News Archives: July, 2009
The Investment Company Institute, the mutual fund industry's trade group and primary statistician, released its weekly "Money Market Mutual Fund Assets" and monthly "Trends in Mutual Fund Investing: June 2009" late Thursday. Both showed a continued slide in money market mutual fund assets. In June, money fund assets fell by $115.6 billion, or 3.1%, to $3.653 trillion, and in the week ended July 29 money fund assets fell by an additional $21.98 billion to $3.634 trillion, their lowest level since mid-November 2008.
ICI also released its "Month-End Portfolio Holdings of Taxable Money Market Funds," which showed dollar amount declines in practically every holding except certificates of deposits, corporate notes and Treasury bills. As of June 30, U.S. Government Agency Securities remain the largest holding in taxable money funds, representing 23.4%, or $749.4 billion, followed by CDs (19.9%, or $635.7 billion), Commercial Paper (16.6%, or $532.3 billion), Treasury Bills and Securities (15.6%, or $499.1 billion) and Repurchase Agreements (15.4%, or $492.7 billion). `Repos, formerly the second largest segment, showed the only sharp drop in the month, down $112.4 billion.
Money funds' asset declines began early this year, after reaching a record $3.922 trillion on Jan. 14, 2009, and they've continued in earnest since mid-March 2009. `Month-to-date in July, ICI's weekly asset statistics show a decline of $30 billion and year-to-date this series shows assets down by $196 billion, or 5.1%. Money market mutual fund assets represented 36.5% of the total $10.0 trillion in overall mutual fund assets as of June 30 according to the ICI.
Institutional money fund assets now account for $2.437 trillion, over two-thirds, or 67%, of total money fund assets, their highest level ever. YTD, institutional assets have declined by $49 billion, or 2%, while retail money fund assets have declined by $158 billion, or 11.6%. "Prime" (or "Taxable non-government") money fund assets remain the dominant segment with $1.974 trillion of the $3.634 trillion (54.3%), Government (including Treasury) money funds total $1.216 trillion (33.5%), and Tax Exempt money funds total $443 billion (12.2%).
Earlier this week, Crane Data sent out a survey to subscribers of our flagship monthly newsletter, Money Fund Intelligence, to gauge the money market mutual fund and cash investor community's responses to the SEC's recent "Money Market Mutual Fund Reform" proposals. The initial responses indicate that the overall proposals are being rated favorably, but the SEC's shortening of WAM (maturity) and removal of illiquid securities provisions are causing the most concerns among money market mutual funds. Our survey to date is also showing that ultra-low interest rates are now seen as a more pressing issue than regulatory changes.
Below, we show the full survey. We invite Crane Data website visitors to add their feedback to our subscribers'. Look for a more detailed discussion and results following their publication in Money Fund Intelligence next Friday.
The "Money Fund Intelligence Subscriber Survey" introduction says: "Dear MFI Subscriber: I hope you're well and hope you're having a nice summer. I wanted to take a moment to solicit your opinions on the SEC's recently issued "Money Market Fund Reform" proposals. I'd appreciate brief answers to the questions below. Responses will be kept "blind" and only released in the aggregate. We'll include the results in the upcoming August issue of Money Fund Intelligence. Thanks again for your input and support, and have a great week! Sincerely, Pete Crane"
MONEY FUND INTELLIGENCE SUBSCRIBER SURVEY July 2009
1. Overall, on a scale of 1 to 10 with 10 being the highest, how do you rate the SEC's MMF Reform proposals? ________.
2. Which of the SEC's Proposed MMF Reform Amendments do you think would do the most good? a. Moving WAM from 90 to 60 days b. Removing Second Tier Securities c. Adding Liquidity Mandates d. Removing Illiquid Securities e. Disclosing monthly portfolio holdings f. Other ___________.
3. Which of the SEC's Proposed MMF Reform Amendments do you think would do the most harm? a. Moving WAM from 90 to 60 days b. Removing Second Tier Securities c. Adding Liquidity Mandates d. Removing Illiquid Securities e. Disclosing monthly portfolio holdings f. Other ___________.
4. What are the most important issues facing money market mutual funds in the coming months? (rank highest to lowest with 1 being the highest, 2 being next, etc.) a. Regulatory Changes ___ b. Consolidation ___ c. Ultra-Low Interest Rates ___ d. Rising Rates ___ e. Competition from Banks or New Products ___ f. Other ___ ___________.
5. On a scale of 1 to 10 with 10 being the highest, rate the attractiveness of a floating NAV. _______
6. If you could add or remove a change, what would it be? ____________________________________.
Thanks for your input! (Please e-mail responses to pete@cranedata.com.)
"Money Funds Are Ripe for 'Radical Surgery'" writes Bloomberg columnist Jane Bryant Quinn in a commentary piece today. She mysteriously tries to resurrect the Group of 30 proposal (see Crane Data's January 19 News "Group of Thirty Recommendation Poses Threat to Money Market Funds"), saying, "I'm among the last people standing who think that Paul Volcker is right about money-market mutual funds. They pose a systemic risk to the financial system and need a radical fix."
She continues, That's not going to happen, at least not now. The Securities and Exchange Commission proposes to tighten up the regulations governing money funds but only by a little bit. The new rules won't force much of a change in the way that money funds operate now."
The Bloomberg article says about bank deposits vs. money funds, "There's a difference between the two: Banks have to hold reserves against demand deposits and pay for Federal Deposit Insurance Corp. insurance. Money funds offer similar transaction accounts without being burdened by these costs. That's why they usually offer higher interest rates than banks."
It adds, "In most cases, money-fund sponsors have come to the rescue of their funds if any question arose about the $1 value of their shares. Peter Crane, president and founder of Crane Data LLC in Westboro, Massachusetts, says as many as one-third of the funds will have needed support by the time this global financial squeeze abates."
"But you can't be sure that sponsors will always be willing or able to bail out their shareholders, says Jack Winters of Hingham, Massachusetts." He says, "Dealers supported auction-rate securities for 25 years until their financial situation precluded it."
The Bloomberg piece adds, "Retail money funds, conservatively invested, aren't as vulnerable to runs as institutional funds and may be safe in their present form. The danger lies with the hot-money institutions that can pull billions of dollars out of a fund in a millisecond. Of course, big investors could also start a run on money funds that fluctuate too much in price. But they would be less likely to sell if they'd lose money on the trade, Winters says."
Finally, Quinn's article says, "The SEC didn't propose a floating NAV. It merely asked for comments on the idea." It quotes Crane, "It's off the table. The crisis is over. The need for radical surgery has lost its impetus." But the article adds, "That is, until the next time. Will money funds be the only institutions 'too big to fail' to escape the costs?"
On June 2, we wrote about the "CFTC Soliciting Public Comment on Changes to Permitted Investments," which described the Commodity Futures Trading Commission's notice "seeking public comment on possible changes to its regulations regarding the investment of customer funds" including removing money market mutual funds as eligible investments. The comment period has now ended, and the responses appear overwhelmingly in favor of keeping money market mutual funds as permitted investment options.
The comments posted on the CFTC's website include responses from the following: Crane Data, Federated Investors, The Dreyfus Corporation, Futures Industry Association, Investment Company Institute, MF Global Inc., Newedge USA LLC, FCStone Group Inc., CME Group Inc., National Futures Association, and Treasury Strategies Inc..
The ICI wrote, "The Investment Company Institute appreciates the opportunity to comment on the CFTC's advance notice or proposed rulemaking on possible changes to its regulations regarding the investment of customer funds segregated pursuant to Section 4d of the Commodity Exchange Act and funds held in an account subject to Regulation 30.7. In response to the market events of September 2008, the CFTC is reviewing 'permitted investments,' including the use of money market funds, under CFTC regulations. We strongly believe that money market funds continue to be an investment 'consistent with the objectives of preserving principal and maintaining liquidity' and, therefore, should remain a permitted investment under these regulations."
Federated's letter said, "Money market funds merit continued inclusion as 'permitted investments' because they are subject to a comprehensive regulatory scheme under the Investment Company Act of 1940, SEC Rule 2a-7 and CFTC Regulation 1.25, which collectively provides liquidity and safety to customer money.... The Reserve Primary Fund was an isolated incident resulting from a unique set of circumstances and should not guide the CFTC's policies regarding the inclusion of money market funds as 'permitted investments' under Regulation 1.25."
Finally, Crane Data's Peter Crane wrote the CFTC, "I believe the record shows that money market mutual funds continue to be an investment 'consistent with the objectives of preserving principal and maintaining liquidity' and that they should remain allowable investments.... Every single heretofore conservative investment class, with the possible exception of Treasury securities, experienced cases of losses and illiquidity at one point or another during the 'Great Subprime Liquidity Crisis'. But money market mutual funds, which represent a much larger market, and target, than any other eligible investment category ... experienced just a single case of loss ... and just a handful of liquidity issues. While Treasury securities provided safety, investors experienced substantial losses of interest income."
Money fund industry veteran and expert Jack Winters is the latest to add his two cents to the SEC's recently-proposed "Money Market Fund Reforms". Though Winters comments are radical and likely "off-the-reservation" as far as the ICI and mutual fund industry are concerned, he is the most serious commenter to date and certainly the most experienced with money market funds.
Winters' letter, dated July 23, says, "I have been involved in the money fund industry since 1976 on the buy side (Federated, Lehman, Bear Stearns, Fidelity, Credit Suisse), the sell side (Lehman), as a consultant (iMoneyNet), and now as an unaffiliated observer. With my experience and the fact that I am not affiliated with any firm, I believe that I can offer informed and objective comments on the challenges facing the industry. I will first offer general comments about money fund risk and then address specific topics on which the SEC has sought comment."
He continues, "My comments are based upon the following facts and assumptions: 1. FACT: A credit incident with one money fund led to a classic liquidity run on virtually every money fund which led to systemic failure as the funds were unable to sell securities in sufficient amounts to meet redemption orders. 2. FACT: The money fund industry was bailed out by the U.S. Treasury and the Federal Reserve. 3. ASSUMPTION: The U.S. Treasury desires to decommission its Temporary Guaranty Program for Money Market Funds and allow the industry to resume operations independent of government assistance. 4. ASSUMPTION: The SEC, U.S. Treasury, Federal Reserve, and Obama Administration do not want to be in a position to have to bail out this industry again."
Winters argues in his "Summary Comment: The SEC's recently proposed regulatory changes are a step in the right direction but will not materially reduce the systemic risk that is embedded within money market funds." He says, "More substantial changes will be necessary to avoid future runs and bailouts."
The comment letter explains, "The SEC's proposal document released on June 30, 2009 is extremely thoughtful and well written. In comparison with the recommendations made by the money fund industry itself (ICI Money Market Working Group - March 17, 2009), it is a bit more restrictive. But let us not forget the near-death experience of September 2008 in which the industry suffered a classic 'run on the bank' as a result of The Reserve Primary Fund's credit loss and subsequent liquidity squeeze that quickly infected virtually every money fund. Fund operators could not meet panicky redemption requests and securities could not be sold in the marketplace. Industry assets might still be frozen today if the Treasury had not guaranteed all money funds and if the Fed had not provided a number of liquidity sources."
Winters theorizes, "In all honesty, industry participants must acknowledge that every prime money fund effectively broke the buck during that period in September when there were no bids for AAA commercial paper. Within the context of this bailout, the SEC Commissioners and the industry should recognize that substantial regulatory changes need to be made before we can believe that systemic risk is materially reduced. Without those changes, it is likely that the Fed and U.S. Treasury will be called upon to bail out the industry again." The letter continues on to lay out possible options and comment on various aspects of the SEC proposal.
Federated Investors, the third largest manager of money market mutual funds with almost $300 billion (according to our monthly Money Fund Intelligence XLS), reported quarterly earnings last night and hosted a conference call this morning. Federated's earnings, quarterly discussion and Q&A almost always offer a unique look into a number of issues impacting the money market industry as a whole. The company's Q2 money fund numbers reflect a tempered decline in overall money fund assets, a still modest impact from fee waivers due to ultra-low yields, and continued longer-term gains in market share by Federated in the money fund space.
On the conference call Q&A, CEO Chris Donahue (who also appeared on CNBC this a.m.) said, "I don't think you're going to see any serious changes or harm to money funds." He dismissed the possibility of capital requirements and a floating rate NAV, saying, "I don't think it's all that real.... You'll also note that there are no proposals for capital on money market funds." He pointed out that a floating NAV was mentioned by the SEC "not in terms of rules, but questions," and added, "From our point of view, a changing NAV is very bad for money funds. The SEC, we don't believe, is going to a floating rate asset or amortized cost. We think they're both under control."
The company's press release says, "Money market assets in both funds and separate accounts were $346.4 billion at June 30, 2009, up $75.3 billion or 28 percent from $271.1 billion at June 30, 2008 and down $13.7 billion or 4 percent from $360.1 billion at March 31, 2009. Money market mutual fund assets were $312.8 billion at June 30, 2009, up $72.2 billion or 30 percent from $240.6 billion at June 30, 2008 and down $16.0 billion or 5 percent from $328.8 billion at March 31, 2009."
Crane Data shows money fund assets as a whole declining by 6.0% in Q2'09 and increasing by 8.3% over the past year. Federated's market share of domestic U.S. money fund assets (tracked by our MFI XLS) was 8.6% in Q22009, down fractionally from 8.7% in Q1 but up sharply from 7.1% a year ago.
Federated explains, "For Q2 2009, revenue was $306.9 million compared to $310.3 million for the same quarter last year. The decrease in revenue primarily reflects decreases in revenue of $41.2 million from lower average equity managed assets ... and $17.0 million in fee waivers related to certain money market funds in order to maintain positive or zero net yields. These decreases in revenue were partially offset by increases of $43.5 million from higher average money market managed assets.... The aforementioned fee waivers were offset by a related reduction in marketing and distribution expenses of $11.4 million such that the net impact on operating income was a decrease of $5.6 million."
A disclaimer states, "Fee waivers to produce positive or zero net yields may increase and such increases could be significant. The amount of these waivers will be determined by a variety of factors including available yields on instruments held by the money market funds, changes in assets within money market funds, actions by the Federal Reserve and the U.S. Department of the Treasury, changes in the mix of money market customer assets, changes in expenses of the money market funds and the willingness of the fund adviser to continue these waivers." Look for more on waivers in coming days. (The Q&A on the conference call contained almost a dozen questions on this topic.)
Finally, the release says, "For Q2 2009, Federated derived 69 percent of its revenue from money market assets, 20 percent from equity assets and 11 percent from fixed-income assets." Look for more coverage once we transcribe this morning's conference call. (You can access the replay via the "About Us" section of http://www.federatedinvestors.com.)
This week, Crane Data unveiled an expansion of its daily money market mutual fund information collection, increasing the number of funds tracked by our Money Fund Intelligence Daily from approximately 550 to 940 funds. Since its launch over a year ago, MFI Daily has been publishing 1-day, 7-day, and 30-day yields, assets, average maturities and daily dividend factors on the largest money funds. Now our coverage and benchmark Crane Money Fund Indexes are more comprehensive than ever.
Though the monitoring of daily aggregate and individual asset flows has waned somewhat in popularity as the threat of a run has receded, yield watching has again become a new popular pastime. Only this time the question is how low can yields go? Demand from institutional investors, money funds, regulators and portals has driven our decision to expand our coverage.
Money fund yields continue to grind down to record lows. Our Crane 100 Money Fund Index is now 0.17%, down from 0.23% at the end of June, and down from 2.20% a year ago and 4.97% two years ago. Our other indexes are dismally low too. The Crane Money Fund Average is 0.11%. (Yields are as of July 21 and are all net, 7-day annualized.) The Crane Institutional Money Fund Index is 0.16%, while the Crane Retail Money Fund Index is 0.05%. Our MFI Daily Crane Tax Exempt Money Fund Index is yielding 0.15%.
Among sub-categories, the Crane Treasury Institutional Index is 0.03%, the Crane Government Institutional Index is 0.10%, and the Crane Prime Institutional Index is 0.26%. The Crane Treasury Retail Index is 0.01%, the Crane Government Retail Index is 0.02%, and the Crane Prime Retail Index is 0.08%. (Our daily Crane 100 history may be seen on Bloomberg; enter "ALLX CRNI" to see the listings.)
Our MFI Daily also include commentary on daily and weekly yield and asset trends along with delivery (at 9 a.m.) of our updated website News and Link of the Day features. We also provide custom versions and will soon be adding late-night early delivery options. Let us know if you'd like to see a sample issue or if you'd like to see any additional funds or features added to our daily. Finally, look for Daily data to be added to our Money Fund Wisdom database query system later in 2009.
Auction-rate securities, a small sector of the securities market that proved to be a poor money fund substitute when the market froze at the beginning of last year, returned to the news yesterday. TD Ameritrade announced a partial ARS buyback (see press release and FAQ), and the SEC issued charges against broker Morgan Keegan.
Yesterday's Journal, in an article entitled, "TD Ameritrade to Return Money," said, "Auction-rate securities, short-term debt instruments whose prices reset in periodic auctions, caused billions of dollars in losses for investors after the $330 billion market collapsed in early 2008."
TDA said in its release, "TD Ameritrade will offer to purchase, at par, eligible auction rate securities (ARS) that were purchased through the firm by certain retail investors on or before Feb. 13, 2008, provided they were not transferred out of the firm before Jan. 24, 2006, resolving pending investigations into its sale of the securities."
Fred Tomczyk, president and chief executive officer, added, "Given our financial strength and the ongoing illiquidity in the auction rate securities market, initiating a buy-back program of this nature is the right thing to do for our clients. While our role in the market for these securities was significantly different from that of other financial institutions that have previously announced similar programs, we believe this is the best way for us to help clients who have been unable to find liquidity in the current market environment."
Also, yesterday's SEC release on Morgan Keegan says, "The Securities and Exchange Commission today charged Tennessee-based broker-dealer Morgan Keegan & Company, Inc. for misleading thousands of investors about the liquidity risks associated with auction rate securities (ARS), and the agency is seeking a court order requiring Morgan Keegan to repurchase the illiquid ARS from its customers. The SEC alleges that Morgan Keegan misrepresented to customers that ARS were safe, highly liquid investments that were comparable to money market funds. Morgan Keegan sold approximately $925 million of ARS to its customers ... but failed to inform its customers about increased liquidity risks for ARS even after the firm decided to stop supporting the ARS market in February 2008."
"Morgan Keegan was clearly aware that the ARS market was deteriorating, but it went so far as to actually accelerate its ARS sales even after other firms' ARS auctions began to fail," said Robert Khuzami, Director of the SEC's Division of Enforcement. "As we've done in our enforcement actions against other firms, the SEC is firmly committed to restoring liquidity to Morgan Keegan customers who purchased ARS."
For more on ARS, see Crane Data's Aug. 9, 2008 article "Auction Rate Securities Brokers Settle; Mess Approaching Resolution?" or search for "auction rate securities" on http://www.cranedata.com.
BlackRock, Inc. reported earnings for the second quarter of 2009 this morning and discussed some issues involving money market funds in its conference call. Chairman and Chief Executive Officer Laurence D. Fink, and Chief Financial Officer, Ann Marie Petach, hosted a teleconference call for investors and analysts. They told listeners, "Investors began to pull out of cash and seek higher returns," and "In the second quarter, clients began to ask 'Do we have too much cash?'" BlackRock's release is available here.
The company's press release says, "Liquidity flows industry-wide reflected low money market rates and investor willingness to redeploy to higher return assets. During the quarter, we had $7.5 billion of net outflows in cash management products, including $10.7 billion of outflows from U.S. investors and $3.2 billion of inflows from international investors. Notwithstanding fee waivers on selected money market funds to avoid negative yields, we had $11.4 billion of net outflows in government and tax-exempt funds, which were partially offset by $3.9 billion of net inflows in prime money market funds and other products. We expect volatility in market conditions to drive continued volatility in cash management flows. Our portfolios remain conservatively positioned to serve the liquidity needs of our clients."
BlackRock ranks fifth among money market mutual fund managers with $238.7 billion in assets as of June 30, 2009. The company, which recently had its Merrill Lynch Institutional funds change their names to FFI (Funds for Institutions), has seen money fund assets decline by $16.6 billion, or 6.5%, over the past 12 months. Overall money fund assets have increased by an average of 8.3% during this period. During the second quarter of 2009, BlackRock saw money fund asset decline by 3.3% vs. a decline of 6.0% for the overall money fund universe, according to our latest Money Fund Intelligence XLS.
The company cited "unusually large outflows in our retail platform" as a factor in the decline. During the Q&A, Petach said, "Our fee waivers have stayed very steady" in response to one question. Fink responded to a question, "We are in favor of more self regulation and more reserves. I think you're going to see consolidation as capital charges are required.... We need to make sure the money market fund industry is competitive with deposits." Fink added that he believes capital is required for funds to compete with FDIC insurance.
The teleconference and webcast replay will be available by 1:00 p.m. on Tuesday, July 21, 2009. To access, dial (800) 642-1687 and enter the Conference ID Number 18871845. To access the webcast, visit the Investor Relations section of www.blackrock.com.
Although we're mystified by their interest, the Sargent Shriver National Center on Poverty Law has posted the first serious comment letter in response to the SEC's recent Proposals on Money Market Mutual Fund Reform. (The other entries to date are all either nonsensical or overly sparse.)
The Shriver comment letter, written by Karen Harris of Chicago, Illinois, says, "We commend the SEC for initiating these proposed rules as an important first step in providing needed investor protections in financial products and services. As indicated in the proposed rules' commentary, there are more than 750 money market funds registered with the SEC which hold approximately $3.8 trillion in assets, including over one-fifth of U.S. households' cash balances. From 1998 to 2008 money market funds grew from approximately $1.4 trillion in assets to $3.8 trillion making money market funds' role in the capital market an extremely important one. For these reasons, the regulation of such funds is important for both fund investors and the nation's economy as a whole."
It continues, "Unfortunately, the recent economic crisis has demonstrated that the regulatory oversight needed to ensure such funds' financial stability and, thereby, investors' and the economy's stability, was insufficient. The results of such lax regulatory oversight are apparent and the SEC's proposed regulations are a welcome attempt to place investor protections and financial stability above financial profit. Yet, although welcome, the proposed rules can be strengthened to provide even more investor protections and financial stability as discussed below."
The Center novel take on NRSROs says, "[R]ather than revise Rule 2a-7 pursuant to the Credit Reform Act the act itself must be revised and SEC regulation of NRSROs strengthened.... [T]he SEC should require NRSROs to disclose conflicts of interest, differentiate between structured and unstructured debt and more clearly state the risks of financial products. Additionally, we would recommend that the SEC consider legislation which would prohibit NRSROs from providing any other products or services, including advice, other than rating.... Finally, and perhaps most importantly, the SEC should prohibit a customer requesting a rating from paying the rating agency. Instead, the customer should pay the SEC, who would then allocate/auction the individual rating activity among the competing rating agencies. Rating agencies, in turn, should be paid in part in the securities they are rating and be required to hold such securities to maturity and not hedge them."
On "Second Tier" securities, the letter says, "As the commentary on the proposed revisions to Rule 2a-7 explain, second tier securities were not directly implicated in the recent strains on money market funds and the economy. Thus, prohibiting funds from investing in second tier securities seems unnecessary at the moment." On many other issues, the Center either has "no comment on this proposal" or agrees with the SEC's suggestions.
Harris' letter closes, "Once again, we commend the SEC on the proposed regulations as an important first step toward ensuring the safety, soundness and investor protection of the US money market system. Many of the regulation's proposals offer hope for increased financial stability and investor protections. With the suggested revisions suggested herein, the proposed regulations can be made even stronger. Thank you for the opportunity to provide comments on the SEC's proposed regulations and please feel free to contact me if you have any questions regarding these comments by the Shriver Center."
Crane Data has yet to post our response, but look for it soon. We're still digesting and seeking feedback and input from our money fund and money market investor readership. While we support many of the majority of the SEC's recommendations, or rather consider them relatively harmless, we fear the overall weight of the proposal could tilt the playing field towards consolidation and concentration. This situation might weaken the money fund industry and overall money markets, rather than strengthen them. So we urge caution and temperance in making any changes.
J.P. Morgan Securities' Alex Roever and Cie-Jai Brown comment this week in a weekly "Short-Term Fixed Income Research Note" on the SEC's recently published proposed amendments to Rule 2a-7 of the Investment Company Act. The pair say, "The proposed changes span a wide range of issues, which we will address in a series of reports." Their most recent report "`is the first in that series and addresses SEC proposals affecting money fund liquidity." Roever and Brown have not posted their comments publicly, but we've received their permission to reprint some of their piece below.
Roever and Brown write, "[T]he SEC is proposing a new three pronged framework for liquidity management that consists of 1) eliminating exposure to illiquid assets, 2) establishing periodic and general liquidity requirements, and 3) stress testing to identify further liquidity needs. The proposal is entirely within the construct of Rule 2a-7 and makes no presumption about the Federal Reserve, as lender of last resort, providing any form of liquidity support to funds like that provided via emergency programs like the AMLF or the MMIFF. In addition, even though the SEC is also proposing a rule that would make it easier for fund affiliates to buy distressed assets from funds, the availability of this kind of nonexplicit support appears to be excluded from this analysis."
They argue that the "SEC's proposed rules for liquidity management would not have been sufficient to address the redemption volume faced by the Reserve Primary Fund and that, "over 100 other stress[ed] funds managed to find external support that kept these funds from failing." They conclude, "We don't think in means the proposed rules are worthless. The presence of the rules should mitigate the risk of runs starting by giving comfort to shareholders that there are significant cash reserves in place to meet redemptions. Also, should a run start the presence of the new liquidity scheme wouldn't preclude the use of outside support, and the additional cash cushion could buy time for that support to be arranged."
"But the proposed rules are not ideal either. They probably won't prevent an extreme case like the Reserve. The new rules will be expensive to implement, and the costs will be born by fund sponsors, shareholders and borrowers that rely on the money markets for funding. Furthermore, while the future role of the Fed as a lender of last resort for MMMFs is uncertain, the value of a program like the AMLF as a source of liquidity should not be ignored. In doing so, the SEC is most likely setting its minimum liquidity thresholds higher than they need to be and thereby imposing greater costs than necessary on stakeholders," say the JPM Analysts.
Roever and Brown continue, "As it stands, the costs of implementing these proposed rules may lead some sponsors and shareholders to exit the money fund space. The loss of fund sponsors will lead to further concentration in an already very concentrated business, which means issuers of money market debt will have to rely on fewer lenders. History suggests investors that leave MMMFs in search of higher yields will migrate to less regulated alternatives that are not as well protected against credit and liquidity risks. Ultimately this may mean that tighter MMMF regulations don't eliminate systemic risk, but rather simply pushes it into another market."
"Finally, one area of potential concern for issuers of CP and other investments favored by prime funds is the impact the proposed rules may have on availability of funding. Clearly, rules that force a higher percentage of fund assets into shorter maturities necessarily mean there is less money available to fund longer term assets. But, also recall that the proposed rules state that no other investments can be made unless a fund is in compliance with the daily and weekly tests. This means events that lead to increased redemptions will potentially curb availability of longer-term funding at times when redemptions push liquid assets below threshold levels (e.g, tax days, quarter-ends, etc.) or during times of market stress. For issuers, the proposed rules likely mean both less credit availability in general and less credit availability when they most want it," they write.
Last week, we discussed the move of the portfolio management team from the old Lehman Brothers Asset Management to Dwight Asset Management. (See "Neuberger Retreats From Taxable Money Funds, Outsources to SSgA and see our "People News.") Dwight parent Old Mutual gave more details on the move this week, issuing a press release entitled, "Old Mutual Asset Management Facilitates Liftout of Cash Management Team to Dwight Asset Management."
The release says, "Old Mutual Asset Management has facilitated a liftout of Neuberger Berman Group's eight-person cash management team to Dwight Asset Management Company LLC (Dwight), an institutional fixed income manager and Old Mutual member firm. Led by industry veteran John C. Donohue, the cash management team will join Dwight in July and report to Frank Koster, Dwight's chief investment officer. Donohue has 17 years of money fund experience and has headed the team for close to a decade. He was responsible for cash management at Neuberger Berman, formerly Lehman Brothers Asset Management."
It continues, "Tom Turpin, Old Mutual Asset Management's President and CEO said, "This successful transaction demonstrates our commitment to investing for growth across our business. By seeking opportunities to deepen our pool of investment talent, we continue to enhance our ability to deliver institutional quality investment performance to clients."
David Thompson, Dwight's president and CEO, "explained the cash management team will enhance Dwight's focus on preserving wealth for 401(k) participants, currently managed via stable value portfolios." He says, "We believe stable value and cash management are complementary disciplines, and the expertise and experience represented by John Donohue's team should significantly benefit our clients."
Donohue comments, "We are excited to join Dwight Asset Management and the Old Mutual organization. Old Mutual's extensive global resources and Dwight's fixed income expertise create a formidable combination, and will enable us to address a wide range of institutional cash management needs."
Turpin adds, "John Donohue's cash management team is an excellent strategic fit for both Dwight and Old Mutual. The team has a proven ability to profitably grow their business and they will broaden the overall liquidity management capabilities of the global enterprise.... Old Mutual and its investment affiliates enjoy a strong reputation amongst U.S. and global institutional investors which, in the aggregate, are among the world's largest clients for cash management services."
This month's Money Fund Intelligence continued its series of money fund manager and fund profiles, interviewing Fifth Third Portfolio Manager John Hoeting, who gives his thoughts on the challenges faced by a mid-sized money fund complexes, investment strategies in the current environment, and reactions to the recent SEC proposals to modify money fund regulations.
Q: What has been the big challenge in managing your money fund? Hoeting says, "The challenge for me is selling our conservative high-quality story. It's also about differentiating ourselves versus bank products. As an investment advisor with a bank sponsor, probably my biggest competition is my own bank and deposit products.
Q: Would the new SEC proposals cause any issue with your current portfolio? He responds, "No. We do not buy second tier securities. On spread duration or WAM, three of our four funds are rated and the fourth one is managed as if it is rated. So the 60 day limit is already in place. We've been managing to the spread duration ever since it was introduced. Because we max out the non-putable floaters at the more conservative 397 days, spread duration will not become an issue. So, from a PM perspective I don't see any problems with the recommendations as stated."
He adds of the proposal, "It wasn't a whole lot different than anticipated. I'd like to hear more on the illiquid securities [ban]. With 144A or private placements, it's pretty clear-cut. But with 4(2) registered commercial paper, which has almost become the norm by many issuers to be liquid CP by advisers, this could become a bigger issue."
But regulation is still a huge challenge, he says. "What's coming down the pipe? What impact is that going to have? Is it going to result in wholesale consolidation? You put that with the zero interest rate market that we are in, and you could see a complete change in the industry. Can the players in the industry outlast the zero interest rate market on top of what's coming with the regulation? From a fee structure standpoint, it is going to get more intense. I would say that in the money market industry, a new mandate was created -- everyone wants high yield with no risk, not just with little risk."
To read the entire interview, see the July issue of Money Fund Intelligence or e-mail pete@cranedata.us for a copy.
The July issue of our Money Fund Intelligence newsletter features a discussion of one company's move to "bankerage," or FDIC-insured brokerage sweep accounts, in the article "Case Study in Cash: Janney's Brokerage Sweep." Below, we excerpt from our piece, which features an interview with Eric Edstrom, VP of Wealth Management at Janney Montgomery Scott LLC and Director of Banking Products and the firm's Janney Advantage Sweep Program.
MFI writes, "With the ultra-low rate environment and concerns over safety persisting, a number of brokerage firms have been pushing or expanding FDIC-insured sweep options. The 'bankerage' trend, which began in 1999 with Merrill Lynch's move toward banking, grew to about $400 billion then stalled. But recently it has gained new momentum. (Crane Data now estimates the segment at over $500 billion.)
We first asked Edstrom, "What does Janney use for its cash sweep and money market options?" He tells us, "Janney provides clients with several sweep investment options. We offer clients the Janney Advantage FDIC Insured Sweep as an option, plus a variety of Dreyfus Money Market Funds -- 3 taxable money market funds and 12 tax-free money market funds, including state-specific municipal sweep investment options."
Edstrom adds, "[M]any of our FCs have attracted new clients from the larger wirehouses and banks where the FDIC coverage is not as robust. The Insured Sweep offers significant advantages for clients -- it's fully liquid, has no market risk, is competitively priced, and features greater FDIC coverage than its peer group. Currently, Janney's program offers $2.5MM of FDIC coverage for individual and certain IRA accounts, while joint accounts are offered $5MM in FDIC coverage."
He says of their vendors, "In 2006 and into 2007, Janney interviewed and completed an extensive due diligence of several product providers. We selected Promontory Interfinancial Network. We were seeking a provider that had an expertise from relationship management to operational completeness."
Promontory, best known for its CDARS (certificate of deposit account registry service), introduced its Insured Network Deposits in April 2006. Spokesman Phil Battey says, "The service allows financial institutions to offer access to an FDIC-insured deposit sweep product -- one that can replace or complement traditional money market mutual funds as the primary settlement and cash vehicle in retail brokerage accounts."
Contact Pete to request a copy of the full article or to request our latest weekly Brokerage Sweep Intelligence, which tracks FDIC-insured money market "sweep" options and money funds offered by the largest brokerages.
Last Thursday, the ICI published a "Compendium of SEC Valuation Guidance, "an indexed and easily searchable compendium of the registered investment company valuation guidance issued by the SEC." The compendium, "SEC Valuation and Liquidity Guidance for Registered Investment Companies," is composed of two volumes. The first volume pertains to registered investment companies generally and the second volume deals with money market funds in particular." In addition to containing extensive accounting and valuation guidance, "SEC Valuation and Liquidity Guidance for Registered Investment Companies, Volume 2," a 329-page monster, contains the entire text of Rule 2a-7 of the Investment Company Act and its subsequent amendments, releases, staff guidance, and SEC enforcement actions on valuation.
The Volume 2 introduction states, "This publication is intended to provide a compendium of U.S. Securities and Exchange Commission (SEC) releases, staff letters, and enforcement actions related to the mutual fund valuation process. ICI published this document for use by legal and compliance professionals, service providers, and others involved in fund valuation practices. This publication is being distributed with the understanding that ICI does not render any legal, accounting, or other professional advice. Although ICI has made reasonable efforts to compile the SEC's guidance regarding fund valuation for the convenience and information of its members and others, ICI does not guarantee and is not responsible for the accuracy or completeness of this publication."
The sections of "SEC Valuation and Liquidity Guidance for Registered Investment Companies, Volume 2" includes: Rule 2a-7 (1983) (p. 1), Accounting Series Release No. 219 (1977) (p. 13), Proposal Regarding Valuation of Debt Instruments and Computation of Current Price Per Share by Certain Open-End Investment Companies (Money Market Funds) (1982) (p. 18), Adoption of Requirements Regarding Valuation of Debt Instruments and Computation of Current Price Per Share by Certain Open-End Investment Companies (Money Market Funds) (1893) (p. 33), Adoption of Requirements Regarding Acquisition and Valuation of Certain Portfolio Instruments by Registered Investment Companies (1986) (p. 51), Proposed Revisions to Rules Regulating Money Market Funds (1990) (p. 62), Adoption of Revisions to Rules Regulating Money Market Funds (1991) (p. 87), Proposed Revisions to Rules Regulating Money Market Funds (1993) (p. 117), Adoption of Revisions to Rules Regulating Money Market Funds (1996), (p. 169), Proposed Technical Revisions to the Rules and Forms Regulating Money Market Funds (1996) (p. 219), Adoption of Technical Revisions to the Rules and Forms Regulating Money Market Funds (1997) (p. 247), Proposal Regarding Treatment of Repurchase Agreements and Refunded Securities as an Acquisition of the Underlying Securities (1999) (p .283), Adoption of Requirements Regarding Treatment of Repurchase Agreements and Refunded Securities as an Acquisition of the Underlying Securities (2001) (p. 297), Excerpt from Proposal Regarding References to Ratings of Nationally Recognized Statistical Rating Organizations (2008) (p .309), Staff Guidance to ICI on Amortized Cost "Shadow Pricing" (2008) (p. 311), and SEC Enforcement Actions on Valuation.
Among the interesting historical tidbits, "Since 1980, the rule has standardized performance advertising by money market funds. Under the rule, money market funds, as defined in the rule, have been limited to quoting seven day yield quotations calculated in accordance with a prescribed formula. The Commission took this action because the lack of comparability of money market fund yield quotations could confuse and mislead investors, and because of the significant role which yield quotations were playing in promoting money market funds."
We applaud and thank the ICI for compiling these documents, many of which were previously only available in hardcopy. They should serve as an essential reference for money fund management, compliance, and accounting personnel.
The July 2009 issue of Crane Data's flagship Money Fund Intelligence newsletter features the articles: "SEC Proposes Money Market Fund Reforms," which discusses the likely changes in Rule 2a-7; "Q&A With Fifth Third Port Mgr John Hoeting," which interviews the manager of the 30th largest money fund complex; and "Case Study in Cash: Janney's Brokerage Sweep," which discusses FDIC-insured sweep accounts and includes quotes from Janney Montgomery Scott's Eric Edstrom. Look for excerpts from the latest issue, which went to subscribers last Wednesday, in the coming week on http://www.cranedata.com.
Our article on money funds reforms says, "The eagerly anticipated changes to money market mutual fund regulations arrived last week with the publication of the SEC's 'Money Market Fund Reforms' proposal. While many fund managers, money market participants, and investors will undoubtedly take issue with pieces of the Commission's work, we expect the overall reaction to be positive ... and accompanied by a huge sigh of relief. We give kudos to the SEC for their comprehensive and thoughtful document."
MFI continues, "We do have some issues, though, and will be posting our thoughts in the near future. We encourage readers to voice their opinions, and we will keep you updated on feedback via www.cranedata.com. Comments on the proposal must be received by Sept. 8, 2009, and should be e-mailed to rule-comments@sec.gov (include File Number S7-11-09) or posted via www.sec.gov/rules/proposed.shtml.
Every issue of Money Fund Intelligence features news, indexes, and performance information on over 1,300 money market mutual funds. Statistics include: assets, average maturity, expense ratio, 7-day yield, 30-day yield, 1-month return, 3-mo, YTD, 1-year, 3-yr, 5-yr, 10-yr and since inception returns. MFI also contains tables of the top-yielding and largest money funds, top-yielding bank deposits, brokerage sweep rates, and our benchmark Crane Money Fund Indexes.
Neuberger Berman, the former Lehman Brothers Asset Management, announced late yesterday that it will outsource the management of its taxable money market funds to SSgA. The release, "Neuberger Berman Selects State Street to Provide Taxable Money Market Funds to Its Clients", says, Neuberger Berman has chosen State Street Global Advisors (SSgA) "as a provider of taxable money market funds to Neuberger Berman fund shareholders and clients commencing next month."
Neuberger has seen its money fund assets decline precipitously, falling from 22nd to 38th in market share over the past year and a half. The former LBAM at one point (Feb. 2008) managed over $30 billion in domestic U.S. money market funds, but it has since shrunk to below $6 billion. (Totals include domestic money funds tracked by Crane Data's Money Fund Intelligence XLS.) The company lost over 42% of its assets, falling from $21.0 billion to $12.1 billion, during the September 2008 Lehman Brothers- and Reserve Primary Fund-induced market panic. Neuberger also recently had its taxable portfolio management team, led by John Donohue, depart to Dwight Asset Management (see our "People" news below and see also P&I's "Dwight gets Neuberger cash team in 'friendly' liftout").
NB's press release says, "The firm said it is focusing on its longstanding equity, fixed income and alternative investment strategies to best serve its clients goals and objectives over the long term. On or about Aug. 14, shareholders of Neuberger Berman taxable money market funds will acquire shares of State Street Institutional Trust funds with comparable investment objectives. Shareholders will receive letters informing them of the change."
"After extensive due diligence and analysis, we have decided to engage State Street as a provider of these products to our clients," said George Walker, chairman and CEO of Neuberger Berman. "With nearly $500 billion (as of March 31, 2009) in liquidity assets under management, we believe State Street Global Advisors, one of the largest global cash managers in the industry, has the necessary expertise and financial resources to fulfill this role, with a portfolio management style that follows a conservative, prudent approach to investing."
SSgA Senior Managing Director James Ross says, "Neuberger Berman is one of State Street's longstanding clients and we are delighted that they have opted to build on the strength of this relationship by awarding SSgA with this new mandate for our money market funds. We look forward to helping Neuberger Berman and its clients by demonstrating our expertise in managing money market funds that seek to preserve capital and liquidity for investors."
The funds involved are: Neuberger Berman Government Money Fund, NB Institutional Cash Fund, NB Cash Reserves, and NB Treasury Fund, which held approximately $4.6 billion as of June 30, 2009. "Neuberger Berman continues to manage four municipal money market funds and also offers cash management to institutional separate account clients," says the release.
Early this morning, the Brussels-based European Fund and Asset Management Association and the London-based Institutional Money Market Funds Association published a report entitled, "EFAMA and IMMFA Recommendation for a European Classification and Definition of Money Market Funds" (link pending). The report says, "There is currently no common definition of money market funds across Europe." This effort "defines clear-cut rules to clarify what the 'money market fund' label should include," according to a press release issued jointly by the two organizations.
The full report says, "`At the end of 2008, European money market funds had EUR 1,350 billion under management, compared to EUR 1,186 billion at end 2007.... The main domiciles of money market funds at end 2008 were France (EUR 488 billion), Luxembourg (EUR 335 billion) and Ireland (EUR 319 billion). These three domiciles represented 85% of the European money market funds market."
The effort "is justified in view of the wide variety of definitions of money market funds that characterise the European market at present.... [T]here are in the marketplace pooled investment products that carry the 'money market' fund label, whereas they are taking on more risk than do money market funds. This situation is a source of confusion for investors, which is detrimental the long-term attractiveness of money market funds. From this perspective, converging towards a common definition in Europe is of long-tem benefit to investors, investment management companies and regulators."
The release explains, "The [new] classification rests on a revised, more robust single category of money market funds composed of two types -- short-term and regular -- defined in a way that limit the main risks to which money market funds are exposed, i.e. interest rate risk, credit/credit spread risk and liquidity risk. The Board of Directors of EFAMA and the members of IMMFA have unanimously endorsed the proposal, and both associations are committed to seek the support of fund managers, regulatory authorities and performance measurement agencies in ensuring that the definition is used across Europe."
They add, "EFAMA and IMMFA also agree that all existing money market funds falling outside the definition of short-term and regular money market funds should be allowed to keep the money market fund label for a transitional period of 3 years. During this time, these funds should be grouped in national fund classification systems in a separate category, under the name 'other' money market funds. By 30 June 2012, any funds that continue to fall outside the proposed definition will no longer be classified as money market funds."
Jean-Baptiste de Franssu, President of EFAMA, says, "The financial crisis has generated investor nervousness about the risks taken by some money market funds. By proposing to reserve the money market fund label to funds designed to generate money market like returns, while aiming at preserving capital and maintaining strong liquidity, our objective is to enhance investor information about the exact nature of money market funds, thereby enhancing investor protection and securing the long-term attractiveness of money market funds."
Travis Barker, Chairman of IMMFA, adds:, "Given the increased attention on and concerns about money market funds, the need for a pan-European definition is more necessary than ever. It is crucial that investors understand the nature of their investment. The new definitions will help to clear up any investor confusion or uncertainty."
While we appreciate any effort by Europe and others to restrict the use of the term "money market fund" to only those vehicles adhering to strict regulatory oversight and abiding by strict quality, maturity, diversity, and soon liquidity, standards like those in the U.S., we believe the splitting of categories will continue to only confuse the marketplace. We would urge Europe to restrict the term "money market" to only the "short-term," highest quality, and most liquid securities. However, we look forward to the discussion and appreciate the efforts of IMMFA and EFAMA. (Note that IMMFA Chairman Travis Barker is scheduled to speak at Crane's Money Fund Symposium in Providence August 25.)
The Association of Financial Professionals recently released its annual "AFP Liquidity Survey," which shows money market mutual funds losing their position as the largest holding of corporations short-term cash investments to bank deposits in 2009. AFP shows money funds' share declining from a record 39.4% last year to 31.8% in mid-2009, while bank deposits increased their share from 25.0% to 37.2%. The survey also shows organizations increasing their cash balances and the percent using online trading portals remaining stable.
AFP's press release on the survey, entitled, "Companies Stockpiling Cash, Credit Access Still Tight, AFP Survey Shows," says, "With little easing in access to credit, U.S. organizations are continuing to stockpile cash, according the Association for Financial Professionals' 2009 Liquidity Survey. Almost three-quarters (72%) of companies had increased or maintained their U.S. cash balances during the first part of 2009.... 42% of organizations increased their U.S. cash and short-term investment balances between December 2008 and May 2009, while 30% saw no significant change in short-term cash balances."
"Despite unprecedented government action, the lack of any significant thaw in short-term credit access is extremely troubling and many companies are reacting by stockpiling cash," says Jim Kaitz, President and CEO of AFP. "This is the fourth annual survey performed by AFP focusing on how organizations manage their short-term investment portfolios.... The AFP 2009 Liquidity Survey was underwritten by The Bank of New York Mellon," says the release.
The survey says, "Organizations allocate an average 78 percent of their short-term investment balances in three safe and liquid investment vehicles: bank deposits, money market mutual funds and Treasury securities. In the 2008 AFP Liquidity Survey, 73 percent of short-term investment vehicles were placed in the same three investment vehicles, while the percentage reported in the 2007 AFP Liquidity Survey was 67 percent."
Regarding portals, the survey says, "Twenty-six percent of organizations use an electronic, multi-family trading portal to execute at least some of their short-term investment transactions. Organizations using trading portals execute an average of 72 percent of their money market mutual fund transactions through the trading portal.... The use of multi-family trading portals has remained stable over the past few years.... Those organizations using trading portals moved an average of 72 percent of their money market mutual fund holdings through these portals, compared to 80 percent in 2008."
Last week Federated Investors posted website commentary by Executive VP and Taxable Money Market CIO Deborah Cunningham on the SEC's "Money Market Fund Reforms" Proposal and on the recent short-term interest rate environment. In a piece entitled, "Market memo: Changes make money markets stronger," Cunningham is asked, "How has the money market responded to the recent financial oversight reform ideas from the White House and the U.S. Securities and Exchange Commission?"
She writes, "Overall, I think it's been positive, though the response has been muted. We commend the SEC for doing an excellent job outlining three critical areas for money market funds -- liquidity, maturity and credit quality. The SEC's considerations could make money market funds even stronger investment vehicles for investors looking to manage their cash. As a cash management pioneer and leader for more than three decades, Federated has maintained a steadfast dedication to products that meet investor requirements for diligent credit analysis, broad diversification, competitive yields and daily liquidity at par. The SEC's considerations maintains these time-tested standards and could tighten the already strict regulatory framework in which the funds operate, ensuring greater protections for investors."
The piece also asks, "What about the suggestion to consider a floating net asset value for money market funds?" Cunningham says, "While I understand why the SEC would want to seek public comment on the topic, we don't believe this will happen since it would do far more harm than good. At Federated, our customers have made it clear to us that a stable $1 net asset value is what they want. And the reforms put forth by the White House last week specifically noted that the President's Working Group and the SEC 'should carefully consider ways to mitigate any potential adverse effects of such a strong regulatory framework' for money market funds. There are ways ... to strengthen the money market fund industry without undermining what arguably is a fundamental building block that has made money market funds a vital part of the U.S. financial markets, with nearly $4 trillion in assets."
Finally, the brief asks, "Is there anything in the SEC's considerations that could be problematic?" Cunningham responds, "The liquidity requirements that the SEC offered for consideration may be problematic because the SEC is proposing one set of liquidity thresholds for retail money market funds and another set of thresholds for institutional money market funds. The SEC did not offer a definition for 'retail' and 'institutional' money market funds, which the money market fund industry itself has struggled to define. We believe that this particular consideration by the SEC merits further comment and study."
In a separate "Month in cash" piece entitled, "Historically low cash yields may be bottoming," Cunningham comments, "Cash yields meandered lower last month [June] from already-depressed levels despite additional indications that the U.S. economy may have hit bottom during the first quarter. At one point, the economic data was so encouraging that the fed funds futures market had priced in a better-than-even chance that benchmark interest rates would begin rising by the end of the year and a nearly 100% chance of an increase by mid-2010. However, the Federal Reserve (Fed) used the occasion of its June 23-24 Federal Open Market Committee meeting to reiterate that it has no intention of tightening monetary policy any time soon, though it did acknowledge that the pace of economic contraction appeared to be slowing."
She explains, "Compared with the sharp declines in May, the drop in cash yields in June was relatively mild, with one-month London interbank offered rates (Libor) falling one basis point to 0.31%, three-month Libor declining six basis points to 0.60%, and 12-month Libor dropping five basis points to 1.55%. Treasury yields also fell slightly, with three-month, six-month, and 12-month bills fetching a modest 0.18%, 0.34%, and 0.45%, respectively, at month's end. As skimpy as those numbers were, however, the cash market actually had braced for the possibility of negative nominal interest rates on June 30 due to a new Federal Deposit Insurance Corp. (FDIC) special assessment that would charge banking institutions for deposit balances on that date, even if the cash was of the custodial variety. Fears that the move by institutions to avoid holding cash could push yields on alternative investments -- Treasury bills in particular -- below zero never materialized. Yet this same 'window dressing' issue could briefly distort market technicals on the final day of each quarter for as long as the regulation remains in place."
Morgan Stanley becomes the first money market fund family to begin regular publication of one of the newly proposed metrics from the SEC's Money Market Fund Reforms. Late last week, the investment manager released a document entitled, "Weighted Average Life: Enhancing Money Market Fund Transparency," which describes a new WAL figure now included alongside the traditional WAM (weighted average maturity) on the company's daily rate sheet.
The announcement says, "At Morgan Stanley Investment Management, we remain committed to delivering to our investors the highest degree of transparency into the composition of our money market funds. In accordance with this objective, we have decided to include an additional risk measure, Weighted Average Life (WAL), on our investor communications. As most investors are aware, Weighted Average Maturity (WAM) has long served as an important metric for money market fund investors evaluating different funds. As a complement to WAM, we believe that the added WAL metric will keep our investors better informed of the strategic positioning of our money market portfolios."
The MS release continues, "The traditional WAM calculation -- as defined by SEC Rule 2a-7 -- has long served investors as a basic gauge of a money market fund's maturity profile. When calculating WAM under Rule 2a-7, a fund adviser is permitted to use the interest-rate reset date, rather than a security's stated final maturity, for variable- and floating-rate securities. By looking to a portfolio's interest rate reset schedule in lieu of final maturity dates, the WAM measure effectively captures a fund's exposure to interest rate movements and the potential price impact resulting from interest rate movements."
"Because of its reliance on interest rate reset dates, WAM does not measure the risk faced by a fund required to hold its entire portfolio of securities to their final maturities. In order to provide investors with greater transparency, we are introducing WAL to supplement our WAM reporting. The WAL calculation is based on a security's stated final maturity date or, when relevant, the date of the next demand feature when the fund may receive payment of principal and interest (such as a put feature). Accordingly, WAL reflects how a portfolio would react to deteriorating credit (widening spreads) or tightening liquidity conditions. We believe that when viewed alongside WAM, the supplemental WAL disclosure will provide investors with a further degree of insight into our portfolios' structure," adds MSIM.
Finally, the piece says, "In addition to ensuring the highest possible degree of transparency for our shareholders, we are also adding the WAL measure in order to respond proactively to anticipated regulatory reforms. The U.S. Securities Exchange Commission has recently proposed a series of rule amendments designed to strengthen the regulatory framework for money market funds. Among its many proposed rule changes, the SEC has suggested funds have a maximum WAL of 120 days and thus affirmed its commitment to the disclosure of this metric. While the outcome of potential regulatory changes remains uncertain, we foresee WAL to be a standard reporting metric under a revised SEC Rule 2a-7."
Crane Data will of course be closely monitoring whether any new metrics are ultimately mandated by the SEC and whether funds decide to include these in their daily and monthly performance reports and communications. We'd love to hear feedback on whether to collect and publish any of these new measures, such as WAL, and daily and weekly liquidity, in our Money Fund Intelligence MFI XLS, or Money Fund Wisdom products, and we're preparing to track full monthly portfolio holdings as they become standardized. Finally, note that we're currently publishing an "Overnight Liquidity" and a "% Maturing in 7 Days" number for selected custom daily clients, and we've recently added Portfolio Composition and links to portfolio holdings to our monthly MFI XLS.
The SEC's new "Money Market Fund Reform" Proposals, in addition to laying out likely new quality, maturity, and liquidity restrictions for money funds, invite interested participants to comment on possible future changes to money fund regulations. It says, "The Commission requests comment on the rules and amendments proposed in this release. Commenters are requested to provide empirical data to support their views. The Commission also requests suggestions for additional changes to existing rules or forms, and comments on other matters that might have an effect on the proposals contained in this release."
Following the main body of proposals, the SEC writes, "We recognize that the events of the last two years raise the question of whether further and perhaps more fundamental changes to the regulatory structure governing money market funds may be warranted. Therefore we are exploring other ways in which we could improve the ability of money market funds to weather liquidity crises and other shocks to the short-term financial markets. We invite interested persons to submit comments on the advisability of pursuing any or all of the following possible reforms, as well as to provide other approaches that we might consider to achieve our goals. We expect to benefit from the comments we receive before deciding whether to propose these changes."
In particular, the Commission seeks comments on the possibility of a "Floating Net Asset Value," which is not among the current proposals recommended by the SEC. They say, "When the Commission adopted rule 2a-7 in 1983, it facilitated money market funds' maintenance of a stable net asset value by permitting them to use the amortized cost method of valuing their portfolio securities.... [U]sing the amortized cost method of valuation is an exception to the general requirement ... that investors in investment companies should pay and receive market value or fair value for their shares. The Commission did not take lightly its decision to permit money market funds to use the amortized cost method of valuation.... [I]n exchange for permitting this valuation method, [the SEC] would impose certain conditions on money-market funds designed to ensure that these funds invested only in instruments that would tend to promote a stable net asset value per share."
The SEC adds, "The $1.00 stable net asset value per share has been one of the trademark features of money market funds. It facilitates the funds' role as a cash management vehicle, provides tax and administrative convenience to both money market funds and their shareholders, and promotes money market funds' role as a low-risk investment option. Many investors may hold shares in money market funds in large part because of these features. We are mindful that if we were to require a floating net asset value, a substantial number of investors might move their investments from money market funds to other investment vehicles."
But they add, "However, a stable $1.00 net asset value per share also creates certain risks for a money market fund and its investors. These risks are a consequence of the amortized cost method of valuation and the resulting insensitivity of the $1.00 net asset value per share to market valuation changes. It may create an incentive for investors to redeem their shares when a fund's market-based net asset value per share falls between $0.995 and $1.00 because they will obtain $1.00 in exchange for their right to fund assets worth less than $1.00 per share. Regardless of the motivation underlying the redemptions, the unrealized losses attributable to redeeming shareholders are now borne by the remaining money market fund shareholders."
The SEC also requests comment on "requiring money market funds to satisfy redemption requests in excess of a certain size through in-kind redemptions." Comments should be received by Sept. 8, 2009 and sent to rule-comments@sec.gov (include File Number S7-11-09). Finally, note that we will be adding a panel on "The SEC's Money Market Fund Reforms" to the agenda for our upcoming Crane's Money Fund Symposium on Sunday afternoon, August 23, in Providence, R.I.
We've still barely made it half-way through the SEC's new 197-page proposal on "Money Market Fund Reforms", but thankfully we have yet to encounter any major surprises or negatives for either investors or fund managers. After reading the document's details, the new quality, maturity, liquidity and other mandates are even less onerous than the summary suggests, and the myriad requests for input and comment appear to signal extreme flexibility on the part of regulators. Below, we briefly review the overall proposal and discuss some of the significant recommendations.
The SEC summarizes, "The severe problems experienced by money market funds since the fall of 2007 and culminating in the fall of 2008 have prompted us to review our regulation of money market funds.... [W]e today are proposing for public comment a number of significant amendments to rule 2a-7 under the Investment Company Act.... Commission staff has consulted extensively with other members of the President's Working Group on Financial Markets, and in particular the Department of Treasury and the Federal Reserve Board, which provided support to money market funds and the short-term debt markets last fall, and which continue to administer programs from which money market funds and their shareholders benefit. We have consulted with managers of money market funds and other experts to develop a deeper understanding of the stresses experienced by funds and the impact of our regulations on the readiness of money market funds to cope with market turbulence and satisfy heavy demand for redemptions.... We have also drawn from our experience as a regulator of money market funds under rule 2a-7 for more than 25 years and particularly since autumn 2007."
They continue, "The proposed rules would reduce the vulnerability of money market funds to breaking the buck by, among other things, improving money market funds' ability to satisfy significant demands for redemptions. If a particular fund does break the buck ... the proposed rules would facilitate the orderly liquidation of the fund in order to protect the interests of all fund shareholders. These changes together should make money market funds (collectively) less susceptible to a run by diminishing the chance that a money market fund will break a dollar and, if one does, provide a means for the fund to orderly liquidate its assets. Finally, our proposals would improve our ability to oversee money market funds by requiring funds to submit to us current portfolio information. Our proposals represent the first step in addressing issues we believe merit immediate attention.... In addition, we ask comment on some more far-reaching changes that could transform the business and regulatory model on which money market funds have operated for more than 30 years."
After a comprehensive discussion on the history of money funds, regulation and recent market events, the SEC details its potential new quality, maturity and liquidity changes. It says, "We propose to generally limit money market fund investments to securities rated in the highest NRSRO ratings category. In addition, we are seeking comment on whether to modify provisions of the rule that incorporate minimum ratings by NRSROs.... We propose that rule 2a-7 be amended to impose a 60-day weighted average maturity limit.... We propose to add to rule 2a-7 a new maturity test, which would limit the weighted average life maturity of portfolio securities to 120 days." The SEC also says, "We propose to prohibit money market funds from acquiring securities unless, at the time they are acquired, they are liquid."
Finally, the proposal, which contains an astounding 300 questions, says, "We propose to require each taxable retail money market fund to invest at least five percent of its assets in cash, U.S. Treasury securities, or securities that can provide the fund with daily liquidity.... We propose to limit a taxable institutional fund to acquiring daily liquid assets unless, immediately after acquiring a security, the fund holds at least 10 percent of its total assets in daily liquid assets.... We request comment on whether institutional money market funds should be subject to a higher daily liquidity requirement (10 percent) than retail funds (five percent).... Our proposed amendments would require that a money market fund's board determine, no less frequently than once each calendar year, whether the fund is an institutional money market fund for purposes of meeting the liquidity requirements."
The SEC has released the full text of its proposed "Money Market Fund Reforms". The 197-page document's summary says, "The Securities and Exchange Commission is proposing amendments to certain rules that govern money market funds under the Investment Company Act. The amendments would: (i) tighten the risk-limiting conditions of rule 2a-7 by, among other things, requiring funds to maintain a portion of their portfolios in instruments that can be readily converted to cash, reducing the weighted average maturity of portfolio holdings, and limiting funds to investing in the highest quality portfolio securities; (ii) require money market funds to report their portfolio holdings monthly to the Commission; and (iii) permit a money market fund that has 'broken the buck' (i.e., re-priced its securities below $1.00 per share) to suspend redemptions to allow for the orderly liquidation of fund assets. In addition, the Commission is seeking comment on other potential changes in our regulation of money market funds, including whether money market funds should, like other types of mutual funds, effect shareholder transactions at the market-based net asset value, i.e., whether they should have 'floating' rather than stabilized net asset values. The proposed amendments are designed to make money market funds more resilient to certain short-term market risks, and to provide greater protections for investors in a money market fund that is unable to maintain a stable net asset value per share."
The SEC says on Background, "Money market funds are open-end management investment companies that are registered under the Investment Company Act and regulated under rule 2a-7 under the Act. They invest in high-quality, short-term debt instruments such as commercial paper, Treasury bills and repurchase agreements. Money market funds pay dividends that reflect prevailing short-term interest rates and, unlike other investment companies, seek to maintain a stable net asset value per share, typically $1.00 per share."
The release continue, "This combination of stability of principal and payment of short-term yields has made money market funds one of the most popular investment vehicles for many different types of investors. Commonly offered features, such as check-writing privileges, exchange privileges, and near-immediate liquidity, have contributed to the popularity of money market funds. More than 750 money market funds are registered with the Commission, and collectively they hold approximately $3.8 trillion of assets.... As of December 2008, about one-fifth of U.S. households' cash balances were held in money market funds."
Under "Market Significance, the document says, "Due in large part to the growth of institutional funds, money market funds have grown substantially over the last decade, from approximately $1.4 trillion in assets under management at the end of 1998 to approximately $3.8 trillion in assets under management at the end of 2008. During this same period, retail taxable money market fund assets grew from approximately $835 billion to $1.36 trillion, or 63 percent, while institutional taxable money market fund assets grew from approximately $516 billion to $2.48 trillion, or 380 percent. One implication of the growth of money market funds is the increased role they play in the capital markets.... As a consequence, the health of money market funds is important not only to their investors, but also to a large number of businesses and state and local governments that finance current operations through the issuance of short-term debt."
For more coverage, see Crane Data News' "Investors Won't Notice Change in MMFs From New Rules Says SEC", "SEC Issues Proposal Outline on Making Money Market Funds Less Risky", and Stradley's "Money Market Fund Reform: SEC Proposes Rule Amendments and Seeks Comment on Fundamental Issues". Look for more excerpts and commentary in coming days, and in the July issue of our Money Fund Intelligence newsletter. The SEC says comments should be received by Sept. 8, 2009 and sent to rule-comments@sec.gov (include File Number S7-11-09). We'd love to receive your comments too!
