. Among other changes, the recommendations would for the first time require money market funds to meet new mandated daily and weekly minimum liquidity standards. The Money Market Working Group also recommends tightening the portfolio maturity limits currently applicable to money market funds and raising credit quality standards."

"The Board has given its strong approval to the reforms developed by the Money Market Working Group and deeply appreciates the Working Group'​s efforts," says John V. Murphy, ICI Chairman and Chairman of OppenheimerFunds. "​The Board also has called for prompt implementation of these improved practices across the industry, pending regulatory action. In light of the significance of these recommendations to fund investors, ICI will encourage the SEC to require funds choosing not to implement these recommendations to disclose that fact to their investors."

The release adds, "The Working Group'​s recommendations are designed to strengthen and preserve the unique attributes of money market funds: safety, liquidity, and the convenience of a stable $​1.​00 net asset value (​NAV). The new standards and regulations will ensure that money market funds are better positioned to sustain prolonged and extreme redemption pressures and that mechanisms are in place to ensure that all shareholders are treated fairly if a fund sees its NAV fall below $​1.​00."

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Mercer Bullard, President of Fund Democracy and Associate Professor of Law at the University of Mississippi School of Law, testified recently before the U.​S. Senate'​s Committee of Banking, Housing and Urban Affairs. Bullard presented on "Enhancing Investor Protection and the Regulation of Securities Markets" and had some strongly supportive comments on money market mutual funds. We excerpt from his statement below.

Bullard told the Senate last week, "[​M]​utual funds have been a singular success story in the midst of the current crisis. Money market funds arguably have been the best illustration of this success. As often happens when those who succeed are surrounded by failed competitors, however, some have responded to the failure of a single retail money market fund -- the first in history -- by demanding that money market funds be converted to and regulated as banks. A former Fed chairman explained this position as follows: '​If they are going to talk like a bank and squawk like a bank, they ought to be regulated like a bank.' The problem with this argument is that money markets do not fail like banks."

He continues, "Since 1980, more than 3,​000 U.​S. banks have failed, costing taxpayers hundreds of billions of dollars. During the same period, two money market funds have failed, costing taxpayers zero dollars. The lesson that the Group of 30 takes from this history is that it is money market funds that should be regulated as banks. The lesson that Congress should take from this history is that banks should be regulated more like money market mutual funds.... [​B]​anks routinely fail because they are permitted to invest deposits that can be withdrawn at a moment'​s notice in illiquid, long-​term, risky assets. In comparison, money market funds invest in liquid, short-​term, safe assets. The Group of 30 has disparaged money market funds as '​underscor[​ing] the dangers of institutions with no capital, no supervision, and no safety net,' yet the extraordinary stability of money market funds relative to banks makes a mockery of their argument."

Finally, Bullard says, "​It is banks that should be regulated like money market funds, with the investment of insured bank deposits being limited to liquid, short-​term, safe assets.... Money market funds have been a paragon of stability because they are permitted to invest only in a diversified pool of short-​term, high-​quality assets." But he veers from the fund industry party line with the comments, "The answer to whether money market fund insurance should be made permanent seems obvious. Terminating the temporary insurance program could lead to another run on money market funds and require that the program immediately be restored.... The question of whether there is an implied federal guarantee of money market funds has been answered."

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The nascent trend of consolidation among fringe players in the money market mutual fund business continues as the Monarch Funds prepares to liquidate. The Monarch Funds, the $​451 million, 81st largest money fund manager (​out of 89) according to our monthly Money Fund Intelligence XLS, discontinued its Monarch Daily Assets Government and Monarch Daily Assets Treasury Funds last month, becoming the first Treasury and Government funds to succumb to ultra-​low interest rates.

The Monarch Funds are advised by Monarch Investment Advisors, a "​privately owned company controlled by Anthony R. "​Tim" Fischer, Jr. and Jack Singer. Portfolio Manager Fischer tells Crane Data that it was time to move on and that the company'​s assets were sold to Federated Investors.

The prospectus supplement says, "​On December 12, 2008, the Board of Trustees of the Monarch Funds approved a plan to liquidate and terminate the Daily Assets Government Fund and Daily Assets Treasury Fund, upon recommendation of Monarch Investment Advisors, LLC, the manager to the Portfolios. The Board determined that the liquidation and termination of the Portfolios was in the best interests of shareholders due primarily to anticipated redemptions by certain shareholders, which were expected to render the Portfolios' fees uncompetitive." (Comerica Bank is listed as owning 47% of the Daily Assets Cash Fund in the latest Statement of Additional Information.)

It continues, "​Pursuant to the Plan, the Portfolios are liquidating their assets and distributing cash pro rata to all shareholders who have not previously redeemed or exchanged all of their shares of the Portfolios. The liquidation of the Portfolios and distribution of assets to shareholders is expected to be completed on or about February 27, 2009. Once the distribution is complete, the Portfolios will terminate."

In other news, Arrowhead Money Market, advised by Luminent Capital Management, is preparing for launch according to recent fund filings. Barry Weiss, who formerly co-​managed money funds at Oppenheimer Funds, and Andrew Tikofsky, will manage the new fund, which has a minimum initial investment of $​1 million and an expense ratio of 0.​70%.

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The SEC recently posted a flurry of responses to "​no-​action" letters written over the past few months requesting extensions of capital support agreements for money market funds. The new issue of mutual fund newsletter Fund Action reports that fund firms were unable to extend support beyond a date of November 6, 2009. The no-​action letters and responses just posted involve the following funds: Columbia Cash Reserves, Columbia Money Market Reserves; Citi Liquid Reserves and Western Asset Money Market Fund; Northern Institutional Diversified Assets, Liquid Assets and Prime Obligations Portfolio, and SEI Prime Obligations.

We haven'​t heard from the SEC yet whether this is a new policy, but Fund Action says the SEC "​will no longer permit firms to keep support facilities for troubled money market funds" and cited Columbia in saying "Nov. 6 was the maximum period that the SEC would permit an extension." The FA article quotes Peter Crane, "The SIV chapter in money funds is slowly but surely drawing to a close. Whether money funds are ready for that remains to be seen. This may cause firms that won'​t be ready by that time to purchase securities outright from their money funds. This may be another effort by regulators to push the bird out of the nest."

The December 11, 2008, Columbia Cash Reserve letter, written by Stephen Keen of Reed Smith, said, "The process of restructuring each of the Covered Securities is continuing and is unlikely to be completed before the scheduled termination of the Original Agreement on December 13, 2008. Moreover, current market conditions continue to create a risk of an unanticipated default that would add to the Covered Securities. The Board therefore held meetings on November 11 and December 10, 2008 at which they approved an extension of the termination date of the Agreement to November 6,​2009."

Western Asset, which has since divested itself of all SIVs, said in its letter, "It is important to note that since the crisis in the credit markets began, Legg Mason has taken a number of steps to support the Funds and other money market funds it sponsors, including entering into support arrangements and increasing them to the levels currently in effect and purchasing troubled securities from the Funds and other funds outright. Legg Mason has consulted with and obtained the approval of the Funds' Boards regarding each of these actions that involved the Funds. Similarly, Legg Mason has sought the Boards' approval to extend the expiration date of the support arrangements."

Finally, Northern'​s letter refers to "​Notes" issued by the SIVs Whistlejacket Capital LLC and White Pine LLC, and said, "​The Notes went into receivership in mid-​February 2008, and are still in receivership. In June 2008, the receiver (​Deloitte & Touche LLP) appointed a replacement investment manager and an investment bank to assist in restructuring the Notes and completing the insolvency proceeding. The likely timeframe for completion of the restructuring is unknown, but it is unlikely that it will be completed by February 28, 2009. In light of the approaching expiration of the Agreements, as well as the continued disruption of the credit markets generally, and the market for the Notes specifically, each Trust and NTC propose to amend the Agreements."

​

Last night, the Associated Press posted "​Shakeout from money fund'​s collapse just starting", an excellent primer for investors and summary of recent events and issues involving money market mutual funds. AP says, "It'​s not the sexiest investment around, but the money-​market mutual fund has become a high-​demand safe haven for those who can no longer stomach the stock market.

The article continues, "​Think again, however, if you believe you'​ve found quiet refuge among the growing ranks of play-​it-​safe types who have nearly $​3.​9 trillion stashed in these investments. Money funds are generally safe places to park cash because they invest in the safest types of debt. Many buy government bonds such as Treasury bills, while so-​called prime funds seek slightly higher yields but accept marginal risk by venturing into short-​term corporate bonds."

The piece discusses the Lehman Brothers bankrupty and Reserve Fund, and says, "To prevent another such debacle, the industry and government regulators are weighing fundamental changes in how money funds operate. Their moves could make money funds even safer, but trim their already tiny yields.... The changes are swirling around an investment that'​s usually so low-​profile it'​s typically compared with bank certificates of deposit." It quotes Peter Crane, publisher of the Money Fund Intelligence, "Everybody will look forward to a time when money funds are boring again."

Finally, the AP article, written by Mark Jewell, says, "​Still, experts say there are no indications that investors will suffer losses anytime soon in any other money funds. But the Reserve mess spurred proposals for changes that are just beginning to ripple across the money fund industry, which now holds about 40 percent of the total $​9.​4 trillion in all U.​S. mutual fund assets."

See also, AP'​s "​4 tips on finding a good money-​market mutual fund".

​

Standard & Poor'​s Ratings Services issued a press release yesterday saying the company "has updated its principal stability fund ratings (​PSFRs) criteria and methodology, including expanded net asset value (​NAV) deviation ranges for each rating category." The company does not expect any immediate ratings changes as a result of the criteria update.

The company published "Standard & Poor'​s Comments On Its Principal Stability Fund Ratings Methodology," which details how the NRSRO will now "incorporate current market stresses that may affect a fund'​s ability to maintain its principal value, as well as fund management response and measures of sponsor support, into fund analysis." S&​P "​also provides clarification on the analysis of certain issues, such as declining NAVs and the bifurcation of assets in rated funds during these unusual market times, as well as how we communicate and address those that fall outside our analytical framework."

The release continues, "To increase ratings transparency and market knowledge about PSFRs further, we also released updated documentation of the definitions of each category of our PSFRs. This document is designed to explain clearly what a PSFR is and its function. Supplementing this is documentation that outlines the qualities and characteristics of PSFRs for both money-​market funds and government and/​or treasury funds, as well as our fund credit and volatility ratings."

The new "Expanded NAV Deviation Ranges For Each PSFR Category" is causing a stir among some funds, however. S&​P says, "Our current PSFR criteria only address when the marked-​to-​market NAV of a '​AAAm' rated fund drops below 0.​9985." They "​adding the following marked-​to-​market NAV (​per share) range" for '​AAAm' funds: 0.​9975 to 1.​0025. "If the NAV for a fund in one of these categories exceeds these ranges, we would typically take rating action," says the ratings agency. Some managers are concerned that this measure is '​draconian' and will force a fund to be watchlisted.

Finally, S&​P summarizes their '​AAAm' PSFRs: - Maximum weighted average maturity (​WAM) of 60 days or less; - Minimum of 50% in '​A-​1+' securities, and maximum of 50% in '​A-​1' securities; and - Maximum final maturity of floating-​rate securities is two years. The company "also evaluate management'​s response to events that may result in one or more of these measures weakening and whether those events impair the fund'​s ability to maintain its principal value."

​

Yesterday, Investment Company Institute President and CEO Paul Schott Stevens testified on "Investor Protection and the Regulation of Securities Markets" before the Committee on Banking, Housing, And Urban Affairs of the United States Senate.

Stevens, in his oral statement, said, "​Finally, let me comment briefly on money market funds. Last September, immediately following the bankruptcy of Lehman Brothers, a single money market fund was unable to sustain its $​1.​00 per share net asset value. Coming hard on the heels of a series of other extraordinary developments that roiled global financial markets, these events worsened an already severe credit squeeze. Investors feared that other wondered what major financial institution might fail next and how other money market funds might be affected. Concerned that the short-​term fixed-​income market was all but frozen, the Federal Reserve and the Treasury Department took a variety of initiatives, including establishment of a Temporary Guarantee Program for Money Market Funds."

He continued, "These steps have proven highly successful. Over time, investors have regained confidence. As of February, assets in money market funds were at an all-​time high, almost $​3.​9 trillion. The Treasury Temporary Guarantee Program will end no later than September 18. Funds have paid more than $​800 million in premiums, yet no claims have been made -- and we do not expect any. We do not envision any future role for federal insurance of money market fund assets, and look forward to an orderly transition out of the Temporary Guarantee Program."

Stevens adds, "​The events of last fall were unprecedented. But it is only responsible that we, the fund industry, look for lessons learned. So in November 2008 ICI formed a working group of senior fund industry leaders to study ways to minimize the risk to money market funds of even the most extreme market conditions. That group will issue a strong and comprehensive set of recommendations designed, among other things, to enhance the way money market funds operate. We expect that report by the end of this month, and we hope to place the Executive Summary in the record of this hearing."

In the accompanying written report, under a section entitled, "IV. Recent Market Events and Money Market Funds: Evolution and Current Significance of Money Market Funds," ICI says, "​Money market funds are registered investment companies that seek to maintain a stable net asset value (​NAV), typically $​1.​00 per share. They are comprehensively regulated under the Investment Company Act and subject to the special requirements of Rule 2a-​7 under that Act that limit the funds' exposure to credit risk and market risk."

"​These strong regulatory protections, administered by the SEC for nearly three decades, have made money market funds an effective cash management tool for retail and institutional investors. Indeed, money market funds represent one of the most notable product innovations in our nation'​s history, with assets that have grown more than 2,​000 percent (​from about $​180 billion to $​3.​9 trillion) since Rule 2a-​7 was adopted in 1983. Money market fund assets thus represent about one third of an estimated $​12 trillion U.​S. '​money market,' the term generally used to refer to the market for debt securities with a maturity of one year or less," said the report.

​

In a speech this morning at the Council on Foreign Relations entitled "​Financial Reform to Address Systemic Risk", Federal Reserve Board of Governors Chairman Ben S. Bernanke made a number of comments on money market funds, suggesting a number of possible regulatory changes. He cited the importance of money funds and commercial paper, and called for "​increasing the resiliency" of funds, not for dramatic change.

Bernanke says, "The world is suffering through the worst financial crisis since the 1930s, a crisis that has precipitated a sharp downturn in the global economy. Its fundamental causes remain in dispute .... In the near term, governments around the world must continue to take forceful and, when appropriate, coordinated actions to restore financial market functioning and the flow of credit.... At the same time that we are addressing such immediate challenges, it is not too soon for policymakers to begin thinking about the reforms to the financial architecture, broadly conceived, that could help prevent a similar crisis from developing in the future."

He continues, "The Federal Reserve and other authorities also are focusing on enhancing the resilience of the triparty repurchase agreement (​repo) market, in which the primary dealers and other major banks and broker-​dealers obtain very large amounts of secured financing from money market mutual funds and other short-​term, risk-​averse sources of funding. For some time, market participants have been working to develop a contingency plan for handling a loss of confidence in either of the two clearing banks that facilitate the settlement of triparty repos. Recent experience demonstrates the need for additional measures to enhance the resilience of these markets, particularly as large borrowers have experienced acute stress. The Federal Reserve'​s Primary Dealer Credit Facility, launched in the wake of the Bear Stearns collapse and expanded in the aftermath of the Lehman Brothers bankruptcy, has stabilized this critical market, and market confidence has been maintained."

Bernanke told the CFR, "Another issue that warrants attention is the potential fragility of the money market mutual fund sector. Last fall, as a result of losses on Lehman Brothers commercial paper, a prominent money market mutual fund '​broke the buck' -- that is, was unable to maintain a net asset value of $​1 per share. Over subsequent days, fearful investors withdrew more than $​250 billion from prime money market mutual funds. The magnitude of these withdrawals decreased only after the Treasury announced a guarantee program for money market mutual fund investors and the Federal Reserve established a new lending program to support liquidity in the asset-​backed commercial paper market."

Finally, he says, "In light of the importance of money market mutual funds -- and, in particular, the crucial role they play in the commercial paper market, a key source of funding for many businesses -- policymakers should consider how to increase the resiliency of those funds that are susceptible to runs. One approach would be to impose tighter restrictions on the instruments in which money market mutual funds can invest, potentially requiring shorter maturities and increased liquidity. A second approach would be to develop a limited system of insurance for money market mutual funds that seek to maintain a stable net asset value. For either of these approaches or others, it would be important to consider the implications not only for the money market mutual fund industry itself, but also for the distribution of liquidity and risk in the financial system as a whole."

​

A Bloomberg article entitled, "​AIG Told U.​S. Failure May Cripple Banks, Money Funds" refers to a confidential report that allegedly points to risks to money market funds based on exposure to AIG. Money market participants, however, appear baffled as to what exactly the referenced report is referring to, as most believe any direct threat from AIG is long past. Sources tell us that AIG was referring to "​stable value funds" not "​money market funds."

The Bloomberg piece says, "The $​38 billion in support provided by the firm to money-​market funds would be in jeopardy, AIG said, possibly forcing some to '​break the buck.' The term refers to a money fund that suffers losses so large that it must pay investors less than the traditional $​1-​a-​share value that gives the short-​term funds their reputation for safety."

We originally thought the company must be referring to European funds or stable value funds, since there are no "​money fund insurance" programs of that magnitude (​other than of course the U.​S. Treasury'​s Money Fund Guarantee Program). AIG has never been a large direct issuer in the money markets, though there were several advisor support events last October involving AIG-​affiliated asset-​backed commercial paper conduits. We then thought perhaps some liquidity support in the muni market was the issue. But it appears that the information is incorrect or at the very least dated, or that the company invoked money market funds in order to attract attention or support."

S&​P'​s Peter Rizzo says, "I believe that article was referring to paper issued by two of AIGs subsidiaries: American General Finance Corp.​and AIG Financial Products Corp. We did see plenty of this paper in our rated funds as it was eligible investment because the paper issued had a short term rating of A-​1 or better based on a put provided by these entities and ultimately AIG. Specifically, AIG Financial Products was a big participant in structured securities market as it provided liquidity to numerous vehicles under the following names: Curzon Funding Ltd issued European notes (​European CP, European CLNs, and European MTNs), Curzon Funding LLC (​an SPE incorporated in Delaware) issued U.​S. notes (​U.​S. CP, secured liquidity notes, callable notes, U.​S. credit-​linked notes, and U.​S. MTNs), and Nightingale Finance Ltd/​Nightingale Finance LLC issued structured investment vehicles (​SIVs)."

The majority of these issues, however, are long gone from money fund portfolios, which have been avoiding anything even remotely AIG-​related for many months now. So it appears that today'​s mention is a false alarm.

​

The March 2009 issue of our flagship Money Fund Intelligence newsletter features the articles "Unprecedented Change Hitting Money Markets," "U.​S.-​Style Money Funds Weathering Global Storm," and our monthly fund profile, "USAA'​s Money Markets Accomplishing Mission." The latest issue also contains a table of "Offshore Money Fund Market Share Rankings," a story on the "High-​Cost of Deposit Insurance Pushing Cash to Money Market Funds," and a sidebar on the ICI'​s recent regulatory reform white paper entitled, "ICI Strikes Back, Defends Money Funds."

MFI'​s lead story says, "While the odds for a complete overhaul of the structure of money market mutual funds appear to be diminishing, the industry still finds itself in the midst of unprecedented change. Funds advisors are being buffeted by liquidations, mergers, ultra-​low yields, personnel cutbacks, increased scrutiny, and a still dangerous credit environment. At least nobody is calling money funds boring anymore." It adds, "Fortunately too for funds, the likelihood of major surgery appears to be waning as regulators and legislators realize the importance of money market funds to the broader economy."

On the global money fund marketplace, MFI says, "Recent statistics and reports show that U.​S.-​style money market mutual funds are faring better than their variable NAV and less diversified counterparts worldwide. The U.​S. marketplace, which dominates the global money fund totals, continued to gain assets and market share over the past 18 months.... The '​offshore' money market mutual fund centers of Dublin and Luxembourg, which have adopted American-​style funds and '​AAA' ratings have seen their markets grow dramatically over the past decade, but they'​ve been threatened by contagion from their less-​disciplined Europan '​money fund' counterparts." MFI includes a ranking of the largest offshore managers from the new Money Fund Intelligence International.

Finally, look for excerpts from our interview with USAA Money Market Fund portfolio manager Anthony Era in the coming days, or see the current issue for the full profile. Money Fund Intelligence includes news, statistics, indexes, and information on over 1,​300 money market mutual funds, as well as our benchmark Crane Indexes. Annual subscriptions to MFI are $​500 and include online access to archived issues and additional web resources. Bulk discounts are available. Write info@​cranedata.​us or call 1-​508-​439-​4419 to subscribe, for more details, or to request a sample issue.

​

A number of ratings actions have been taken over the past several days, including Moody'​s awarding its Aaa ratings to PIMCO Treasury and PIMCO Government Money Market Fund, Moody'​s assigning Aaa/​MR1 ratings to BNP Paribas InstiCash USD and CHF, Moody'​s withdrawing ratings on two RidgeWorth bond funds, and S&​P changing its principal stability fund ratings on the New MexiGROW Local Government Investment Pool (​LGIP).

Moody'​s Vice President Martin Duffy says of the PIMCO ratings, "The Aaa ratings assigned to both portfolios reflect our favorable opinion of the credit quality of the fund'​s investments, PIMCO'​s approach to managing liquidity, and the weighted average maturity constraints of 60 days or less put in place by the adviser to limit the funds' exposure to interest rate risk. The ratings are further supported by our view that the fund advisor'​s operational procedures, systems and management controls are sound."

The press release explains, "Money Market Funds rated Aaa are judged to be of an investment quality similar to Aaa-​rated fixed income obligations, that is, they are judged to be of the best quality.... The PIMCO US Government Money Market Fund was launched on January 27, 2008, but the PIMCO Treasury Money Market Fund fund has not yet been formally launched."

Moody'​s also assigned Aaa/​MR1 ratings to the $​2.​5 billion "​offshore" BNP Paribas InstiCash USD and the CHF (​Swiss franc) 240 million BNP Paribas InstiCash CHF, two Luxembourg variable net asset value money market funds. The funds of BNP Paribas InstiCash are domiciled in Luxembourg and qualify as a Societe d'​Investissement a Capital Variable, or SICAV. The umbrella fund has Euro, USD, GBP and CHF sub-​funds.

Standard & Poor'​s Ratings Services said Friday "​that it lowered its principal stability fund rating on the New MexiGROW Local Government Investment Pool (​LGIP) to '​Dm' from '​AAAm' and then raised the rating back to '​AAAm'. These rating actions are based on the New Mexico State Treasurer'​s Office'​s recent decision to reallocate on a pro rata basis the LGIP'​s initial exposure to the Reserve Primary Fund. S&​P also rated Neuberger Berman Government Money Fund '​AAAm' and Moody'​s withdrew ratings on two RidgeWorth ultra-​short bond funds.

​

The Municipal Securities Rulemaking Board (​MRSB) has issued a letter to Treasury Secretary Tim Geithner asking the U.​S. Treasury to extend the temporary guarantee program for money market mutual funds. In a press release, the MRSB says, "As you are aware, Treasury'​s Temporary Guarantee Program for Money Market Funds will terminate on April 30, 2009, unless the Department of the Treasury elects to extend it. In the tax exempt marketplace, the Guarantee Program has been a tremendous success and it has preserved the demand for variable rate demand obligations (​VRDOs), of which tax-​exempt money market funds are the principal investors. The Municipal Securities Rulemaking Board applauds Treasury for this bold and creative initiative."

The letter, from MSRB Chair Ronald Stack, continues, "​As you may know, the MSRB was created by Congress in 1975 with a mission to protect investors and promote a fair and efficient municipal securities market. To that end, we urge Treasury to extend the Guarantee Program to September 18, 2009, the outside expiration date of the Program. We also encourage Treasury to announce the extension significantly in advance of the Guarantee Program'​s current termination date of April 30, 2009, just as former Secretary Paulson elected on November 24, 2008 to extend the Program'​s initial three-​month term, even though it did not expire until January. Advance notice of an extension will reduce what would otherwise be unnecessary volatility in the tax-​exempt marketplace as the April 30 termination date approaches."

"Clearly, the Program has been of enormous importance to money market funds and their customers, who are overwhelmingly individual investors. Less obviously, the Guarantee Program has been of major importance to banks. The tax-​exempt VRDOs owned by money market funds typically may be tendered for purchase at par on 7 days' notice. If those VRDOs cannot be remarketed to other investors, banks are obligated to purchase them, under the terms of letters of credit or standby bond purchase agreements. If individual investors withdraw their investments from money market funds in large numbers, the money market funds will exercise their tender rights. Since they are the principal investors in VRDOs, it will not be possible to remarket most of those VRDOs to other investors, and banks will be required to honor their purchase obligations. The effect on those banks would be significant and some banks might be unable to meet their purchase obligations," says the MSRB.

They continue, "​While the states and local governments who issued the VRDOs are obligated to reimburse the banks, they typically are not required to do so immediately, but instead may '​term out' their reimbursement obligations over a period of time. Such term outs, however, tend to require full repayment of the issuer'​s outstanding debt over a significantly shorter period than anticipated in connection with the original debt offering, thereby potentially resulting in serious debt management consequences to issuers. The MSRB believes that, to avoid this result, this successful Guarantee Program should be extended soon."

Finally, the MRSB says, "​We are available to answer any questions you might have about the municipal market and the necessity for the extension of the Guarantee Program. We also stand ready to assist Treasury in developing other programs that could aid state and local issuers, and the broader municipal market, during this prolonged crisis."

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Calamos Investments has filed to close and liquidate its Calamos Government Money Market Fund, ending the company'​s brief foray into the institutional money market fund arena. The fund, launched in May 2007, was never able to break above the critical $​1 billion in assets; Calamos ranked 78th among the 90 money fund managers tracked by our Money Fund Intelligence XLS with $​651 million in assets. (​See our November 2008 Money Fund Intelligence profile, "Calamos Veteran Frank Rachwalski Talks Funds.")

On page 9 of a recently updated Calamos Government Money Market Fund prospectus, under "Closing and Liquidation of the Fund," it says, "`​On February 20, 2009, the Board of Trustees approved the liquidation of the Fund. The Fund will close to new investors and additional purchases by existing investors at the close of business on May 1, 2009. The Fund will be liquidated as of the close of business on or about May 15, 2009." Investors will be able to exchange into other Calamos funds without sales charges. The company says, "​You may also redeem your shares at any time before the liquidation. If you do not exchange or redeem your Fund shares prior to the liquidation date, those shares will be liquidated, and liquidation proceeds will be paid to you."

The filing continues, "If you wish to exchange your Fund shares for shares of another money market fund, beginning on May 1, 2009, you may exchange them for shares of the Fidelity Institutional Money Market Prime Money Market Portfolio. Class A, Class B, Class C and Class I shares of the Fund may be exchanged for Class III, Class IV, Class IV and Class I Fidelity Prime Money Market Fund Shares, respectively. Fidelity Prime Money Market Fund Shares are offered by a separate prospectus and are not offered by the Trust. If you should redeem (​and not exchange) your Fidelity Prime Money Market Fund Shares, you would pay any applicable contingent deferred sales charge. For a prospectus and more complete information on Fidelity Prime Money Market Fund Shares, including management fees and expenses, please call 877.​297.​2952. Please read the prospectus relating to Fidelity Prime Money Market Fund Shares carefully."

Calamos becomes the fourth manager of money market mutual funds to declare a retreat from the money fund space over the past year. Munder, Credit Suisse and, most recently, Janus (​institutional funds only) have all filed to liquidate their money market funds. See previous `​Crane Data News articles: 9/​3/​08 "Munder Capital Mgmt to Liquidate Funds, Exit Money Market Business," 12/​18/​08 "Credit Suisse Liquidating Money Funds," and 1/​22/​09 "Janus Plans to Exit Institutional Money Market Mutual Fund Business."

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On Wednesday, the Investment Company Institute released a white paper, "Financial Services Regulatory Reform: Discussion and Recommendations," with "recommendations on how to achieve meaningful reform of the current system for regulating the U.​S. financial services industry, with particular emphasis on the functioning of the capital markets and the regulation of investment companies." They propose a new "Capital Markets Regulator" to "encompass the combined functions of the Securities and Exchange Commission and the Commodity Futures Trading Commission, thus creating a single independent federal regulator responsible for oversight of U.​S. capital markets, market participants, and all financial investment products."

The paper says, "​Congress should affirm the role of the Capital Markets Regulator as the regulatory standard setter for all registered investment companies. The Capital Markets Regulator'​s jurisdiction should include money market funds. ICI further envisions the Capital Markets Regulator as the first line of defense with respect to risks across the capital markets. The new agency should be granted explicit authority to regulate in certain areas where there are currently gaps in regulation -- in particular, with regard to hedge funds, derivatives, and municipal securities -- and explicit authority to harmonize the legal standards applicable to investment advisers and broker-​dealers."

A footnote explains, "ICI has formed a Money Market Working Group that is developing recommendations to improve the functioning of the money market and the operation and regulation of funds investing in that market. The group will identify needed improvements in market and industry practices; regulatory reforms, including improvements to SEC rules governing money market funds; and possibly legislative proposals. The Working Group expects to report its recommendations in the first quarter of 2009."

ICI'​s report says, "​How these issues are resolved will have a very real impact on registered investment companies, as both issuers and investors in the capital markets. Money market funds, for example, are comprehensively regulated under the Investment Company Act of 1940 and subject to special requirements that limit the fund'​s exposure to credit risk and market risk. These strong regulatory protections, administered by the SEC for nearly three decades, have made money market funds an effective cash management tool for retail and institutional investors and an important source of short-​term financing for American business and municipalities.

It continues, Given the size of this industry segment and its important role in our nation'​s money markets, money market funds are likely to be on the radar screen of the Systemic Risk Regulator as it monitors the financial markets. The type of information about money market funds that the Systemic Risk Regulator may need to perform this function, and how the regulator will obtain that information, are just two of the specific issues that will need to be carefully considered. As a threshold matter, however, ICI firmly believes that regulation and oversight of money market funds must be the province of the Capital Markets Regulator." (​See also the AEI'​s "Regulation Without Reason: The Group of Thirty Report.")

​

After disclosing that banks lost $​26.​2 billion in fourth quarter of 2008 and the deposit insurance fund (​DIF) declined by $​16 billion to $​19 billion, the Federal Deposit Insurance Corp. last week "took action to ensure the continued strength of the [​deposit] insurance fund by imposing a special assessment on insured institutions of 20 basis points, implementing changes to the risk-​based assessment system, and setting rates beginning the second quarter of 2009." The FDIC'​s release says, "The amended restoration plan was accompanied by a final rule that sets assessment rates and makes adjustments that improve how the assessment system differentiates for risk. Currently, most banks ... pay anywhere from 12 cents per $​100 of deposits to 14 cents per $​100 for insurance. Under the final rule, banks in this [​best risk] category will pay initial base rates ranging from 12 cents per $​100 to 16 cents."

In their latest weekly "Short-​Term Fixed Income," J.​P. Morgan Securities analysts Alex Roever and Cie-​Jai Brown, in a section entitled, "Assessing the FDIC'​s '​gift'," comment on the charges. "Although that doesn'​t sound like much for deposit insurance, a couple of basis points on trillions of dollars adds up fast. In addition, there are other insurance-​related fees that banks must bear such as the surcharge for non-​interest bearing accounts, now fully covered under the TLGP, without regard to deposit size. Although amounts will vary by institution, higher-​quality banks will likely pay insurance premiums on interest-​bearing deposits of 13-​18bp, and on non-​interest bearing accounts of 23-​28bp. This does not include the proposed special assessments," they say.

Roever and Brown continue, "​As they are not charitable institutions, banks are passing some or all of these fees back to their customers. As a result, a depositor with a non-​interest-​bearing bank account actually '​earns' a negative interest rate, meaning they get back less than they put in. This dynamic goes a long way toward explaining why, in spite of expanded insurance coverage, US commercial bank deposits have only grown about 7% since the time of the Lehman Brothers bankruptcy, in spite of what are likely the most volatile credit and equity markets in recorded history. At the same time, alternatives like money market funds have seen, and continue to see, significant growth in assets under management. From the start of this year through February 18 (​the most recent Fed data on deposits) AuM at taxable money funds grew almost $​64bn, while deposits increased only about $​36bn over the same period."

They conclude, "​German speakers among you may recall the German word for '​gift' translates into the English word for '​poison'. Rising insurance assessments, to a degree, are poisoning the competitive position of US bank and savings institution deposits. The high cost of deposit insurance is pushing cash in the direction of market based alternatives like money market funds, repurchase agreements, and other money market instruments. Even with net yields on most money funds well inside of one percent (​and falling), funds continue to offer better returns than some common forms of bank deposits. Coming into 2009 we expected money funds to suffer competitively versus insured bank deposits. However, the high-​and-​rising cost of deposit insurance seems to be shifting the competitive landscape in favor of funds and other market-​based alternatives."

​

The Bank for International Settlements (​BIS), an "international organisation which fosters international monetary and financial cooperation and serves as a bank for central banks," writes in its March 2009 BIS Quarterly Review about "US dollar money market funds and non-​US banks. The article, which was written by Naohiko Baba, Robert McCauley, and Srichander Ramaswamy, summarizes, "The Lehman Brothers failure stressed global interbank and foreign exchange markets because it led to a run on money market funds, the largest suppliers of dollar funding to non-​US banks. Policy stopped the run and replaced private with public funding."

The BIS Quarterly says, "​That a loss of confidence in dollar money market funds amplified the financial instability arising from the Lehman Brothers failure in September 2008 is well appreciated. What is less well understood, however, is why the run on these funds coincided with the deterioration in global interbank markets. Similarly unclear is the relationship between policies to stabilise US money markets and those to distribute dollars through cooperating central banks. How great was the need of non-​US banks for dollars and how much did they rely on US dollar money market funds How did a safe haven become the critical link between Lehman'​s failure and the seizing-​up of interbank markets? Was the run on money market funds indiscriminate? How did policies to calm the US money market fit with policies to provide dollars to non-​US banks?"

The article continues, "In sum, the run on US dollar money market funds after the Lehman failure stressed global interbank markets because the funds bulked so large as suppliers of US dollars to non-​US banks. Public policies stopped the run and replaced the reduced private supply of dollars with public funding." The report "reviews European banks' need for US dollars" and "quantifies the role of dollar money market funds as dollar providers." It reviews "how money funds played this role up to August 2008 and then how the Lehman failure undid it" and "reviews policies that responded to the run and associated fund flows."

The data-​rich study contains a table of the 15 largest prime money funds and their holdings of European bank debt, a number of tables on asset growth and flows (​many using Crane Data numbers), a table of "​Asset growth of the largest money market fund managers", and "​US institutional money market fund assets and maturity." But it also says, "`​The future of the money market fund industry is not clear. Those in the industry tend to take the view that too much should not be made of one fund that tried to shoot the moon. According to them, events have shown that money market funds can survive much stress."

Look for more on this study and on the future of money market funds in our pending March issue of Money Fund Intelligence. (​See too, The Austalian/​Dow Jones article on the topic, "​Treat money market funds like banks".)

Money Market News Archive