The Investment Company Institute published its latest weekly "Money Market Mutual Fund Assets" report, which says, "Total money market mutual fund assets increased by $24.62 billion to $2.807 trillion for the week ended Wednesday, October 27. The ICI also published its latest monthly "Trends in Mutual Fund Investing - September 2010," which shows that money fund assets declined by $30 billion in September, and ICI distributed (to subscribers only) its latest "Month-End Portfolio Holdings of Taxable Money Funds," which shows that CDs retook the largest holding spot from Repo and that Average Maturities continued to extend in September.
ICI's weekly MMF statistics release says, "Taxable government funds increased by $12.32 billion, taxable non-government funds increased by $12.54 billion, and tax-exempt funds decreased by $250 million.... Assets of retail money market funds decreased by $3.01 billion to $942.31 billion. Taxable government money market fund assets in the retail category decreased by $460 million to $166.58 billion, taxable non-government money market fund assets decreased by $1.79 billion to $574.33 billion, and tax-exempt fund assets decreased by $760 million to $201.41 billion.... Assets of institutional money market funds increased by $27.63 billion to $1.864 trillion. Among institutional funds, taxable government money market fund assets increased by $12.79 billion to $655.31 billion, taxable non-government money market fund assets increased by $14.33 billion to $1.085 trillion, and tax-exempt fund assets increased by $510 million to $123.74 billion.
The ICI's monthly series says, "Money market funds had an outflow of $32.34 billion in September, compared with an inflow of $19.07 billion in August. Funds offered primarily to institutions had an outflow of $16.85 billion. Funds offered primarily to individuals had an outflow of $15.49 billion." It also shows "Liquid Assets of Stock Funds remained at a record low of 3.5% in September.
ICI's Portfolio Composition series shows Taxable money fund holdings of Certificates of Deposits, including Eurodollar CDs, rose by $19.6 billion to $572.5 billion, or 23.2% of assets (the largest holding type). Holdings of Repurchase Agreements (Repo), which fell by $60.3 billion to $503.4 billion, or 20.4% of holdings, ranked second. Next was U.S. Government Agency Securities, which rose by $6.2 billion to $503.4 billion, or 20.4%, followed by Commercial Paper, which rose by $183 million to $394.4 billion, or 16.0% of taxable money fund holdings.
U.S. Treasury Bills and Securities were the fifth largest segment with $317.0 billion, or 12.8%. Notes, including Bank Notes (2.4%) and Corporate Notes (4.2%) made up another 6.6% of taxable MMF assets with $162.7 billion, while Other investments totalled $79.8 billion, or 3.8%. The Average Maturity of portfolios tracked by ICI extended to 44 days from 43 days the prior month and from 36 days three months ago. The number of taxable portfolios remained at 450 and the number of accounts outstanding dipped to 28.3 million.
In other news, Fitch Ratings released a statement entitled, "MMFs Ratings Remain Unaffected by Exposures to Citigroup and BofA". It says, "Fitch Ratings says today that Fitch-rated money market funds (MMFs) exposures to Citigroup and BofA remain moderate in terms of size and tenor and consistent with Fitch's 'AAAmmf' rating criteria. The agency has reviewed its universe of rated U.S. and European MMFs following its Oct. 22, 2010 rating actions placing the short-term 'F1+' ratings of Citigroup, Inc. (Citigroup) and Bank of America Corporation (BofA) on Rating Watch Negative. Subsequently, Fitch also placed seven asset-backed commercial paper (ABCP) programs sponsored by the related banks on Rating Watch Negative, reflecting the programs' reliance on sponsor-provided liquidity and/or credit enhancement."
Though pressures and challenges remain, life goes on in the money market fund world as a new entrant prepares for a fund launch. Balance Sheet Solutions, which is affiliated with Members United Corporate Federal Credit Union, has filed for a new Institutional U.S. Government Money Market Fund. Meanwhile, the push to offer enhanced cash and ultra-short alternatives by managers continues with the launch of USAA Ultra Short-Term Bond Fund (UUSTX).
The Balance Sheet Solutions Inst US Govt MMF filing says, "To achieve its investment objective, the Money Market Fund invests in high quality fixed and variable rate short-term money market instruments consisting primarily of U.S. Government Securities, which are securities issued or guaranteed as to principal and interest by the U.S. Government or its agencies, instrumentalities or sponsored entities. Under normal circumstances, the Money Market Fund will invest at least 80% of its assets in U.S. Government Securities. The Fund also invests in repurchase agreements collateralized by U.S. Government Securities and mortgage-backed securities that are issued or guaranteed by U.S. Government agencies or instrumentalities."
It adds, "The Fund's investment portfolio is constructed to consist of instruments permitted by the Federal Credit Union Act and the National Credit Union Administration's Rules and Regulations Part 703 for federally chartered credit unions. However, the Fund will limit its portfolio to the investments discussed in this Prospectus and in the Fund's Statement of Additional Information, and will not invest in all types of investments permitted under Part 703. Shares of the Fund may be held by any type of institutional investor, and are not limited to credit unions." The fund will charge 0.37%, Balance Sheet Solutions, LLC is the fund's investment adviser, and Darren Fago is the portfolio manager.
A letter on the BSI website says, "As you might have already heard, Balance Sheet Solutions’ parent company, Members United Corporate FCU, was conserved by the NCUA Office of Corporate Credit Unions Friday, September 24th. NCUA has assured us that this event will not impact the way Balance Sheet Solutions serves our customers and clients. Our operations remain fully intact and fully operational."
The USAA press release, entitled, "USAA Launches Funds Keyed to Inflation and Interest-Rate Concerns", says, "USAA today announced the launch of two new mutual funds as part of an overall strategy to increase members' and other customers' investment solutions in response to economic uncertainty and the potential for inflation and rising interest rates.... The USAA Ultra Short-Term Bond Fund is designed for risk-averse investors who are concerned about rising interest rates and are seeking a bond fund with less price sensitivity due to its shorter maturity and ability to reprice quickly. The fund also seeks to provide better returns than money market funds."
Fitch Ratings published a document yesterday entitled, "U.S. Money Market Funds: A Year of Changes and Challenges - and More to Come?. Fitch briefly discusses the PWG Money Market Reform Options report and reviews its revisions to the ratings agency's criteria for rating AAA money funds. It says, "Last week, the President's Working Group on Financial Markets released a report titled 'Money Market Reform Options,' which called for a study of various proposed options for further reform of money market funds. The PWG report discussed policy options that may help further reduce systemic risk of MMFs, outlining benefits and limitations of each option. Fitch Ratings is closely monitoring the developments surrounding this report."
Fitch continues, "These policy options will be further studied by the newly established Financial Stability Oversight Council (FSOC), and the FSOC, and the SEC, as part of these deliberations, will solicit public comments and conduct a series of meetings with various money market fund stakeholders. The report from the PWG is latest development for the money market fund industry in a year of many changes and challenges. As market participants consider these developments and the effects they may have going forward, Fitch believes it is worth reviewing the changes and challenges of the past 12 months and the implications for the ratings of money market funds."
The NRSRO says, "In October 2009, Fitch published substantially revised rating criteria and ratings scales for money market funds (Global Money Market Fund Rating Criteria, Oct. 5, 2009). Following an exposure draft published in early 2009 and in-depth feedback from market participants, the criteria changes were designed to address some of the more pressing structural weaknesses in money market funds that surfaced during the credit/liquidity crisis in late 2008. Changes to Fitch's ratings definitions and scale for money market funds brought greater transparency and differentiation versus other rated funds and securities. Since then, Fitch has fully reviewed all of its rated money market funds globally under the new criteria, while also focusing on providing funds and their investors with enhanced analytical tools and transparency."
It continues, "Fitch's revised ratings criteria included several notable changes that were intended to provide investors with greater liquidity protection and capital preservation. These revisions included minimum liquidity guidelines and an assessment of shareholder concentrations vis-a-vis these liquidity guidelines to address redemption risk, adoption of maximum and average final maturity guidelines for portfolio holdings, an enhanced framework for measuring direct and indirect credit risk arising from repurchase agreements and other forms of counterparty risk and, finally, consideration of the sponsor's ability and willingness to provide support to the fund, if needed."
They add, "Since Fitch's criteria update, the industry has continued to evolve and adapt in the face of regulatory changes and a challenging operating environment. In 2010, the SEC enacted several notable changes to Rule 2a-7 of the 1940 Investment Act that governs U.S. money market funds. Under the revised Rule 2a-7, all registered money market funds are required to maintain minimum levels of overnight and one-week liquidity, operate with tighter limits on interest rate risk, keep the weighted average final portfolio maturity to 120 days, and hold smaller exposures to higher credit risk (Tier 2) securities. Funds also are required to have an understanding of their shareholders and their potential funding needs in order to manage redemption risk accordingly. Additionally, the SEC adopted portfolio and 'shadow NAV' reporting requirements and made it administratively easier for fund sponsors to take measures to support the fund's $1 NAV and provide liquidity."
Fitch says, "At the same time, fund sponsors generally have adopted a more risk-averse profile, operating well inside the SEC's regulatory limits and Fitch's new ratings parameters.... The many regulatory changes that have taken place over the last year are undoubtedly positive in terms of strengthening the safety (and lowering the systemic risk) of money market funds. They provide an important baseline level of credit quality and liquidity and can be viewed as a welcome convergence toward global standards and more uniform definitions of what constitutes a 'money market fund.' That said, AAAmmf-rated money market funds continue to be held to a higher standard of conservatism, relative to current regulatory minimums, consistent with investors expectations."
Finally, they comment, "Money market funds and their sponsors continue to face challenges, including an uncertain regulatory environment and a more difficult, less profitable operating environment constrained by low interest rates and less portfolio flexibility. On the regulatory front, the PWG's options for further regulatory reform encompass a range of proposals, including: Floating or variable NAV for all money market funds; Privately-funded emergency liquidity facilities for MMFs; Mandatory redemptions in kind; Insurance for MMFs; A two-tier system of MMFs, with more conservative investment and operating guidelines for stable NAV funds; A two-tier system of MMFs, with stable NAV funds offered to retail investors and floating NAV funds offered to institutional investors; Regulating stable NAV MMFs as special purpose banks."
They add, "Some of these proposals could be far-reaching in their impact. However, it is not at all clear which, if any, of these potential options may be adopted. To date, the industry has proven itself to be resilient and adaptive in the face of these challenges. In fact, many of the larger sponsors continue to show an interest in expanding the depth and breadth of their 'liquidity franchises' for the longer-term. Nonetheless, the outlook for the industry in 2011 is less than certain against this backdrop of unresolved regulatory debates, a challenging operating environment and heightened market risk."
Last Thursday, Deutsche Bank Group's DB Advisors unit hosted a conference call entitled, "Regulation and austerity: Bitter medicine for a better future?." During the Q&A following, Crane Data asked DB's Joe Benevento, Head of Portfolio Management, Liquidity Management, Americas, about the status of the company's variable NAV money fund filing. Listeners also asked about the municipal market and asset-backed commercial paper.
Crane asked DB, "What is the status of the Variable NAV Fund? When will it go live? Will adhere to the new 2a-7 rules? Benevento responded, "If you look at that Variable NAV fund that Deutsche had registered, it is an important segment of the market for customers who want to know all points in time the transparency of what their securities are worth and don't want the wrapper to get in the way of access to that cash. So we believe this is an important part of the future of the money market industry. If you think about it, that doesn't take away the strength or importance of any $1.00 NAV fund in the market." He added, "[T]here are plenty of changes coming and our thought was to hold off on issuing this new product to the market until the appropriate time.... It's important to get this information. We expect vNAV will compliment the stable NAV products and we want to be sure that our customers know the full landscape the money market fund industry will operate within."
Benevento continued, "We do plan to launch at the end of this year or in the 4th quarter. As of now, we think it's important to have consistency of guidelines, meaning that 'money market fund' means a defined universe of securities and a set of rules for duration. It's important to get customers used to the things they know and the buying community interesting in understanding the volatility of those assets within that acceptable universe. It's also very important to look at supplementing this product in the future and having VNAVs that are slightly longer than the old 2a-7."
He also said, "It's important to see that the regulatory framework, both Basel III and Dodd-Frank, all push funding levels out longer than 30 days. That is directly against what 2a-7 as amended requires for funds. So at some point in time, the market will be issuing longer funding, and I think it's important for market participants start thinking about issuing products that get customers comfortable ... [with] products slightly outside of money market fund range without seeing the mistakes that were made in the enhanced cash market.... I think it is very important that the industry get together and look at products that are just outside of a stable money fund that get customers comfortable on a defined investment universe."
Another question asked about the outlook for municipal money funds. Benevento responded, "This is clearly a market that is undergoing some change. There are fair amount of municipalities that have been responsible throughout this crisis.... There clearly are differences in the credit issued out there in the municipal market.... If you think about an overwhelming majority of the municipal money market, it depends on bank liquidity and bank letters of credit. If those banks liquidities need to be 100% funded dollar for dollar, and funded in very high quality securities to backstop these liquidity facilities, it will be a difficult or expensive venture to offer bank liquidity on these municipal securities. Clearly, we see the VRDO market shrinking, or in certain cases new products emerging from that market, whether it be 30 day puts, or moving to more issuer-generated maturities."
Finally, Benevento was asked, "Will ABCP become irrelevant due to the new Basel III regulations? He responded, "What is interesting about the ABCP market is that it's had its death warrant issued many times over. This market is resilient. I think we will see changes in that market. I think there is a need for funding by ABCP customers and putting it through the banking system will make that funding very expensive. So there is clearly some innovation that needs to go on. One hundred percent liquidity backed deals will be expensive and will need to prove the profitability side of that equation.... [T]his ultimately becomes a higher cost of funding for some of those companies using ABCP.... So we definitely see the size of that market shrinking. The issuers and the issues that remain outstanding are the cleanest of the clean going through the crisis and have [been] whittled down to very solid programs and in many cases programs that are fully backed by those banks.... [But] for the time being we do see a slow decline in issuance and we are definitely starting to see a fair amount of innovation being put to that market."
As we noted in a Money Fund Intelligence subscriber e-mail on our website late Thursday, the U.S. Treasury released its long-awaited "Report of the President's Working Group on Financial Markets: Money Market Fund Reform Options." As we said Friday, while the report doesn't strongly endorse any option, it should be well-received by the money fund community as it appears to discount the possibility of a floating NAV and support the concept of a private liquidity facility. Below, we review the report, the next steps and we quote from several comment pieces on the new PWG paper.
The Treasury's press release says the PWG report's purpose was to "assess options for mitigating the systemic risk associated with money market funds and reduc[e] their susceptibility to runs." It says, "The PWG now requests that the Financial Stability Oversight Council (FSOC), established by the Dodd-Frank Wall Street Reform and Consumer Protection Act, consider the options discussed in this report and pursue appropriate next steps.... [T]he Securities and Exchange Commission, as the regulator of money market funds, will solicit public comments ... [a] request for comment will be published in the near future. Today's release is one part in a series of steps that the regulatory community will be taking in the coming months to implement financial reform and to help ensure that the financial system continues to become more resilient."
The first response to the report was "ICI Responds to PWG Report on Money Market Funds," which quotes Paul Schott Stevens, "The President's Working Group on Financial Markets' report on money market funds provides a variety of options for consideration in the regulation of this vital investment vehicle.... We look forward to working with regulators and policymakers to develop ideas that will strengthen money market funds against any future crisis. The report represents the latest step in a multi-layered process of strengthening money market funds since 2008. The fund industry has consistently supported reforms to make these funds more resilient in the face of extreme market conditions. Money market funds provide valuable cash management services to a wide range of investors, including households, state and local governments, businesses, and nonprofit entities.... Throughout their 30-year history, money market funds have an outstanding record of strength. We look forward to further discussions on the options offered by the PWG. For more information on ICI's views on money market funds, please see the July 2010 speech by Paul Stevens."
Joan Ohlbaum Swirsky of Stradley Ronon published a Fund Alert Friday entitled, "President's Working Group Reports on Alternatives for Money Market Fund Reform". It says, "On Oct. 21, 2010, the President's Working Group on Financial Markets (PWG) released its long-awaited report on reform of money market funds (the Report), overdue by more than a year from its original target release date of Sept. 15, 2009. As expected, the Report is an analysis of the alternatives for the fundamental reform of money market funds, rather than a recommendation of any of the alternatives."
Swirsky explains, "The Report does not rule out any of these alternatives. But the Report shows a recognition of and appreciation for the potential difficulties and drawbacks of certain of the alternatives that have been widely opposed in the industry.... [T]he Report cautions that the [floating NAV] benefits 'would have to be weighed carefully against the risks that such a change would entail' and 'may have several unintended consequences.' Also, the Report details the 'significant hurdles,' 'uncertainties' and 'unintended consequences' that could arise if money market funds were required to reorganize as 'special purpose banks.' On the other hand, the Report is more sanguine about the possibility of a private liquidity facility. The Report says, 'Notwithstanding [certain] concerns' about a private liquidity facility, such a facility 'could play an important role in supplementing the SEC's new liquidity requirements for MMFs.'"
She adds, "The Report states that the goal of money market fund reform is not to prevent any individual money market fund from ever breaking the dollar, nor to 'to eliminate all risks posed by MMFs.' Further, the Report recognizes that liquidity requirements that would cover all redemption scenarios 'probably would be impractical and inefficient.' Also, the Report repeatedly acknowledges the continuing role of the SEC as 'the regulator for MMFs.' Accordingly, the Report does not appear to contemplate a complete transformation of money market funds.... The fact that the Report does not emphasize a bank-regulatory approach to money market funds may indicate that the involvement of FSOC does not necessarily portend a bank-regulatory approach to money market fund reform.... The Report notes repeatedly the possibility that reform of money market funds may push investors to less regulated investment vehicles, which would create more systemic risk. The Report suggests new ideas to enhance constraints on unregulated money market fund substitutes."
See also, "U.S. Chamber Warns Against Moves That Would Harm Money Market Funds, Treasury Strategies' WSJ Blog post "President's Working Group Report Extends Uncertainty for Money Fund Managers", and Reuters' "Debate likely on floating NAV for money funds".
The U.S. Treasury has released its long-awaited "Report of the President's Working Group on Financial Markets: Money Market Fund Reform Options," a paper "detailing a number of options for reforms related to money market funds. These options address the vulnerabilities of money market funds that contributed to the financial crisis in 2008." While the report doesn't strongly endorse any option, it should be well-received by the money fund community as it appears to discount the possibility of a floating NAV and support the concept of a private liquidity facility.
Treasury's press release says, "Following the crisis, the Treasury Department directed the PWG to develop this report to assess options for mitigating the systemic risk associated with money market funds and reducing their susceptibility to runs. The PWG agrees that, while a number of positive reforms have been implemented, more should be done to address this susceptibility. The PWG now requests that the Financial Stability Oversight Council (FSOC), established by the Dodd-Frank Wall Street Reform and Consumer Protection Act, consider the options discussed in this report and pursue appropriate next steps. To assist the FSOC in any analysis, the Securities and Exchange Commission, as the regulator of money market funds, will solicit public comments, including the production of empirical data and other information in support of such comments. A notice and request for comment will be published in the near future. Today's release is one part in a series of steps that the regulatory community will be taking in the coming months to implement financial reform and to help ensure that the financial system continues to become more resilient."
The report's Introduction explains, "Several key events during the financial crisis underscored the vulnerability of the financial system to systemic risk. One such event was the September 2008 run on money market funds (MMFs), which began after the failure of Lehman Brothers Holdings, Inc., caused significant capital losses at a large MMF. Amid broad concerns about the safety of MMFs and other financial institutions, investors rapidly redeemed MMF shares, and the cash needs of MMFs exacerbated strains in short-term funding markets. These strains, in turn, threatened the broader economy, as firms and institutions dependent upon those markets for short-term financing found credit increasingly difficult to obtain. Forceful government action was taken to stop the run, restore investor confidence, and prevent the development of an even more severe recession. Even so, short-term funding markets remained disrupted for some time."
The PWG publication continues, "The Treasury Department proposed in its Financial Regulatory Reform: A New Foundation (2009), that the President's Working Group on Financial Markets (PWG) prepare a report on fundamental changes needed to address systemic risk and to reduce the susceptibility of MMFs to runs. Treasury stated that the Securities and Exchange Commission's (SEC) rule amendments to strengthen the regulation of MMFs -- which were in development at the time and which subsequently have been adopted -- should enhance investor protection and mitigate the risk of runs. However, Treasury also noted that those rule changes could not, by themselves, be expected to prevent a run on MMFs of the scale experienced in September 2008. While suggesting a number of areas for review, Treasury added that the PWG should consider ways to mitigate possible adverse effects of further regulatory changes, such as the potential flight of assets from MMFs to less regulated or unregulated vehicles."
It says, "This report by the PWG responds to Treasury's call. The PWG undertook a study of possible further reforms that, individually or in combination, might mitigate systemic risk by complementing the SEC's changes to MMF regulation. The PWG supports the SEC's recent actions and agrees with the SEC that more should be done to address MMFs' susceptibility to runs. This report details a number of options for further reform that the PWG requests be examined by the newly established Financial Stability Oversight Council (FSOC). These options range from measures that could be implemented by the SEC under current statutory authorities to broader changes that would require new legislation, coordination by multiple government agencies, and the creation of new private entities. For example, a new requirement that MMFs adopt floating net asset values (NAVs) or that large funds meet redemption requests in kind could be accomplished by SEC rule amendments. In contrast, the introduction of a private emergency liquidity facility, insurance for MMFs, conversion of MMFs to special purpose banks, or a two-tier system of MMFs that might combine some of the other measures likely would involve a coordinated effort by the SEC, bank regulators, and financial firms."
The report explains, "Importantly, this report also emphasizes that the efficacy of the options presented herein would be enhanced considerably by the imposition of new constraints on less regulated or unregulated MMF substitutes, such as offshore MMFs, enhanced cash funds, and other stable value vehicles. Without new restrictions on such investment vehicles, which would require legislation, new rules that further constrain MMFs may motivate some investors to shift assets into MMF substitutes that may pose greater systemic risk than MMFs. The PWG requests that the FSOC consider the options discussed in this report to identify those most likely to materially reduce MMFs' susceptibility to runs and to pursue their implementation. To assist the FSOC in any analysis, the SEC, as the regulator of MMFs, will solicit public comments, including the production of empirical data and other information in support of such comments."
Finally, under "Policy Options," the report discusses, Floating net asset values; Private emergency liquidity facilities for MMFs; Mandatory redemptions in kind; Insurance for MMFs; A two-tier system of MMFs with enhanced protection for stable NAV funds; A two-tier system of MMFs with stable NAV MMFs reserved for retail investors; Regulating stable NAV MMFs as special purpose banks; and Enhanced constraints on unregulated MMF substitutes.
BlackRock's latest quarterly earnings report release says, "Cash management AUM increased to $283.7 billion. Cash management AUM increased for only the third time in the last eight quarters. Net new business totaled $1.8 billion, with net inflows of $10.4 billion from U.S. institutional clients largely offset by net outflows of $7.6 billion from retail and high net worth investors, and the effect of the reclassification of a $0.9 billion exchange-traded fund as fixed income. Merger-related outflows totaled $0.6 billion or 1% of acquired cash management AUM. Yields remained at or near historic lows as economic weakness, accommodative monetary policy and regulatory uncertainty continued to prevail."
On yesterday morning's conference call, Chairman Larry Fink commented, "On cash, we had new flows for the first time in 8 quarters. I think what is going on is because of now a longer view of low rates, especially in light of a second round of quantitative easing by the Fed, the persistence of low rates is probably going to continue. Banks who were aggressive at the beginning of the year and last year were aggressive in taking down deposits, have become less competitive and the money market industry is now offering a competitive product related to bank deposits. I think that trend will continue going into 2011."
He added, "So I think we're going to see a shift in flows, and we're certainly seeing that already in the fourth quarter where we're seeing increased liquidity flows in the first two weeks.... I think that's another big change in the dynamic ... for the last two years where as a large player in the money markets.... Some of the major headwinds are behind us."
When asked about low rates and fee waivers in the Q&A, Fink answered, "I don't think QE2 is focused at all on the short end.... Institutional, I don't believe there are any fee waivers. On the retail side, we have some, but they're small." Since the second quarter they haven't seen any change, BlackRock added.
In other news, we hear rumors that the President's Working Group on Financial Markets may finally release its long-awaited report on money market mutual funds Thursday. No word yet from Treasury, but we'll keep you posted. Word should come via the www.financialstability.gov website. (See our previous Crane Data News articles, "Money Funds Poised for Release of President's Working Group Report" and "Money Funds Await PWG Report, Rule 2a-7 Changes Pushed Into 2010."
The original June 17, 2009, report, entitled, "Financial Regulatory Reform: A New Foundation, had as a goal to "Reduce the Susceptibility of Money Market Mutual Funds (MMFs) to Runs." It said, "The SEC should move forward with its plans to strengthen the regulatory framework around MMFs to reduce the credit and liquidity risk profile of individual MMFs and to make the MMF industry as a whole less susceptible to runs. The President's Working Group on Financial Markets should prepare a report assessing whether more fundamental changes are necessary to further reduce the MMF industry's susceptibility to runs, such as eliminating the ability of a MMF to use a stable net asset value or requiring MMFs to obtain access to reliable emergency liquidity facilities from private sources."
The most recent round of quarterly earnings reports, which continues this morning with BlackRock's 9am Q3 earnings and conference call, has already revealed a couple of new bits of information on the state of money market fund managers. Schwab's latest earnings reveal that the company finally took a loss to rid itself of its remaining Whistlejacket SIV holdings, while BNY Mellon's Q3 numbers show that online "portals" and platforms are seeing revenue hurt from lower distribution fee revenue.
A BusinessWire press release entitled "Schwab Reports Third Quarter Revenues up 5% Year-over-Year" says, "The Charles Schwab Corporation announced today that its net income was $124 million for the third quarter of 2010, down 38% from $200 million for the third quarter of 2009. Schwab's third quarter net income was $218 million prior to the inclusion of previously announced charges totaling $94 million after-tax. Those charges relate to the company's decisions to cover the net remaining losses recognized by its money market mutual funds as a result of their investments in a single structured investment vehicle that defaulted in 2008, and to end the sponsorship of its affinity credit card program. For the nine months ended September 30, 2010, the company's net income was $335 million, down 46% from the year-earlier period. The company's year-to-date results also include charges totaling $120 million after-tax relating to the settlement of a civil class action lawsuit involving the Schwab YieldPlus Fund(R), an ultra-short bond fund. The company's year-to-date net income prior to the inclusion of charges totaled $555 million after-tax."
Schwab CFO Joe Martinetto noted, "Our diversified business model enabled us to grow revenues during the third quarter even as interest rates declined somewhat during the period. Although our trading revenue declined by 24% from year-earlier levels as a result of our improved pricing and the environment's effect on client activity, our net interest revenue rose by 31% over the year-earlier total while our net interest margin remained relatively flat. Our asset management and administration fees also showed year-over-year improvement in the third quarter -- for the first time in two years -- through higher client balances in Mutual Fund OneSource and advisory programs such as Schwab Managed Portfolios, as well as further easing in money market fund fee waivers. Overall, our third quarter revenue growth represents the first year-over-year increase since the second quarter of 2008."
The disclosure that Schwab took action to protect its money fund investors from possible losses brings the overall tally of "bailouts" to almost 30 of the approximately 90 managers of money funds. Schwab had never been listed before, because it had been holding a small percentage of Whistlejacket SIV debt in its funds. A number of other funds had been forced to act on defaulted debt to preserve their AAA ratings, but the retail-oriented Schwab funds had no rating to protect. It appears that Schwab allowed the Whistlejacket to stay in the portfolio until recently, when they finally decided to remove the last vestiges of the SIV.
BNY Mellon's release says, "Securities servicing fees totaled $1.5 billion, an increase of 20% year-over-year and 17% sequentially. Both increases reflect the impact of the Acquisitions. Year-over-year results also reflect higher asset servicing revenue as a result of higher market values and new business and higher issuer services revenue from increased depositary receipts, while clearing services revenue was negatively impacted by lower transaction volumes and lower money market related distribution fees. The sequential comparison also reflects higher asset servicing and issuer services revenue, primarily depositary receipts, offset by lower clearing services revenue. Securities lending fee revenue totaled $38 million in the third quarter of 2010 compared with $43 million in the prior year period and $46 million sequentially."
Yesterday, two articles involving money market funds were featured in the mainstream investment press. Bloomberg BusinessWeek wrote, "S&P Rating Plan Faulted for Reducing Repo Cash, Funds' Choices", saying, "A Standard & Poor's plan to change the way it rates the credit risk of counterparties in repurchase agreements will boost costs for broker-dealers who draw cash through the arrangements and shrink the pool of liquid assets for money funds, according to industry participants. Today is the final day in a one-month public comment period on S&P's proposal to view unrated broker-dealers serving as counterparties in repos to rated money funds as having 'high credit risk.' S&P now assigns to an unrated counterparty that's at least half-owned by a rated entity the parent company's risk level."
The piece quoted Baclays Capital's Joseph Abate, "This would be disruptive not only to the dealer community, whose funding costs will go up, but also to the money funds who will need to find some replacement for that overnight liquidity. The changes are unnecessary because the overwhelming majority of repos held by money market funds are against government securities which are liquid and the transactions are typically overnight." (See Crane Data's Sept. 20 News "More Ratings Bad News: SnP RFC Requires Repo Counterparty Ratings".)
Also, this week's Investment News features "Federated plans to buck the tide on money funds", a Q&A with Federated Investors' CEO Chris Donahue. It says, "Some asset management executives would argue that now isn't a good time to be in the money market fund business. Yields on money market funds have been close to zero for months. Regulators have tightened rules around these offerings, and the industry is looking at further regulation."
The article continues, "Nevertheless, J. Christopher Donahue, president and chief executive of Federated Investors Inc., thinks that it's not only a good time to be in the money market business, it's time to expand. Mr. Donahue, whose firm had $336.8 billion in assets under management as of June 30, thinks that regulators' idea to impose capital requirements on money market funds could be detrimental to the industry and to investors. In a recent interview, he spoke about how he plans to build up Federated's $260.5 billion money market business and his plans for the firm as a whole."
One question says, "The Investment Company Institute has been working on developing a bank that would provide additional liquidity to prime money market funds and would be capitalized by the industry. What is the status of that project?" Donahue answers, "I think it's moving ahead. I am not in the position to tell you where the Federal Reserve and Treasury Department are on the issue, but we have people on some of the working groups within the ICI, and they have had very good meetings. We think it's a very good idea. There is a huge issue with liquidity."
Money Fund Intelligence's October issue profiles Morgan Stanley Investment Management and speaks with Kevin Klingert, Managing Director & Head of Liquidity, Dave Carson, Executive Director & Head of North America Liquidity Sales, and Executive Director & Senior Portfolio Managers Jonas Kolk and Michael Cha. Excerpts from our Q&A follow:
Q: How important are money market funds to Morgan Stanley? Klingert says, "Earlier this year, Morgan Stanley Investment Management (MSIM) established a dedicated Liquidity Management business. While we have been in the money fund business since the seventies, this distinct unit within MSIM is focused on the 2a-7 and customized cash market. This is a business that the firm knows well, and is an important complement to the overall suite of investment solutions that MSIM provides to our clients."
He adds, "The importance of money funds to Morgan Stanley is evidenced by the depth of resources we have established in credit, research, portfolio management, as well as in the expansion of our distribution resources both here in the United States and offshore. Morgan Stanley has committed significant financial resources to expanding our Sales presence, as we have recently completed the process of hiring highly experienced sales people in five regions within the United States, and London. We believe we have attracted some of the best talent in the industry, which is a testament to our commitment to the business, the respect of the franchise, and the anticipation of MSIM's plans to increase AUM and overall market share."
Q: How has MS been weathering the storm and now the yield drought? Kolk tells us, "We have been unwavering in our commitment to managing our portfolios in a thoughtful and conservative manner, focusing on principal preservation and liquidity. At certain times during the storm, we have sacrificed yield in our portfolios, defensively positioning the funds during times of market stress and dislocation. This defensive posture has allowed us to capitalize on market opportunities to participate in prudent, innovative investments resulting from market and regulatory changes.... Putable FRNs are a great example. Due to our conservative WAM/WAL positioning we proactively approached several high quality banks and negotiated putable transactions with three month put windows and attractive step-up coupons."
Cha adds, "I believe that our early conservative approach to the way we manage money has now become more uniformly adopted as a result of the changes to 2a-7 and the interest rate environment. The yield drought has affected everybody, and as we initially saw a migration of clients from Prime Funds to Government Funds, we are now beginning to see a leveling off of this type of activity. We continue to see steady growth in all funds as we enter the 4th quarter, and as our sales presence grows, we anticipate significant growth in 2011 and beyond."
Q: What's the biggest challenge in managing money funds? Kolk answers, "Today's biggest challenge is keeping pace with the rapidly developing and changing regulatory landscape and the potential for associated unintended consequences (i.e. Basel III). In addition, proposed changes to rating agency methodology add to the challenges. From an historic standpoint, the biggest challenge has been striking the correct balance in terms of the natural asset liability mismatch that is inherent in money market funds. It has and continues to be a delicate balance between delivering a competitive return for our shareholders while maintaining ample liquidity in a safe and sound portfolio construct."
Q: Will you have to be a giant in the future to manage money funds? Carson comments, "While I don't think you have to be a 'giant' to manage money funds, we have seen consolidation in the industry, and we expect more. Liquidity Management is highly scalable, and those who can best recognize these economies of scale will be well-positioned to succeed. While scale will be important, it is also essential that some of the giants not lose the flexibility to adapt to various market conditions. We feel that we are very well-positioned to support sustained growth, as a function of competitive performance, and adherence to our strategy of dedicating ever-increasing resources to this business. Again, this is a core business to MSIM overall, and we will continue to support the business from the considerable resources of Morgan Stanley and the team of dedicated expert professionals delivering it."
Q: What are your thoughts on the future of money funds? Do you think changes like a floating rate, liquidity facility, or capital reserves are likely or desirable? Klingert says, "Clearly, there have been changes in the money market industry, and additional changes are being considered. Regardless of the outcome, we feel confident that, however the landscape evolves, MSIM's Liquidity Business will be well positioned to be successful. We will continue to evaluate the marketplace and dedicate resources to ensure this success."
Money market mutual fund assets fell below the $2.8 trillion level and dipped to their lowest level since late July 2010 and since late August 2007. ICI's latest "Money Market Mutual Fund Assets" survey says, "Total money market mutual fund assets decreased by $5.81 billion to $2.799 trillion for the week ended Wednesday, October 13. Taxable government funds decreased by $7.04 billion, taxable non-government funds increased by $2.58 billion, and tax-exempt funds decreased by $1.36 billion."
ICI's weekly report continues, "Assets of retail money market funds decreased by $2.67 billion to $950.30 billion. Taxable government money market fund assets in the retail category decreased by $550 million to $165.56 billion, taxable non-government money market fund assets decreased by $1.49 billion to $581.40 billion, and tax-exempt fund assets decreased by $630 million to $203.34 billion." Retail money fund assets are at their lowest level since November 2006.
It adds, "Assets of institutional money market funds decreased by $3.14 billion to $1.849 trillion. Among institutional funds, taxable government money market fund assets decreased by $6.49 billion to $654.79 billion, taxable non-government money market fund assets increased by $4.07 billion to $1.069 trillion, and tax-exempt fund assets decreased by $730 million to $124.83 billion." Institutional assets are at their lowest level since August of this year.
Year-to-date, money fund assets have declined by $494 billion, or 15.0%, and over 52 weeks money fund assets have declined by $605 billion, or 17.1%. Over the past 2 years (104 weeks), money fund assets have fallen by $708 billion, or 19.8%, while over 3 years (156 weeks) money fund assets are almost flat (down by $29.8 billion, or 1.1%). But assets remain almost $900 billion higher than their most recent previous trough of $1.913 trillion at the end of 2004 and almost a trillion higher than their level of 10 years ago ($1.845 trillion at year end 2000).
Earlier this week New York Federal Reserve Bank President and Chief Executive Officer William Dudley gave a speech entitled, "Basel and the Wider Financial Stability Agenda," in `Remarks at the 2010 Institute of International Finance Annual Membership Meeting, Washington, D.C.. Dudley said, "Over the past year, important new regulatory initiatives have been advanced both at the national and international level. These include the recent agreement in Basel on stronger capital and liquidity standards for internationally active banks and the considerable regulatory changes embodied in the Dodd-Frank Act (DFA)."
He commented, "Turning next to the new Basel liquidity requirement, the new standard will likely necessitate a significant adjustment in behavior for those banks that historically relied on short-term wholesale funding and those that had negligible buffers but instead had relied on the Federal Reserve and the Federal Home Loan Bank System to be their liquidity backstops. However, the transition costs are likely to be quite manageable because, as was the case for the capital standards, there are many margins available for adjustment."
Dudley continued, "Before I assess the transition costs of the liquidity coverage ratio (LCR) standard, a few words about what the LCR is intended to do and how it operates. The notion behind the LCR standard is that large, internationally active financial institutions should have a liquidity buffer that enables them to operate for 30 days in a stress environment without having to rely on government support, including central bank liquidity backstops. Banks would have to have sufficient liquid assets that they could sell to be able to meet outflows stemming from deposit withdrawals; bank debt that matures and is unable to be rolled over; and drawdowns from committed credit and liquidity facilities provided to financial firms and other entities. The size of the required liquidity buffer depends, in part, on the maturity of the bank's assets and liabilities, the stickiness of its deposit liabilities, the amount of irrevocable liquidity backstops and composition of its assets."
He explained, "The adjustment costs associated with the LCR standard should be low because, like capital, there are different, relatively low-cost ways to adjust to the standards. For example, because the liquidity buffer only needs to last for 30 days, a bank that extends the maturity of its short-term wholesale borrowing or its deposit liabilities by a month or two will find that this goes a long way in helping to meet this standard. Banks could also cut the level of their backstop liquidity lines and other commitments to financial firms. The standard assumes that such lines of credit can be fully drawn upon and thus, count as potential draws against the buffer."
Dudley also said, "Because the common international liquidity standards are relatively untested, regulators are implementing LCR with an 'observation period.' What this means is that unanticipated and unintended consequences generated by the new liquidity standard will be closely scrutinized and, if necessary, adjustments will be made to the rules if undesirable effects become evident over time. For example, the tough requirements on backstop liquidity lines could potentially be modified if such rules generated unintended negative consequences for short-term corporate funding markets, such as the nonfinancial corporate commercial paper market."
Later in the speech, he commented, "In all of the reforms that we are implementing it is important that we pay close attention to the shadow banking system. By shadow banks, I mean the largely unregulated financial entities that take credit risk and/or engage in maturity transformation without access to explicit governmental backstops such as the Federal Reserve's discount window and or deposit insurance. As we saw in the crisis, without such support, these institutions are vulnerable to runs. When this occurred, the shadow banking sector imploded in a way that imposed significant costs on the regulated sector."
Finally, Dudley added, "The risk is that tighter capital and liquidity requirements for the large financial institutions could push much of the business of credit intermediation and maturity transformation from the regulated sector to the unregulated sector. However, this risk is mitigated by the fact that shadow banks heavily rely on credit support and liquidity lines from the regulated sector. The costs of such facilities will be affected by the new capital and liquidity standards for banks. Thus, the economics of the shadow-banking sector are likely to change in a way that makes such activities less attractive. In addition, by increasing transparency and requiring some risk retention by issuers, Dodd-Frank should make the securitization markets in which shadow banks operate less likely to support poorly underwritten credit. Taken together, these changes mean it is less likely that there will be widespread movement of credit and maturity transformation from the regulated sector to the unregulated sector. Nonetheless, as my colleague Governor Tarullo noted in a recent speech, more will need to be done to increase the stability of the unregulated sector, and developments in this area will need to be scrutinized carefully in the years ahead."
As we wrote in our latest Money Fund Intelligence, money market mutual funds have begun disclosing their portfolio holdings in a standardized format as of October 7. While money funds have always posted some form of portfolio holdings, many of these were not timely and the information and formats provided varied widely. The SEC's new "Disclosure of Portfolio Information" rule that went live last week mandates that funds post monthly holdings with CUSIPs, principal values, amortized cost values, maturities, and new SEC investment categories. Below, we discuss these new holdings disclosures, the SEC Reform rules, and Crane Data's efforts to track this new info and to construct a database of money fund holdings.
Federated Investors has released a "Guide to New Portfolio Holdings Format" on the company's "Money Market Matters" page. The "Federated Money Market Fund Portfolio Holdings" guide, subtitled, "New Format. Same Commitment to Our Investors," says, "This month you will notice a new format for Federated's money market portfolio holding reports. The recently amended Rule 2a-7, which governs money market funds, requires all money market funds to provide their holdings on a monthly basis. Additionally, the requirements dictate that the holdings report includes specific information about the fund. The example below highlights newly required information, plus some new information that has been added by Federated. We believe our new format will provide additional clarity so that you can more effectively monitor your fund."
Federated's example lists the fund (Prime Obligations Fund), current assets, weighted average maturity (must now be 60 days or fewer), weighted average life (must be 120 days or fewer), principal amount, security description, CUSIP, amortized cost value, effective maturity ("the maturity date as determined under Rule 2a-7 for purposes of calculating WAM, taking into account maturity shortening provisions, such as interest rate resets), final maturity, and Rule 2a-7 category of investment (security categorization as defined by the SEC). The guide adds, "Although not required, Federated will continue to provide additional security categorization information to the holdings."
Note that the SEC's Category of Investment (see p.21) includes: "Treasury Debt; Government Agency Debt; Variable Rate Demand Note; Other Municipal Debt; Financial Company Commercial Paper; Asset Backed Commercial Paper; Other Commercial Paper; Certificate of Deposit; Structured Investment Vehicle Note; Other Note; Treasury Repurchase Agreement; Government Agency Repurchase Agreement; Other Repurchase Agreement; Insurance Company Funding Agreement; Investment Company; [and] Other Instrument."
On page 72 of its February 23 "Money Market Fund Reform rule, the SEC says under, "Disclosure of Portfolio Information. Public Website Posting," "We are amending rule 2a-7 to require money market funds to disclose information about their portfolio holdings each month on their websites. The disclosure will provide greater transparency of portfolio information in a manner convenient for most investors. The amendment is designed to give investors a better understanding of the current risks to which the fund is exposed, strengthening their ability to exert influence on risk-taking by fund advisers."
It continues, "As amended, rule 2a-7(c)(12) will require funds to disclose monthly with respect to each security held: (i) the name of the issuer; (ii) the category of investment (e.g., Treasury debt, government agency debt, asset backed commercial paper, structured investment vehicle note); (iii) the CUSIP number (if any); (iv) the principal amount; (v) the maturity date as determined under rule 2a-7 for purposes of calculating weighted average maturity; (vi) the final maturity date, if different from the maturity date previously described; (vii) coupon or yield; and (viii) the amortized cost value. In addition, the amendments require funds to disclose their overall weighted average maturity and weighted average life maturity of their portfolios.... The amended rule requires funds to post the portfolio information, current as of the last business day of the previous month, no later than the fifth business day of the month.... Portfolio information must be maintained on the fund's website for no less than six months after posting."
On the pending Form N-MFP, a second holdings mandate which will require more detailed disclosures starting with month-end November data but with a 60-day lag (it will be first released in early February), the SEC writes, "Money market funds must report on Form N-MFP, with respect to each portfolio security held on the last business day of the prior month, the following items: (i) the name of the issuer; (ii) the title of the issue, including the coupon or yield; (iii) the CUSIP number; (iv) the category of investment...; (v) the NRSROs designated by the fund [this provision has been put on hold], the credit ratings given by each NRSRO, and whether each security is first tier, second tier, unrated, or no longer eligible; (vi) the maturity date as determined under rule 2a-7, taking into account the maturity shortening provisions of rule 2a-7(d); (vii) the final legal maturity date, taking into account any maturity date extensions that may be effected at the option of the issuer; (viii) whether the instrument has certain enhancement features; (ix) the principal amount; (x) the current amortized cost value; (xi) the percentage of the money market fund's assets invested in the security; (xii) whether the security is an illiquid security (as defined in amended rule 2a-7(a)(19)); and (xiii) 'Explanatory notes.' Form N-MFP also requires funds to report to us information about the fund, including information about the fund's risk characteristics such as the dollar weighted average maturity of the fund's portfolio and its seven-day gross yield."
These new data points and the new holdings format standardization should allow companies to begin building a true database of money fund holdings, which doesn't exist currently. (We currently offer Portfolio Composition and 'Hotlinks' to Portfolio Holdings in our monthly Money Fund Intelligence XLS. The links have been updated to reflect the new holdings format in most cases.) Crane Data has been storing the largest fund's holdings in a spreadsheet format for several months now, but we've recently begun work on a full portfolio holdings dataset. We intend to add this to our Money Fund Wisdom software early in 2011, and we plan on adding WAL, or weighted average life, to our MFI XLS beginning next month. Contact us if you'd like more details.
On Friday, Wells Fargo Advantage Funds' Institutional Cash Management released its latest monthly "Portfolio Manager Commentary: Overview, Strategy, and Outlook." In this issue, Mike Shinners and Karen Hessing discuss the "Credit Landscape," saying, "On September 19, the oversight body of the Basel Committee on Banking and Supervision (BCBS) announced and fully endorsed changes to bank capital requirements and introduced global liquidity standards. Collectively, these changes are commonly referred to as Basel III and are scheduled to be presented for approval by the G-20 at its November meeting in Seoul."
Wells explains, While much of the discussion has focused on the changes to capital requirements, the liquidity standards may have a significant impact on short term investment opportunities. The liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR) are two standards broadly designed with the intention of improving the resilience of institutions during short-term liquidity disruptions (LCR) and improving asset/liability funding mismatches by incenting the use of longer-term funding (NSFR). Taken as a whole, the measures may improve the risk profile of financial institutions. However, they may also constrain investment opportunities in the short-term space as financial institutions extend funding, purchase liquid assets, and exit or reduce certain issuance programs, even as revised Rule 2a-7 reduces the limit on weighted average final maturity and enacts minimum standards for daily and liquid assets."
The piece says, "The LCR, or 'run on the bank,' ratio requires a bank to maintain a stock of unencumbered, highly liquid assets that exceed an estimate of net cash outflows over a 30-day horizon during a 'stressed' environment. While implementation is scheduled for 2015, the observation period begins January 2011, and regulators have already pushed financial institutions to increase liquid asset holdings.... The requirement to hold liquid assets against credit and/or liquidity facilities and other short-term debt may make certain types of debt issuance cost-prohibitive for both banks and borrowers to continue to issue or sponsor; such programs may include repo, commercial paper, and, in particular, asset-backed commercial paper, as well as other types of supported issuance, such as letter-of-credit-backed municipal debt.... All of this may have the effect of reducing lending by financial institutions."
It adds, "The NSFR, which is expected to be implemented in January 2018, measures the required amount of funding that is expected to be stable over a one-year time horizon, examining on- and off-balance-sheet exposures.... Stable funding includes capital, preferred stock, liabilities with effective maturities greater than one year, and a portion of other deposits that are expected to stay on deposit during a stressed event. The effect of the ratio also constrains a financial institution's ability to issue a significant amount of debt outside the 30-day review period in the LCR. Implementation has been delayed until 2018 because of the significant amount of rulemaking yet to be done and because of concerns expressed by various national regulators and institutions that the ratio may not appropriately capture jurisdictional nuances that may affect national banking systems differently."
Finally, the Wells publication adds in "The Inside Track," "The Fed's commitment to the zero interest rate policy seems even stronger as discussions about a second phase of quantitative easing have picked up. There continues to be a disconnect between the issuers' desire to fund longer and market participants' need for shorter-term investments -- an issue that we do not think will be resolved easily. Although we've seen some securities issued that bridge that gap, demand continues to outstrip supply, and we believe that over the longer term, the yield curve will steepen further. With much rule-writing to be done in the coming months, and a somewhat unsettled credit environment, there is still a fair amount of uncertainty in the money markets. In light of all of this, we think it is wise to continue to focus our investment strategy on that stable NAV and a high degree of portfolio liquidity."
Following the success of our Crane's Money Fund Symposium in Boston, which attracted over 330 money market professionals this past July, Crane Data is pleased to announce the launch of a second money market mutual fund event. Our new Crane's Money Fund University, a new 2-day educational conference, will be held January 13-14, 2011, at The Westin Jersey City Newport. The preliminary agenda was sent to subscribers of Money Fund Intelligence yesterday and is now available on www.moneyfunduniversity.com. (The registration page will go live this Monday, Oct. 11.)
Money Fund University will offer attendees an affordable and comprehensive two day, "basic training" course on money market mutual funds. We'll cover the history of money funds, interest rates, Rule 2a-7, ratings, rankings, money market instruments such as commercial paper and repo, portfolio construction, credit analysis, and more. New portfolio managers, analysts, investors, issuers, service providers, and anyone interested in expanding their knowledge of "cash" investing should benefit from our concentrated and comprehensive program. Even experienced professionals should enjoy a refresher course and the opportunity to interact with peers in a convenient and informal setting.
The Preliminary Agenda for Day 1 of Crane's Money Fund University (e-mail Pete for the full PDF brochure) includes the following sessions and speakers: The History of Money Market Mutual Funds by Peter Crane of Crane Data and Sean Collins of the Investment Company Institute; Interest Rate Basics & Money Market Math, by Phil Giles of Columbia University; The Federal Reserve & Money Markets by Lou Crandall of Wrightson ICAP and Joseph Abate of Barclays Capital; Money Fund Regulations: Rule 2a-7 Basics by John Hunt of Jenkins McLaughlin & Hunt LLP; Money Fund Ratings & Fund Surveillance with Peter Rizzo of Standard & Poor's and Viktoria Baklanova of Fitch Ratings; and Crisis Review, Support & Reforms in MMFs with Steffanie Brady of the Federal Reserve of Boston and Stephen Keen. Lunch, breaks and a reception are also included in the Day 1 activities.
The Day 2 Agenda includes sessions on Instruments of the Money Markets, such as: Commercial Paper, CDs and Prime Money Fund Securities with Alex Roever of J.P. Morgan Securities, Rob Crowe of Citi, and Barry Weiss of Arrowhead Research; Treasury Securities, Government Agencies & Repo by Sal Urside of G.X. Clarke; ABCP, Structured Securities & New Securities with Stephanie Gentile of Credit Suisse; Tax-Exempt Securities, VRDNs, TOBs, and Put Bonds with Colleen Meehan of Dreyfus; Portfolio Construction Strategies with Kevin Kennedy (tentative) of Western Asset; Credit Analysis & Approved Lists with Louis Geser of Dreyfus and Jacob Weinstein of Fidelity Investments; and more. Breakfast, lunch and refreshment breaks are also all included in Day 2's activities.
Attendee registration for Crane's Money Fund University is $500 prior to October 31st and $600 starting November 1st. Exhibit space is $2,000 and sponsorship opportunities are $3K, $4.5K, and $5K. A small block of rooms have been reserved at the Westin Jersey City. The conference negotiated rate of $169 plus tax (14% currently) is available through December, 16th. For booking information please reference the Hotel and Travel Tab on the conference website. The Westin Jersey City Newport is ideally located minutes from Newark Liberty International Airport, just west of Wall Street and Manhattan's World Financial Center. The hotel is just one block from the Pavonia/Newport PATH station and immediately adjacent to the 1.2-million-square-foot Newport Centre Mall. We hope to see you in Jersey!
Finally, look for the preliminary agenda for the big show, Money Fund Symposium, to appear starting next month. Crane's MF Symposium 2011 will be held June 22-24 in Philadelphia. In just two years, Money Fund Symposium has become the largest gathering of money market professionals and cash investors in the world. We expect next year's event to be even bigger and better, so watch www.cranedata.com and our new URL, www.moneyfundsymposium.com, for more information starting in November. Please feel free to call or write for more details or with any questions or requests.
The latest Money Fund Intelligence, Crane Data's flagship monthly newsletter, was e-mailed to subscribers this morning. The October edition features articles entitled, "More Changes in Money Fund Land; Now vs. 2008," which details the liquidations, mergers and name changes that have taken place over the past two years; "New Morgan Stanley Committed to Liquidity," which profiles MSIM and Liquidity team members Kevin Klingert, Dave Carson, Jonas Kolk and Michael Cha; and our first issuer article, "SMBC’s Rising Profile in the Money Markets." The agenda for our new Crane's Money Fund University, a "basic training" event for money markets, was also sent out to subscribers.
The "More Changes" article says, "While both yields and assets were relatively flat, the latest month saw more changes among money fund offerings and providers. The steady trickle of liquidations, fund suite consolidations and lineup tweaks continued in September. Though more is undoubtedly on the way, the vast majority of money funds continue on with business as usual." Our monthly Money Fund Intelligence XLS, which contains a "Fund Family" ranking, shows that eleven managers have liquidated their money fund lineups over the last two years and that the number of providers has shrunk from 90 to 80 since Sept. 2008.
Our monthly Fund Profile asks, "How important are money market funds to Morgan Stanley? Klingert says, "Earlier this year, Morgan Stanley Investment Management (MSIM) established a dedicated Liquidity Management business. While Morgan Stanley has been in the money fund business since 1975, this distinct unit within MSIM is focused on the 2a-7 and Customized Cash market. This is a business that the Firm knows well, and is an important complement to the overall suite of investment solutions that MSIM provides to our clients." (Look for more excerpts in coming weeks.)
Our piece on Sumitomo Mitsui Banking Corporation quotes, "Nobuyuki Kawabata, General Manager, Planning Department, Americas Division, "We've been issuing in the U.S. money markets for several years and have become more active since the liquidity crisis of 2008. The U.S. money markets are the largest in the world by a far margin and institutionally we've always felt that it's important to be a major player here." The article discusses recent developments in the cash marketplace, including funding strategies, ultra-low yields, and changes in money funds from an issuer's perspective.
Finally, the website and preliminary agenda for Money Fund University are now live. Crane Data's complement to its Money Fund Symposium conference (which will be June 22-24 in Philadelphia in 2011) will offer attendees a comprehensive two day, 'basic training' course on money market mutual funds. The event is Jan. 13-14, 2011, at The Westin Jersey City Newport. Topics include: Rule 2a-7, interest rates, money market investments, and much more. For more, visit: www.moneyfunduniversity.com or contact us for the PDF brochure.
Deutsche Bank sent out a press release yesterday entitled, "Henderson Appoints Deutsche Bank's Asset Management Division as Investment Manager of Henderson Liquid Assets Fund." It says, "Henderson Global Investors and DB Advisors, the institutional fixed income asset management arm of Deutsche Bank, today announced that DB Advisors will be appointed investment manager of the Henderson Liquid Assets Fund on a sub-advisory basis with effect from 12 October 2010."
The release explains, "HLAF is a L3.3 billion Irish domiciled AAA-rated GBP-denominated, treasury-style money market fund. It aims to provide a constant net asset value with a 7-day London Interbank Bid Rate return and is exclusively offered to institutional or professional investors. The appointment of DB Advisors follows a review by Henderson of its cash investment business in light of potential changes to the way that the money market fund industry is regulated. With over E94 billion in money market assets under management, DB Advisors is a leading global provider of liquidity management strategies for institutions."
David Jacob, Chief Investment Officer of Listed Assets at Henderson says, "In conducting this review and coming to this decision we focused on finding the best outcome for investors in HLAF. DB Advisors has a significant international global money market business with a first rate reputation and utilises an extensive range of cash investment instruments. HLAF investors, including Henderson's institutional clients, will be able to benefit from greater access to these resources going forward. The Henderson cash team are passing the fund to DB Advisors with an excellent track record. The team will now focus on Henderson's investment-style money market funds, the Henderson Cash Fund and the Henderson Money Market Unit Trust, which are variable net asset value funds used by our retail investors."
Mark Bolton, Head of DB Advisors UK, comments in the release, "We are delighted to have this opportunity to add value for investors in the Henderson Liquid Assets Fund. We are committed to offering investors in the UK the full benefit of our global services, including cash and short-duration investment solutions."
Henderson Liquid Assets Fund plc was launched January 6, 2003. The release adds, "The Company is an Undertaking for Collective Investment in Transferable Securities under the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 1989, of Ireland. The company has received an Aaa/MR1+ rating from Moody's (06 Jan 2003) and an AAA/mmf rating from Fitch (19 Jan 2010). Assets under management: L3.3 billion (as at 30 September 2010)."
The fund's Objective is, "To provide an attractive rate of return commensurate with security of capital through investment in short-term deposits, certificates of deposit and other money market instruments. The performance objective will be to outperform 1 week LIBID rates over the longer term, from a diversified portfolio of money market instruments such as will qualify the Fund for an Aaa/MR1+ rating from Moody's and an AAA/mmf rating from Fitch."
DB Advisors is the 7th largest manager of "offshore" money market funds (those domiciled in Dublin or Luxembourg and marketed to European and multinational corporations) with $21.5 billion, according to Crane's Money Fund Intelligence International. (MFII currently doesn't track Henderson's money market fund.)
Fitch Ratings put out a press release yesterday entitled, "Fitch: U.S. Money Market Funds Likely to Increase Repurchase Agreement Activity." It says, "U.S. money market funds (MMFs) have increased their investment in repurchase agreements (repos) in response to the credit crisis and regulatory changes, a trend that is unlikely to abate over the near-to-intermediate term.... As of Aug. 31, 2010, repo activities undertaken by U.S. prime MMFs totaled $281.5 billion, or 17% of total assets under management. Historically, U.S. prime MMFs have allocated, on average, 11% of their total assets to repos (42% for U.S. government MMFs). The sharp increase in repo allocations by prime MMFs began in 2H'07, coinciding with the onset of the credit crisis and a general risk aversion towards various forms of short-term structured credit securities."
The Fitch release continues, "Recent regulatory changes have imposed additional liquidity and maturity constraints on U.S. MMFs, making the use of overnight repos increasingly important. Furthermore, in an environment of declining availability of short-term investment options that are also of high credit quality, Fitch expects MMF investment in repos to increase. The repo market has become one of the biggest sectors in the global money markets reaching $2.8 trillion on its peak in early 2008. According to data compiled from Fitch, the value of securities financed by tri-party repos averaged $1.7 trillion in the first quarter of 2010. Fitch estimates that approximately 1/4 of this market is attributable to repo transactions conducted by U.S. taxable MMFs. At the end of the first quarter of 2010 U.S. prime MMFs' investments in repos totalled $170 billion, while U.S. government MMFs had $275.9 billion in such transactions."
The 7-page Fitch report, entitled "U.S. Money Market Funds: Repurchase Agreement Practices," says, "Repurchase agreements (repos) have become an increasingly important investment option for U.S. money market funds (MMFs) over the past three years, prompted by the credit crisis and subsequent regulatory changes to MMFs. This special report examines the effects of some of these market dynamics on U.S. MMFs and analyzes the main risk management considerations of repo activities." The paper includes a chart which shows the "spikes in repo allocations by U.S. prime MMFs."
Highlights of the Fitch report include: "At 17% of prime MMFs’ assets under management invested in repos, MMFs are increasingly active investors in this asset class, predominantly on an overnight basis.... Given current market conditions of ultra-low yields and constrained supply of MMF-eligible assets, some U.S. prime MMFs have increased their allocations to longer-dated repos and repos backed by nongovernment collateral.... The tri-party repo market is concentrated with respect to its participants. Top 10 repo counterparties of Fitch-rated taxable MMFs account for more than 82% of all repo exposures in Fitch-rated taxable MMF portfolios.... Repos undertaken by U.S. MMFs are almost exclusively done on a tri-party basis in order to minimize the risks associated with a counterparty default. Fitch Ratings notes that The Federal Reserve Bank of New York (FRBNY) recently published a White Paper on tri-party repo with the goal of further strengthening the market against counterparty risk, particularly intra-day risk from the dominant clearing banks."
Under "ReEvaluating Credit Risk: Counterparty Analysis," the report says, "It should be noted that MMFs often conduct repos with unrated wholly owned subsidiaries of rated banks and other financial institutions. Fitch normally views such exposure as an exposure to the subsidiary’s rated parent unless the credit profile of the subsidiary differs significantly from that of its rated parent." The piece includes a table of the top 10 repo counterparties of Fitch-rated taxable MMFs. These (all rated F1+) include: Barclays Bank (15.5%), Deutsche Bank (14.6%), BNP Paribas (12.9%), Bank of America (9.7%), Goldman Sachs (8.4%), Royal Bank of Scotland (5.4%), Credit Suisse (5.2%), Citigroup (3.6%), Societe Generale (3.6%), and Toronto-Dominion Bank (3.2%).
Finally, Fitch says, "The FRBNY published a White Paper in May 2010 titled 'Tri-Party Repo Infrastructure Reform,' which puts forth recommendations designed to strengthen the market for tri-party repo. Specifically, the paper highlights the need to reduce intra-day settlement/counterparty risk and risk management practices at the large, dominant tri-party clearing banks.... Repos continue to be an important asset class and a liquidity management tool for MMFs. Given the recent regulatory changes, which impose additional liquidity and maturity constraints on U.S. MMFs, the use of overnight repos has become increasingly important. In addition, in the environment of declining availability of high credit quality, short-term investment options, Fitch would expect MMFs’ investments in repos to increase."
Several fund liquidations, name changes and consolidations occurred last week, including Neuberger Berman's tax-exempt money fund closings, the renaming of RiverSource as Columbia, and the merger of the former Barclays offshore money fund suite into BlackRock's offshore lineup. While none of these moves was totally new or earth-shattering, they continue to demonstrate the fluid nature of money fund lineups and listings in 2010. Since September 2008, out of the 84 money fund managers tracked by Crane Data, 8 have liquidated (with one more pending), 4 have merged into other managers, and 6 have changed names. (See our pending October issue of our Money Fund Intelligence for the full list and for more details.)
We wrote in our Sept. 13 Crane Data News ("Liquidations Continue in Money Fund Space; Neuberger Files to Quit)," "Neuberger Berman appears to be the latest casualty of ultra-low rates, asset outflows and rising regulatory requirements in the money market mutual fund space. A recent SEC filing for the Neuberger Berman Income Funds and Neuberger Berman Municipal Money Fund says, "The Board ... recently approved the liquidation of Neuberger Berman Municipal Money Fund, which is scheduled to occur on or about September 28, 2010." (Note that Neuberger, the former Lehman Brothers, continues to manage other "cash" and other money funds, including the SEI Tax-Ex Trust T-F MMP (TXEXX).) The Neuberger Tax-Exempt funds, including Neuberger Berman Muni MF Invest (NMNXX), Neuberger Berman NY Muni MF (NYNXX), and Neuberger Berman Tax-Fr MF Re (NTFXX) did indeed liquidate on Sept. 28.
We also just learned that the Columbia name will be return to the money fund space, though this time as just the retail presence of the RiverSource funds. The $2.5 billion RiverSource Cash Management A was renamed as Columbia Cash Managemt A (IDSXX) on Sept. 27, and the $125 million RiverSource Government MMF A was renamed Columbia Government MMF A (SCMXX). (See the name changes here.) Earlier this year, the previous Columbia money funds were renamed BofA Funds following the sale of Columbia Management's long-term fund business to Ameriprise Financial. (See our May 4 Crane Data News "Columbia Money Funds Now BofA Funds, BofA Global Capital Mgmt" for more details.)
Also, the consolidation of fund lineups continues (see our August 26 News "Goldman to Consolidate Fund Lineups, Liquidate Inst Liquid Assets MFs") with the merger of BlackRock's Dublin-based ("offshore") Cash Selection Funds (formerly Barclays Global) into BlackRock's Institutional Cash Series money funds. BlackRock said to European and non-U.S.-based shareholders of these funds, "The CSF Funds and the ICS Funds have been managed by the same investment team since BlackRock acquired Barclays Global Investors in December 2009.... By merging the funds, investors will be investing in larger pooled investment vehicles whilst maintaining access to the same BlackRock investment expertise." (See our Money Fund Intelligence International for more details.) This merger took place on Sept. 27.
Finally, two other small funds were liquidated last week. DWS CAT Prem MM Sh MMP Sh (CPRXX) and DWS Premier MM Shares TEP (IEXXX) were both liquidated on Sept. 29, 2010. We also saw assets of the RidgeWorth funds move into various Federated funds last week, though this liquidation isn't officially scheduled to occur until around Nov. 30. (See the latest filing here.)
J.P. Morgan Asset Management is launching a new "ultra-short" money market fund, as well as what appears to be an "enhanced cash" fund. Standard & Poor's yesterday released new ratings on both JPMorgan Current Yield Money Market Fund (JCCXX) and JPMorgan Managed Income Fund (JMGSX). (A new rating normally means a fund launch is imminent.) S&P rated the former, whose SEC filing was mentioned in Crane Data's June 28 "Link of the Day", 'AAAm', and rated the latter, 'AAf/S1+'. While we've seen a handful of new entrants appear just beyond the outskirts of Rule 2a-7 (and more are undoubtedly on the way), Current Yield appears to be the unique in its apparent positioning as an ultra-short (under 10 day WAM) money fund (there have though been some pure "repo" money funds in the distant past).
S&P says, "The JPMorgan Current Yield Money Market Fund seeks to provide current income while maintaining liquidity and providing stability of principal. The fund is unique in that, under normal market conditions, it will maintain a maximum dollar-weighted average maturity of 10 days or less. Eligible investments include U.S. treasury obligations, federal agency obligations of the U.S. government, repurchase agreements, and debt securities issued or guaranteed by qualified U.S. and foreign banks, including certificates of deposit, time deposits, and other short-term securities. The Fund's credit quality is excellent, with more than 50% of the securities invested in 'A-1+' rated securities and the remainder in 'A-1' rated paper."
The ratings agency says of the Managed Income Fund, "The 'AAf' fund credit quality rating is based on our analysis of the credit quality of the Fund's eligible investments, the counterparties, and the Fund's investment managers' overall management. The 'AAf' fund credit quality rating signifies that the fund's portfolio holdings provide very strong protection against losses from credit defaults. As part of our volatility analysis, we assessed the management, portfolio-level risk, target durations, and comparable return strategies of the JPMorgan Managed Income Fund. The 'S1+' volatility rating signifies that a fund possesses extremely low sensitivity to changing market conditions, and an aggregate level of risk that is less than or equal to that of a portfolio comprised of the highest-quality fixed-income instruments with an average maturity of one year or less."
S&P adds, "The JPMorgan Managed Income Fund seeks to provide current income while maintaining a low volatility of principal. The Fund does not seek to maintain a net asset value of $1, and there is a risk of market fluctuation. Eligible investments include high-quality money-market instruments such as commercial paper, certificates of deposit, time deposits, deposit notes, corporate securities (including U.S. dollar issues of foreign corporations), asset-backed securities, U.S. treasuries (including strips and securities issued or guaranteed by the FDIC), agencies' foreign-government-guaranteed securities (U.S. dollar-denominated only), debt obligations of supranational organizations, repurchase agreements, and rule 144A securities. The Fund's benchmark is the BofA Merrill Lynch U.S. 3-Month Treasury Bill Index."
Finally, S&P says of JPMorgan, "J.P. Morgan Asset Management, one of the largest asset-management firms in the world, is the fund's investment adviser. As of June 30, 2010, the firm had more than $1.1 trillion in assets under management. In addition to this newly rated fund, J.P. Morgan Asset Management manages 10 'AAAm' rated funds, including the JP Morgan Prime Money Market Fund. The custodian for the Fund is JP Morgan Chase Bank, and JP Morgan Funds Management Inc. is the Fund's administrator."