The latest statistics released by the Investment Company Institute in its "Month-End Portfolio Holdings" table show taxable money fund investments in Certificates of Deposit, U.S. Government Agency Securities and Commercial Paper dropped in February 2010. CDs remain the largest holding in taxable MMFs at 22.7% (includes Eurodollar CDs), or $626.2 billion, followed by Repurchase Agreements at 19.6% ($542.3 billion), Agencies at 17.6% ($485.8 billion), and CP at 17.3% ($478.0 billion).
Overall money fund assets declined by $76.2 billion, or 2.4%, to $3.139 trillion according to ICI's most recent monthly "Trends in Mutual Fund Investing." Repos, Bank Notes and Corporate Notes were the only sectors (besides "Other") to show increases, rising $2.1 billion, $1.6 billion, and $1.3 billion, respectively. Year-to-date, Repo holdings have jumped by $52.7 billion, while Agencies, CDs and CP have fallen sharply (down $68.6 billion, $44.2 billion, and $42.3 billion, respectively).
ICI's monthly asset series says, "Money market funds had an outflow of $77.26 billion in February, compared with an outflow of $103.45 billion in January. Funds offered primarily to institutions had an outflow of $69.41 billion. Funds offered primarily to individuals had an outflow of $7.85 billion." ICI's weekly series shows March's numbers down by $113 billion month-to-date, which would make it the largest monthly decline since Sept. 2008.
Statistics from ICI also show the number of taxable money fund accounts fell below 30 million (to 29.696 million) in February. Accounts outstanding have declined by 4.55 million over the past year. Average maturities fell by one day to 50 days, the number of taxable funds (portfolios) fell by two to 475, and the percentage of liquid assets in stock funds continues to set record lows at 3.5%.
Crane Data's preliminary Portfolio Composition statistics for March, a separate series from the ICI's, show Repos as taxable money funds' largest holding (25%), followed by Govt (20%), Treasury (17%), CDs (14%), CP (12%), ABCP (6%), FRNs (2%), Corp (1%) and Other (3%). (Our Money Fund Intelligence XLS began tracking Portfolio Composition late in 2009, and we're still working out our collections and categorizations.) Be on the lookout for an analysis of the largest holdings of the largest money market funds in the pending April issue of our Money Fund Intelligence, and watch for money fund holdings to be added to our Money Fund Wisdom database later in 2010.
Fitch Ratings launched the first issue of a new research publication entitled, "European Money Market Funds Quarterly" yesterday. The newsletter covering "trends, developments and pertinent issues in the money market funds (MMF) industry in Europe." A press release says, "Fitch's initial quarterly MMF newsletter assesses the difficulties faced by European MMFs throughout the financial crisis and notes that European MMFs managers are increasingly focused on sovereign risk, new regulations and stability of funds' capital base. The agency has also considered the adjustments that market participants have implemented to try to ensure that MMFs continue to meet their primary objective of preserving principal stability and liquidity."
The release quotes Fitch's London-based Roxana Mahboubian, "As concerns around sovereign indebtedness continue to mount, money market funds are increasingly reviewing direct government or government-related entity exposures and indirect exposures via financial institutions in such countries as Portugal, Ireland, Italy, Spain and the UK." It also quotes Paris-based Aymeric Poizot, "The low interest rate environment and the improved liquidity observed last year extended average portfolio maturities and led some funds to invest further out on the curve or in slightly less liquid assets."
It adds, "Money Market Funds have radically changed their portfolio composition, with a shift away from floating rate notes and asset-backed securities. Effective liquidity management in MMF also become a key consideration in 2008 and 2009 with managers focusing more on their client base and maintaining sufficient liquidity buffers. On average, 30% of Fitch-rated MMFs portfolios mature in less than seven days, as of end 2009."
The report says, "In 2009, assets under management (AuM) in European MMF remained flat overall (EUR1.3trn as at end-2009), with growth in the first half of the year offset by some outflows during the last quarter of 2009. AuM in 'AAA' rated MMFs increased by only 2.7% to EUR438.61bn (as at end-2009), the smallest annual growth rate in the past nine years. The bulk of the industry assets remained stable in a cash rich but still uncertain environment. However, some money left low-yielding MMFs in search of returns while riskier asset classes exhibited record performances from Q209 onwards."
On French money market funds, Fitch says, "A pronounced and prolonged redemption period for French domiciled funds occurred in the autumn of 2007 with the rising credit, and subsequent liquidity, concerns across asset-backed securities and structured investment vehicles. Outflows however affected mostly dynamic or enhanced MMFs and several managers of such fund types in Europe were either forced to suspend redemptions or had to take the decision to liquidate their funds." (Note that some, including Crane Data, don't consider these French vehicles true "money market funds".)
Last Thursday, Clearwater Analytics hosted a Webinar on "Money Market Fund Reform (see replay and slides here)." While much of the panel featured now familiar recaps of the recent SEC Money Market Fund Reforms, ICI Senior Economist Sean Collins revealed a number of fresh statistics on money funds (expected to appear in May in the next edition of the ICI's Mutual Fund Fact Book).
Collins says to the Webinar audience, "[I]n 2007 and 2008, we had record inflows, in excess of $600 billion in each of those years. Then 2009, [we saw] some significant reversal, split about evenly between retails and institutional funds.... If you look at our weekly data, you'll see that we've continued to see fairly substantially outflows in recent weeks. For example, in the last three weeks or so, we've seen about $100 billion in outflows.... At the moment on a weekly basis, we are probably down to about $3 trillion mark."
He continues, "The next slide gives you some indication of what the importance of money market funds is in helping businesses manage their short term assets.... You can see in 2008, about 35% of businesses' short-term assets were held in money market funds. This is things like direct holdings of commercial paper, repurchase agreements, Treasury securites, cash at banks, money market funds, and other similar instruments. With the outflows in 2009, we are down to about 30%. But [this is] still above any record level except for 2008."
Collins explains, "The reason for the outflows, certainly on the retail side, not surprisingly, is just a no small measure due to what's been happening to short-term interest rates. This [next slide] shows you the flows to taxable retail money market funds ... relative to ... the spread between the yield on money market funds and money market deposit accounts at banks. You can see that in 2009 and early 2010, given the very low level of interest rates ... we've been having significant outflows."
He adds, "I think to some extent that carries over to what's going on the institutional sector as well. When you are getting roughly zero on a short-term instrument, you may be willing to go out the curve a bit to try and get a little bit of yield, or if you can get a little bit more in some kind of a bank instrument you may go there. So I think that what's been happening recently, if there is any doubt, is probably not so much related to any confidence in the money fund product, but probably just primarily where we are at in the interest rate cycle at the moment."
Collins also says, "One effect has been that we are beginning to see some compression in the industry.... [T]he percent of assets held by the top five complexes has crept up from 39% in 2006 to 47% in 2010.... That probably reflects a number of factors: one is simply outflows over the past year, regulatory pressures which are adding to cost, and the low interest rate environment especially for funds that have had to offer waivers.... But I think that the interest rate environment here is probably what is driving the outflows." He adds, "The number of funds has been declining for about 10 years now, from 1,045 in 1999 to about 704 as of January 2010. I think that's just evidence of some of the market pressures that we're seeing, probably also evidence of rationalization of the market for the product itself."
On the future, he says, "We still have the President's Working Group report to come out, and we're not sure what we'll see in that.... Bob Plaze at the SEC has said [in Phoenix recently] that some of what's in it might give [ICI President] Paul Stevens some heartburn. But we really don't know what's in there, so we're just playing 'wait-and-see' at the moment. Another big question is monetary policy. We all know that short term rates are going to go up at some point. It's more a matter of how quickly and when. I think we heard today from Chairman Bernanke that it's probably later rather than sooner.... When the Federal Reserve does begin to raise rates, they're going to do it slowly."
Finally, Collins responds to a question on outflows and regulations, "I think some of it's going out the curve. Some of it's probably gone back into bank products. Some of it may be going offshore. But again, I'm not convinced that what we have been seeing recently is any indication that people are worried about the product per se. It's more a matter of just what the interest rate cycle looks like at the moment. Down the road, as money funds begin to pick up yield, we'll probably see that chain of events reverse, I would think.... We had an awful a lot of money flow in to money funds in the aftermath of September 2008. I think it would have been unreasonable to expect all of that to stick.... I just don't think that at this point we can say that the new regulations have been completely behind of what is going on [with any outflows]. Certainly, it's going to have an effect. But it's too early to say that we have lost a trillion dollars because of new regulations. I think other factors are probably quite important."
Moody's Investors Service released an "Industry Outlook report entitled, "Asset Management Industry: 2009 Review and 2010 Outlook" yesterday which says in a press release that the "Outlook [is] still negative for global asset management industry. While the 19-page report doesn't focus on money market funds, it does include a couple of pages on "cash."
Senior Vice President and US Team Leader of Moody's Global Managed Investments Group Dan Serrao says of the broader fund industry, "In the last couple of years, investors have watched the industry lose a great deal of their money and so they are now opting for lower risk fixed income products and more passive, lower-fee forms of money management, like ETFs, which squeeze the managers' revenue yields.
The Outlook says, "Money market fund managers are facing nearly the lowest yield environment possible, which is crimping the profitability of this important asset class. The slowly declining balance of money in money market funds over 2009 indicated improving willingness to come back into the market, but still, the amount of money in money market funds today (about $3.1 trillion in the U.S. and about $5.5 trillion globally) remains about 50% higher than levels seen in 2006. Money market funds are likely to hold an elevated level of importance as a key allocation within investors' portfolios and floating NAV funds may gain more acceptance. The costs of managing these funds will continue to be challenging, even for scale players."
On "Changes to Rule 2a-7," the Moody's report writes, "Over $3.1 trillion of assets are managed by money market fund (MMF) managers. These managers face a new set of SEC rules for MMFs that will be mostly phased in over the coming year. When the SEC's new liquidity rules go into effect on 28 May 2010, MMFs will be required to have at least 30% of their assets mature within seven days. We believe that the rules are manageable, but incrementally, there will be higher costs to managing MMFs and yields will be constrained by the risk and liquidity limits."
It continues, "The recent announcement by the Fed to permit large funds to enter the reverse repo market will help to offset these issues. MMFs will benefit from an increase in supply of high-quality assets at a time when the supply of safe assets has contracted. We view this benefit to be of greater importance to MMF credit profiles than a rise in absolute fund yields."
Finally, Moody's says, "While capital requirements are not part of the ruling, we believe that capital capacity will increasingly be a consideration in evaluating managers. Most of the very large money market fund managers will not be materially affected any potential increase in interest in the balance sheet qualities of money market fund managers."
The Federal Deposit Insurance Corporation released its latest "FDIC Quarterly," "a comprehensive summary of the most current financial results for the banking industry, along with feature articles." The latest edition shows a gradual recovery in the banking sector, a continued and growing reliance on the unlimited FDIC insurance of the Transaction Account Guarantee program, and a huge negative balance in the Deposit Insurance Fund. The report is also evidence that the temporary support measures extended to the banking sector dwarf those facilities offered to support the money market mutual fund industry.
The Quarterly says, "The FDIC Board approved the Temporary Liquidity Guarantee Program (TLGP) in response to major disruptions in credit markets. The TLGP improves access to liquidity for participating institutions by fully guaranteeing non-interest-bearing transaction deposit accounts and by guaranteeing eligible senior unsecured debt. As of December 31, 2009, more than 86 percent of FDIC-insured institutions have opted in to the Transaction Account Guarantee Program, and 7,808 eligible entities have elected the option to participate in the Debt Guarantee Program. Approximately $834 billion in non-interest-bearing transaction accounts was guaranteed as of December 31, 2009, and $309 billion in guaranteed senior unsecured debt, issued by 84 entities, was outstanding at the end of the fourth quarter."
It explains, "A final rule extending the Transaction Account Guarantee component of the TLGP six months, to June 30, 2010, was adopted on August 26, 2009. Entities participating in the Transaction Account Guarantee program had the opportunity to opt out of the extended program. Depository institutions that remain in the extended program will be subject to increased fees that are adjusted to reflect the institution's risk.... Institutions participating in the TAGP provided customers full coverage on noninterest-bearing transaction accounts for an annual fee of 10 basis points through year-end 2009. Fees for qualifying noninterest-bearing transaction accounts guaranteed between January 1, 2010, and June 30, 2010, will be based on the participating entity's risk category assignment under the FDIC's risk-based premium system. Annualized fees will be 15, 20, or 25 basis points, depending on an institution's risk category.... As of December 31, 2009, a total of $10.3 billion in fees had been assessed under the DGP."
The FDIC publication also says, "Total deposits increased by $125.7 billion (1.4 percent) [to $9.227 trillion], domestic deposits increased by $143.6 billion (1.9 percent), and foreign office deposits decreased by $17.8 billion (1.2 percent). Domestic savings deposits and interest-bearing checking accounts increased by $194.1 billion (5.4 percent). Domestic noninterestbearing deposits increased by $89.8 billion (6.1 percent), and domestic time deposits decreased by $140.4 billion (5.6 percent)." It adds that $5.392 trillion of insured deposits is currently covered by the deposit insurance fund (DIF), which is running a balance of negative $20.9 billion.
Given the huge balances remaining in the TAG program, we expect much of this money to migrate back towards money market mutual funds in the second half of the year. Rising interest rates and rising FDIC fees should also begin to tilt the playing field back in favor of money market funds at some point during 2010 or 2011.
Climbing money market rates are beginning to work their magic by allowing money fund companies to unwind some of the most painful stages of their fee waivers, but those same higher overnight and short-term rates have been drawing investors out of funds and into Treasury bills and other direct instruments. Rate data released by the Treasury show 4-week, 13-week and 26-week Treasury bill rates last week at their highest levels since August 2009. Rates of 0.14%, 0.16%, and 0.24%, respectively, as of March 18 were more than double their level of a month prior, and a welcome relief following the near-zero periods of December 2009 and January 2010. (See recent CP rates from the Federal Reserve here.)
Though money fund yields have inched up ever so slightly -- our Crane 100 Money Fund Index of the 100 largest taxable money market mutual funds has risen a mere one basis point off its record lows, from 0.04% to 0.05%. But the underlying market shift towards the higher end of the Fed's zero-to-25 basis point target range could take many money funds off of a death-watch. Large funds could likely survive indefinitely with gross yields of 15-30 basis points; even their outlook was uncertain in a zero to 15 bps range. Money funds currently charge average expenses of 0.27% annualized as measured by our Crane 100. (This is down from 0.37% a year ago. Current expense ratios could be even lower as our numbers may not reflect the full impact of fee waivers.)
As an FT article "Beware, repo rates are on the rise" explained (citing a Barclays Capital report), "It's been less than a month since the Federal Reserve resumed its Supplementary Financing Program in a bid to begin draining liquidity, but the effects are already creeping into the rate market."
But FT quotes Barclays, "Instead, our economists expect the Fed to raise interest rates in September -- which may be a few months earlier than the consensus. With reverse repos unlikely to begin until late June at the earliest, our sense is that markets may be over-reading what to us seems to be a purely technical reaction to an overabundance of collateral in the repo market." Nonetheless, the slightly higher yields are a welcome development. Whether they last remains to be seen.
Money funds continued to see outflows on Monday, though the pace has slowed considerably. Our Money Fund Intelligence Daily shows assets declining by $2.5 billion on March 22 with a decline of $22.7 billion in the week ended Monday. The extremely heavy outflows of March 12 ($20.0 billion) and March 15 ($28.4 billion) were followed by much more moderate declines of $8.5 billion (3/16), $4.0 billion (3/17), $1.1 billion (3/18), and $6.5 billion (3/19). It appears that the quarterly tax payments, coupled with a surprise spike in repo rates, were the biggest factors in the sucking sound eminating from the money fund sector. (Today's MFI Daily shows that money funds actually inched higher Tuesday, March 23, rising $707 million.)
As we wrote in a Jan. 6, 2010, Crane Data News piece entitled, "Standard and Poor's Requests Comment on MMF Rating Revisions", S&P's Ratings Services is "requesting comments on proposed revisions to its Principal Stability Fund Ratings Criteria." The company's request for comment said, "We encourage all market participants to submit comments in writing on the proposed criteria by March 26, 2010. Please e-mail your written comments to CriteriaComments@standardandpoors.com. Once the comment period is over, we will evaluate the comments and finalize the principal stability fund rating criteria."
The original RFC added, "The proposed changes include: adopting WAM to final maturity criteria (with no change in regular WAMs for AAAm funds); allowing 95% correlations to 3-month LIBOR (in addition to Fed funds) for variable/floating rate indexes; restricting maturities of illiquid securities; tweaking maximum issuer concentrations; adding weekly stress tests; and, eliminating the 'G' designation for government money funds."
In related news, recent S&P Ratings Headlines include: "SSGA Money Market Fund Upgraded To 'AAAm'," "Old Mutual Cash Reserves Fund Rated 'AAAm'," and "TCW Money Market Fund Rating Withdrawn At Investment Advisor's Request." The SSgA release says, "Standard & Poor's Ratings Services said today that it raised its principal stability fund rating on the SSgA Money Market Fund to 'AAAm' from 'Am'."
They explain, "The upgrade is based on the decision of SSgA Funds Management Inc. -- the investment advisor to the fund -- to manage the fund to more conservative weighted average maturity (WAM) guidelines given recent changes to money-market fund regulations.... [B]ecause one of the recent changes to Rule 2a-7 under the Investment Company Act of 1940 will limit the maximum WAM to 60 days for all money-market mutual funds (which includes the SSgA Money Market Fund), the fund will be managed within the 60-day WAM criteria for 'AAAm' rated funds."
The Old Mutual release says S&P "assigned its 'AAAm' principal stability fund rating to the Old Mutual Cash Reserves Fund.... The fund's investment adviser is Old Mutual Capital Inc., which is a wholly owned subsidiary of Old Mutual Asset Management (OMAM), the U.S. asset management group of Old Mutual PLC. OML is an international financial services company based in London with operations in asset management, banking, and general insurance." (See yesterday's News on Old Mutual's new Government and Treasury MMF filings.)
S&P continues, "Dwight Asset Management Co. LLC, an independently operated affiliate of OMAM, is the subadviser for the fund and is responsible for the day-to-day management of its investments. The firm, located in Burlington, Vermont, had approximately $69 billion in AUM as of Dec. 31, 2009. Dwight is exclusively focused on fixed-income investment solutions, including cash and liquidity management, stable value, insurance asset management, and total return strategies. Dwight's liquidity management team has a long history of managing 2a-7-registered money-market funds and short-duration investment portfolios, and the senior members of the team have worked together for more than 10 years."
Finally, S&P's TCW release says, "Standard & Poor's Ratings Services ... withdrew its 'AAAm' principal stability fund rating on TCW Money Market Fund at the request of the fund's investment advisor, TCW investment Management Co. The fund was within 'AAAm' rating criteria at the time of this rating withdrawal."
Old Mutual, and sub-adviser Dwight Asset Management, have filed to launch two Institutional classes of new money market funds, Old Mutual Government Money Fund and Old Mutual Treasury Fund. (We learned of this latest filing from ignites.com.) We first discussed the South African financial giant and its Burlington, Vt.-based stable value subsidiary's pending push into the U.S. institutional money fund marketplace last July. See our previous "Crane Data News" stories on this topic -- July 18, 2009's, "More on Old Mutual and Dwight Asset Management's Move Into Cash" and July 10, 2009's "Neuberger Retreats From Taxable Money Funds, Outsources to SSgA". See too our "People News from July 7, 2009, "Donohue, Robey, Hiatt at Dwight,," and Feb. 2, 2010, "Christine Trulby Joins Dwight."
The March 15 SEC filing says, "Old Mutual Funds II offers a convenient and economical means of investing in professionally managed portfolios of securities, called mutual funds. This Prospectus offers Institutional Class shares of Old Mutual Government Money Fund and Old Mutual Treasury Fund. Shares of other retail mutual funds advised by Old Mutual Capital, Inc. are offered by separate prospectuses.... Old Mutual Capital, Inc. is the investment manager to each Fund. The Adviser has retained Dwight Asset Management Company LLC to assist in managing the Funds."
The prospectus continues, "Institutional Class shares are available to the following categories of eligible investors and require a minimum initial investment of $1 million in a Fund: A bank, trust company, or other type of depository institution purchasing shares for its own account; An insurance company, registered investment company, endowment, or foundation purchasing shares for its own account; Pension or profit sharing plans or the custodian for such a plan; and Qualified or non-qualified employee benefit plans.... Eligible investors may purchase Institutional Class shares with a minimum initial investment of $100,000 in a Fund provided they sign a LOI, committing them to increase that investment to a minimum investment of $1 million in that Fund within twelve months."
Our July Crane Data story on Dwight quoted David Thompson, Dwight's president & CEO, "[T]he cash management team will enhance Dwight's focus on preserving wealth for 401(k) participants, currently managed via stable value portfolios." He added, "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."
The final full agenda has been set for this year's Crane's Money Fund Symposium, which will be held July 26-28, 2010, at The InterContinental Boston. Crane Data entered the conference business in 2009 with its inaugural Symposium event in Providence, Rhode Island. Last year's show was an unqualified success, attracting over 130 attendees, sponsors and speakers. We expect this year's gathering to be even bigger and better, and to attract over 200 money market fund portfolio managers, professionals, investors, issuers and servicers to Crane's affordable educational program and informal networking venue.
The lineup for Money Fund Symposium's opening afternoon, Monday, July 26, includes: "Welcome to Money Fund Symposium" by Crane Data's Peter G. Crane; the keynote speech, "Washington & The New Regulatory Regime," by ICI's Paul Schott Stevens; a discussion of "The New Normal in the Money Markets," with Federated Investors' Debbie Cunningham and J.P. Morgan Securities' Alex Roever; a talk on "Parent Backing, Bailouts, No-Action Letters" by Goodwin Proctor's John Hunt; a "Government Support Review: AMLF, CPFF, TMMFG," with Barclays Capital's Joseph Abate and the Federal Reserve Bank of Boston's Burcu Duygan-Bump; and, a discussion on "Industry Consolidation & Outlook for MMFs with S&P's Peter Rizzo and Wells Fargo Advantage Funds' Dave Sylvester.
The packed agenda continues on Tuesday morning, July 27, with the presentaions: "State of The Money Market Fund Industry by Crane Data's Peter Crane and ICI's Brian Reid; a panel on "Portfolio Manager Strategies: Managing Money Funds in an Ultra-Low & Rising Rate Environment" featuring Fidelity's Michael Morin, SEI Investments' Sean Simko, and Northern Trust Global Investments Peter Yi; a talk on "Government & Agency Fund Issues" with SSgA Funds' Todd Bean and Goldman Sachs Asset Mgmt Shaun Cullinan; and, a "Municipal Money Fund Market Update with Dreyfus' Colleen Meehan and Federated's Mary Jo Ochson.
Tuesday afternoon features: "Sell-Side Update: CP, Supply & New Issues" with Barclays Capital's Chris Conetta, Dexia Bank's Frank Sansone, Citi Global Mkts Jean-Luc Sinniger and Bank of America Merrill Lynch's Chris Walsh; "Analyzing Fund Portfolios & Holdings" with SVB Asset Management's Adam Dean, Moody's Investors Service's Marty Duffy and Fitch Ratings Viktoria Baklanova; "Money Fund Investors & Due Diligence featuring Mosaic Company's Michael Crawford, 3M Corp's Andy Noll and Capital Advisors Group Lance Pan; and, finally, "Global & European Money Fund Issues" with JPMorgan AM's Bob Deutsch and IMMFA's Gail Le Coz.
The Wednesday, July 28 morning agenda includes sessions on: "The Changing Cash Product Landscape: FDIC Sweeps, ETFs, and Floating-Rate Money Funds with Promontory Interfinancial's Mark Brooks, PIMCO's Jerome Schneider, and Deutsche Asset Mgmt's Joe Benevento; a discussion of "Online Portal Technology & MF Analytics with Clearwater Analytics Matt Clay, State Street Globallink's Greg Fortuna, Cachematrix's George Hagerman and a speaker from TradeWeb; and, our last session, "Critical Questions on The New Rule 2a-7" with PriceWaterhouse Coopers Richard Grueter, Reed Smith's Stephen Keen and a representative from the U.S. Securities & Exchange Commission. We will also host an optional (free) afternoon workshop demonstrating Crane Data's Money Fund Wisdom premium database product.
Crane's Money Fund Symposium has attracted a host of sponsors and exhibitors to date. Platinum sponsors include: Bank of America Merrill Lynch and J.P. Morgan Securities. Gold sponsors include: Barclays Capital, Federated Investors, Fidelity Investments, and Wells Fargo Advantage Funds. Additional sponsors and exhibitors include: Bank of Ireland, Capital Advisors, Citibank Online Investments, J.M. Lummis & Co., Standard & Poor's, Western Asset, Natixis, and TradeWeb.
Registration for Crane's Money Fund Symposium is just $750! Visit http://www.kinsleymeetings.com/crane to register and to make hotel reservations. (Crane Data and partner Kinsley Associates have reserved a limited number of hotel rooms at The InterContinental Boston at the discounted rate of $235 plus tax. You must register through the website to get this discounted rate.) Please contact us with any questions or requests. We hope to see you in Boston!
We wrote Monday about ICI President & CEO Paul Schott Stevens speech at the Investment Company Institute's Mutual Funds and Investment Management Conference in Phoenix entitled, "Weathering the Worst: Making Money Market Funds Even Stronger." (See Crane Data News "ICI's Stevens Defends $1 NAV, Reveals Liquidity Facility Blueprint".) Today, we excerpt from a couple more important sections that we couldn't fit into Monday's article, including comments on money funds' importance in financing the U.S. economy and on why floating rate money funds "are not immune to redemption pressures."
Stevens said Monday, "Before the start of the financial crisis, few of us would have expected money market funds to become the focus of so much attention. During their history of 30-plus years, these funds have been a steady, predictable mainstay of finance. For retail investors, money market funds have long provided the only means to obtain access to higher-yielding money market instruments. For institutions of many kinds, these funds are a preferred vehicle for cash management."
He explained, "Their popularity with investors also has given money market funds an important role in financing the American economy. Over time, money market funds have become an important and irreplaceable pipeline in the flow of short-term capital. Consider what the $3.1 trillion invested in money market funds means to our economy. Money market funds are about jobs. They hold almost half of the commercial paper that businesses issue to finance payrolls and inventories. Money market funds are about communities. They hold nearly two-thirds of the short-term debt that finances state and local governments. Money market funds are about ordinary Americans. Credit-card, home-equity and auto loans are substantially financed by asset-backed commercial paper held by money market funds. Money market funds even play a vital role in financing the U.S. government. One dollar out of every six in short-term paper issued by the Treasury ends up in a money market fund."
Stevens told the Phoenix audience, "In all of these contexts, the ready availability of capital through money market funds lowers the cost of financing. It helps create and maintain jobs, promotes capital investment, helps state and local governments fund their operations, and keeps the wheels of commerce turning."
On floating rate funds and their susceptibility to runs, Stevens explained, "[H]ard experience shows that mutual funds that float their NAV are not immune to redemption pressure. That's clear from the record of floating-value ultra-short bond funds -- they lost half of their assets in the course of 2008. Similarly, French floating-value money market funds, known as tresorerie dynamique funds, lost about 40 percent of their assets in a three-month time span from July 2007 to September 2007. Clearly, the experience of these other funds demonstrates that a fluctuating per-share value would not eliminate the possibility of wholesale redemptions from money market funds during a future crisis."
He continued, "Second, the proponents of floating value ignore the severe dislocations that it might cause for investors and issuers -- and, by extension, American businesses and workers. Investors, both retail and institutional, clearly see the advantages of stable-value funds. They've demonstrated that by voting with their dollars. At the end of 2009, there was $2.9 trillion invested in taxable money market funds. By contrast, short-term bond funds held just $184 billion -- despite their higher yields. Money market funds' 15-to-1 advantage in total assets -- at a time when yields on money market funds are razor-thin -- speaks volumes about the needs and preferences of investors."
"A retail investor expects that $1.00 put into a money market fund will count for $1.00 when writing a check or making a withdrawal. If money market funds lose their stable value, retail investors who want a stable-value cash investment will have no alternative but to use bank accounts -- by no means an ideal substitute. Institutional investors already have many alternatives. But they stick with money market funds in large part because a floating-value fund would mean constant accounting and tax headaches. In such funds, investors must track realized or unrealized capital gains and losses in their position and conduct detailed recordkeeping when there are changes in the value of their money market fund investments," he added.
Stevens said, "So if regulators forced money market funds to abandon their stable $1.00 value, institutional investors would leave.... Indeed, many institutions are required by law or by investment policy to keep cash in stable-value accounts. And where would they go? Banks might seem to be the obvious winners. But banks don't want large institutional deposits. In fact, banks now 'sweep' institutional deposits off of their books and into money market funds and other short-term instruments, so that the banks can avoid carrying large demand balances. Wiping out stable-value money market funds won't make banks any more eager to assume those liabilities."
He explained, "Instead, institutions that want or require stable value would probably turn to the true 'shadow banking system' -- private pools, here and overseas, that promise to maintain a fixed price. These alternatives would neither be registered with the SEC nor subject to regulation under the Investment Company Act 1940, including Rule 2a-7. They would not assure investors the same protections that money market funds do with respect to credit quality, maturity, liquidity, and other aspects of portfolio management. Investors will be more likely -- not less -- to withdraw their assets from such funds in a future crisis."
Finally, Stevens said, "Given this analysis, it came as no surprise to us that investors, the businesses and municipalities that depend on these funds, and consumer advocates all have spoken out against floating the value of money market funds. Out of more than 120 comment letters filed with the SEC, the ones that favored floating values could be counted on the fingers of one hand. By contrast, scores of letters opposed this idea, from writers as disparate as the American Public Power Association, the city of Brookfield, Wisconsin, the National Association of State Treasurers, AARP, and the Consumer Federation of America -- not to mention individual investors strongly opposed to changing the fundamental nature of this product."
The Investment Company Institute and the Federal Bar Association's 2010 Mutual Funds and Investment Management Conference, which ends Wednesday morning in Phoenix, featured several important and timely discussions focused on money market mutual funds. Yesterday, we excerpted from ICI President Paul Stevens' Monday speech, "Weathering the Worst: Making Money Market Funds Even Stronger." (See Crane Data News "ICI's Stevens Defends $1 NAV, Reveals Liquidity Facility Blueprint".) Today, we quote from U.S. Securities and Exchange Commission Commissioner Luis Aguilar's speech, entitled, "Making Sure Investors Benefit from Money Market Fund Reform. (Look for coverage of the Tuesday panel, "Impact of Government and Regulatory Policies on the Money Market and Money Market Funds," which featured Crane Data's Peter Crane, ICI's Brian Reid, Reed Smith's Stephen Keen, and the SEC's Bob Plaze in the next Money Fund Intelligence newsletter.)
Commissioner Aguilar said on Money Market Funds Monday, "Now I would like to focus on money market funds, without question one of the most successful products the industry has ever developed. Today, a money market fund industry that started with one fund in 1971 now has over 750 funds with more than $3 trillion under management. Money market funds are interwoven into the fabric of the American economy. They are relied on by investors and intermediaries of all kinds. These funds are attractive to retail and institutional investors alike, both small and large.... Issuers, in addition to investors, also rely heavily on money market funds."
He continued, "Obviously, the credit crisis has been challenging for money markets and managers and has affected their profitability. Persistent low yields and the outflows of assets has resulted in various managers either quitting the business, or reducing the number of money market funds through mergers, liquidations or sales. Nonetheless, even in this environment, money market funds remain an integral part of the fabric by which families and companies manage their financial affairs. Many attribute the popularity of money market funds to their ability to maintain a stable net asset value -- typically at a dollar per share."
On the recent "Money Market Fund Reforms, Aguilar said, "It was with investors in mind that I supported the amendments to Rule 2a-7 to strengthen portfolio quality, maturity, and liquidity requirements by limiting the types of investments funds can make, as well as by adopting new requirements, such as the daily and weekly liquidity requirements that a fund hold investments it can readily turn to cash. The amendments went to the heart of how a money market fund is organized, operated, and liquidated. The changes to Rule 2a-7 recognize the integral role these funds play and are designed to fortify and strengthen the entire money market fund framework by making funds more resilient in the face of credit, liquidity, and interest rate risk."
He said, "I recognize that these amendments limiting investment choices and risk taking represent a trade-off between making money market funds more resilient investment vehicles and the cost in potential yield that investors can expect. Taken as a whole, however, they strike an appropriate balance. The new requirements of 2a-7 decrease the likelihood that money market funds will go through a crisis like we experienced in late 2008 -- and they will serve to better align the funds' ability to maintain a net asset value, typically at $1.00 per share, with the expectation of investors that one (1) dollar in means one (1) dollar out. This may be the most important expectation that investors have when they invest in money market funds. It needs to be protected."
Aguilar continued, "Money market funds have been very successful. They have been so successful that the Commission recognized in the mid-1990s, that 'investors generally treat money market funds as cash investments.' Moreover, the phenomenal success of these funds combined with the fact that until 2008 only one fund had ever 'broken the buck,' has reinforced the public perception of the safety of these vehicles. I understand the serious conflict that investors view money market funds as safe -- when, in fact, these funds are not guaranteed. To make sure that investors were clear on this fact, the Commission, in the early nineties, began to require a money market fund prospectus to clearly delineate on its cover, and in its sales literature and advertisements, that 'an investment in the fund is not guaranteed or insured by the U.S. government and that there is no assurance that the fund will be able to maintain its stable net asset value.'"
"However, the federal intervention of 2008 to halt the beginnings of a money market run may have raised public expectations that the federal government will step in if another crisis occurs. As result, investor confusion may be expected. Even though money market funds have had an enviable track record of safety -- and even as they are made more resilient -- investors in money market funds need to realize that, as with almost any investment, these investments have risk. I encourage the industry to make sure that its marketing efforts, particularly oral representations to investors, underscore that potential risk rather than exacerbate investor confusion," he said.
Aguilar's speech continued, "Notwithstanding the substantial reform recently made as to Rule 2a-7, more may be in the works. Besides what may be contained in the pending money market fund report by the President's Working Group on Financial Markets, the Chairman as well as senior staff at the Commission have telegraphed a desire to see more fundamental structural change in the money market fund industry. In particular, the staff is examining the merits of a floating, mark-to-market NAV for money market funds, rather than the stable one-dollar price. Other ideas under consideration include real-time disclosure of the shadow price; mandatory redemptions-in-kind for large redemptions (such as by institutional investors); a private liquidity facility to provide liquidity to money market funds in times of stress; and a possible 'two-tiered' system of money market funds, with a stable NAV only for money market funds subject to greater risk-limiting conditions and possible liquidity facility requirements, among others."
He added, "I believe that any consideration of future reforms should be careful not to jeopardize the tremendous value money market funds bring to investors. As the Commission considers further money market reform, I believe two fundamental priorities must be at the forefront of our consideration. The first priority should be to recognize that money market fund investments have historically worked well for all investors, particularly for retail investors. All contemplated proposals should take retail investors into account and make sure that they are able to continue to participate and benefit."
Finally, Aguilar said, "In addition, any further reform should not be so 'transformational' that the money market fund is no longer an economically attractive product. Future proposals should be rigorously analyzed to determine the consequences that would result. One consequence no one wants to see is a flight of trillions of dollars to unregistered vehicles that have no regulatory oversight or accountability. As a second round of reform is contemplated, there needs to be serious consideration given to what other reforms should be made regarding unregistered vehicles to insure that there is no regulatory end-run."
In a speech Monday morning at the Investment Company Institute's Mutual Funds and Investment Management Conference in Phoenix, Arizona entitled, "Weathering the Worst: Making Money Market Funds Even Stronger," ICI President & CEO Paul Schott Stevens strongly defended the money market mutual fund industry and its $1.00 NAV standard, and revealed that the ICI is pursuing the challenge of a "stronger liquidity backstop" for the industry."
Steven's says, "Today, I'd like to discuss that process of reform with regard to one specific product -- money market funds. As you all know, a string of failures in major financial institutions drove investors and liquidity out of the money markets beginning in the summer of 2007.... This sequence of events battered virtually every part of the financial system, including all issuers, investors, and intermediaries in the money markets.... Many forms of government intervention ultimately stemmed the crisis. The Treasury Guarantee Program for Money Market Funds helped calm the waters. Facilities established by the Federal Reserve helped restore liquidity to the markets for commercial paper and asset-backed securities. One measure of the success of these facilities is that the Treasury collected $1.2 billion in guarantee fees from money market funds, but paid out no claims. Money market funds and other market participants clearly benefited from these interventions."
Stevens says, "As markets began to recover, our industry understood the need to address a concern that was by no means apparent during the long and successful run money market funds have enjoyed as a stable, secure tool for cash management and investment. In short: how can we make money market funds more resilient under extreme market conditions -- able to withstand another deep and widespread loss of liquidity in the money markets? The Institute and our members have devoted countless hours to working on this problem. There are three points that I'd like to discuss with you today."
"First, the fund industry and the Securities and Exchange Commission (SEC) already have made significant and important progress toward making money market funds more secure.... The significance of the SEC's new rules for money market funds should not be underestimated. Second, the search for ways to make money market funds even more secure under the most adverse market conditions has not stopped. The Institute and its members remain active on a number of fronts, as I will describe shortly. My third point is that the fund industry remains open to a wide range of ideas on reform of money market funds -- with one exception. We strongly oppose the notion of forcing money market funds to abandon their objective of maintaining a stable per-share value. The steady net asset value (NAV) -- typically $1.00 per share -- is a fundamental feature of money market funds," he says.
Stevens explains, "Make no mistake: forcing these funds to 'float' their NAV will destroy money market funds as we know them. It will penalize individual investors and exact a high price in the American economy. But it will not -- repeat, not -- reduce risks to the financial system. By any measure, it is a bad idea.... The heavy redemption pressure on money market funds clearly revealed vulnerabilities that needed to be addressed -- not just to sustain money market funds, but to protect the financial markets and the economy. We have taken those problems very seriously, and continue to do so."
He continues, "Some observers believe there is a simple solution to these challenges: force money market funds to float their per-share value. By their account, the amortized cost accounting that allows a money market fund to seek to maintain a stable net asset value makes these funds more vulnerable to runs. They argue that investors are prone to sell stable-value shares when there are small drops in the value of the funds' underlying securities below the fixed $1.00 -- but wouldn't sell if the shares' value floated routinely. Proponents of this idea, and other measures that would have the same effect, are motivated by sincere concerns about reducing systemic risk. But their prescription in many cases reveals a bank-centered view of the world and a nostalgia for the 1970s that investors simply don't share."
"Repeatedly, these critics say that money market funds are part of a 'shadow banking system' that operates with 'no supervision.' Of course, as you all know, money market funds hardly operate in the shadows. The public disclosure regime to which they are subject exceeds anything known to the banking sector. And they operate under a strict regulatory regime -- one that embraces all the regulations applicable to mutual funds generally, as well as highly detailed standards for management of their portfolios. For my part, I'll take the record of money market fund regulation over the last 30-plus years any day. Even so, we have looked at this proposition in detail, in the light of market data and investor behavior. And we have concluded that the notion of forcing money market funds to float their value would wreak havoc on our markets -- without any offsetting benefits."
Stevens adds, "Clearly, this is a bad idea -- and we should reject it. What do we suggest instead? First, let's recognize that the SEC and the fund industry have already made major strides toward the goal of making money market funds more resilient even under extreme conditions.... But even with this great progress, our search for ways to weather-proof money market funds has not stopped. ICI and our industry are not resting. For example, we are actively engaged in a task force sponsored by the Federal Reserve Bank of New York to strengthen the underpinnings of a vital portion of the money market -- tri-party repurchase agreements.... ICI has also pursued the challenge of providing a stronger backstop for money market funds in a time of crisis. After it issued its report last March, ICI's Money Market Working Group began to explore additional ideas for providing liquidity for money market funds to meet redemptions when liquidity has dried up in the markets."
He says, "Today, I'm pleased to tell you that we are moving forward rapidly to complete a blueprint for such a liquidity facility. This would be a state-chartered bank or trust company, organized and capitalized by the prime money market fund industry and managed and governed in accordance with applicable banking laws. It would be dedicated to providing additional liquidity to prime money market funds in the event of severe market conditions."
"We have discussed this facility with regulators and other policymakers, and recognize that there are significant hurdles we must clear to create such an institution. I can't give you an exact timetable on when -- or even if -- this liquidity facility might be launched. I can tell you that ICI's Executive Committee supports establishing such a facility if industry participants and regulators can agree on a workable model. While we have committed to pursuing this liquidity facility proposal, we are not shutting the door to other ideas that would meet the goal of making money market funds even more resilient in the face of another deep and pervasive freeze in markets."
Finally, Stevens says, "What I've described for you is a multi-layered approach to enhancing the resilience of money market funds. The foundation is the sound risk-limiting regulations that have been in place under Rule 2a-7 since 1982, reinforced by new credit, maturity, and disclosure standards. These have been enhanced by the SEC's new liquidity requirements, including the 'know your investor' rules to increase awareness among both fund advisers and fund boards of the potential for sudden redemptions. Add to that the authority provided a money market fund board to halt a run in the fund and implement a fair and orderly liquidation. New reforms of the tri-party repurchase agreement market will ensure that money market funds will have greater confidence in their collateral and enhanced security in those agreements. And finally, we are working on a facility that can provide a mutual pool of liquidity available in times of market stress. Taken together, these measures would provide a wholly new level of protection for money market funds, their investors, and the markets."
We excerpted the first part of our latest Money Fund Intelligence "profile" in last week's Crane Data News story, "March MFI Profiles The New Western Asset: Looking for a Legg Up." Today, we recycle some more highlights from our interview with Western Asset Management's Kevin Kennedy and Michael Van Raaphorst for the benefit of non-subscribers.
We ask, "Will you have to be a giant in the future to manage money funds? Van Raaphorst tells us, "I definitely think that consolidation is something that's ongoing within the industry. But you're really looking at consolidation outside the top 20. According to the numbers that we see, over 90% percent of assets are with the top 20 providers." (Crane Data's latest Money Fund Intelligence XLS shows the largest 20 providers manage $2.76 trillion, or 93% of all money fund assets.)
He adds, "Folks that are outside of that range may be looking at this business with the amended regulations and questions around how long rates are going to be at this level. They may be thinking about exiting the business. Fortunately, we sit well within that [top 20] range and we think that there is a lot of room for those larger players to continue to gain overall market share. We also feel like we are in a good spot right now to continue to grow our business."
MFI also asks, "Does it also help that Western Asset is big in bonds?" Van Raaphorst says, "We look at the money market portion of our business as a unique franchise within our overall corporate structure. But to the extent that money moves out the curve and into our other fixed income products, that's really how we envisioned the long-term design between the money market funds and our other fixed income products at Western Asset, as a diversifier. That ability to cross-sell is very important in both directions."
He continues, "The money fund business served us very well from an overall firm AUM standpoint in 2007 and 2008. Another unique feature in terms of specializing in both money funds and fixed income is that on the investment side of things, our money market investment teams have access to the depth and breadth of our fixed income research efforts across the globe, outside of the money fund arena."
Finally, we ask, "How have assets been doing beyond 2a-7 funds?" Van Raaphorst answers, "Clients obviously in this type of environment are looking for alternatives when it comes to yield. We've had a lot more interest in our enhanced liquidity separate account business. We haven't seen a substantial flood of new dollars, but it has been fairly steady. We expect that specific product area to continue to increase. I think anybody that is in this business is trying to make sure that they have their bases covered (including commingled vehicles), and we definitely fall within that category."
The Federal Reserve's latest "Flow of Funds" Z.1. Statistical Release shows that nonfinancial corporate businesses became the second-largest holder of money market mutual funds (behind the household sector) in the fourth quarter of 2009. Since 2007, funding corporations, which includes securities lenders, had been the second largest holder of money funds. The Fed's "Flow of Funds" contains a wealth of statistics on U.S. finances, including several tables on money market mutual funds.
The Fed's Table L.206 "Money Market Mutual Fund Shares shows the Household sector with $1,320 billion, or 40.5% of the $3.259 trillion as of Q4 2009. Nonfinancial corporate businesses held $684 billion, or 21.0%, while Funding corporations held $669 billion, or 20.5%. Life insurance companies ranked a distant fourth with $246 billion, or 7.5% of money fund assets. Other money fund holder categories include: Private pension funds ($96 billion, or 3.0%); State and local governments ($92 billion, or 2.8%); Nonfarm noncorporate businesses ($74 billion, or 2.3%); Rest of the world ($59 billion, or 1.8%); and State and local government retirement funds ($19 billion, or 0.6%).
During the Fourth Quarter of 2009, Funding corporations saw the largest decline in assets (down $50 billion), followed by Households (down $28 billion), Nonfinancial corporate businesses (down $16 billion) and Life insurance companies (down $11 billion). During 2009, Household holdings of money funds declined by $260 billion (-16.5%) and Funding corporation holdings declined by $175 billion (-20.8%), while Nonfinancial corporate business declined by just 7.0% (-$52 billion).
The Fed's Table L.121 "Money Market Mutual Funds" shows that Time and savings deposits represent the largest holding of money market funds with $573 billion (17.6%) as of Q4 2009. Agency- and GSE-backed securities rank second, according to the Z.1 "Flow of Funds," with $543 billion (16.7%), while Open market paper (which includes CP) accounts for $511 billion (15.7%). Security RPs (repo) ranks fourth with $480 billion (14.7%), Treasury securities rank fifth with $406 billion (12.5%), and Municipal securities rank sixth with $401 billion (12.3%). The remainder of money fund assets is invested in Corporate and foreign bonds ($170 billion, or 5.2%), Foreign deposits ($97 billion, or 3.0%), Miscellaneous assets ($59 billion, or 1.8%), and Checkable deposits and currency ($18 billion, or 0.5%).
The biggest increase in holdings over the past year was in Time and savings deposits, which rose by $218 billion (61.4%). Agencies, Treasuries, and CP all saw sharp declines in 2009, down $213 billion (28.2%), $171 billion (29.7%), and $108 billion (17.4%), respectively. To request a copy of a spreadsheet version of these money fund tables, e-mail email@example.com.
In a just-published "Credit FAQ piece, "What Effect Will The Certificate Of Deposit Accounts Registry Service Program Have On Fund Ratings?, S&P writes, "The recent market turmoil has prompted portfolio managers, investment managers, and treasury professionals to look for investments that add value without sacrificing yield or diversification. Recently, Standard & Poor's Ratings Services has received numerous inquiries regarding how we view the liquidity and credit quality of the Certificate of Deposit Accounts Registry Service (CDARS) program in regards to principal stability fund ratings (PSFRs), fund credit quality ratings (FCRs), and liquidity assessments."
The FAQ explains, "We have criteria regarding our assessment of certificates of deposit (CDs) and collateralized CDs for taxable and tax-exempt PSFRs, FCRs, and liquidity assessments.... Our responses to the following questions provide an indication of how we assess the risks of these securities in relation to our analysis of PSFRs, FCRs, and liquidity assessments. This Credit FAQ should be considered in conjunction with previously published criteria."
Among the Frequently Asked Questions are: "What is the CDARS program?" S&P says, "CDARS is a program offered by nearly 3,000 member financial institutions of the CDARS network and is designed to provide investors the benefit of Federal Deposit Insurance Corp. (FDIC) insurance for deposits up to $50 million. Generally, investors place large deposits with a member, who then places the investors' deposits into CDs issued by participating banks. CDs issued through CDARS generally are in amounts less than the FDIC insurance maximum so that each CD's principal and interest remains eligible for full FDIC insurance. Currently the FDIC insurance maximum is $250,000 per depositor through Dec. 31, 2013. After the extension date, the maximum amount is scheduled to return to $100,000 per depositor.... CDARS CDs' maturities generally range from four weeks to five years.... Typically, early breakage penalties exist and generally vary based on the CD's maturity."
They also ask, "How does Standard & Poor's treat noncollateralized CDs compared to CDARS CDs?" S&P answers, "In PSFRs and FCRs, noncollateralized CDs that do not qualify for FDIC insurance take on the same credit rating as was assigned to the issuing bank. Portfolio exposures no greater than 5% per issuing bank are consistent with our investment-grade PSFR criteria.... For both PSFRs and FCRs, to the extent the underlying deposits fall within FDIC coverage amounts, we classify CDARS equivalent to the U.S. sovereign credit rating. How does Standard & Poor's view the credit risk associated with CDs issued by CDARS? In our opinion, because CDARS-issued CDs are FDIC insured, we view the credit risk as equal to the U.S. government sovereign credit rating (currently 'AAA')."
Another question is, "How does Standard & Poor's view the liquidity risks associated with CDARS CDs?" S&P says, "In our opinion, potential areas of liquidity risk in CDARS CDs include: Inherent illiquidity: CDARS CDs are nonnegotiable, not DTC eligible, and are not traded in an active secondary market; Payment delays: When the FDIC has to make a payment on deposits, it pays the insured amount to the participating bank, and the participating bank pays the investors; Custodian bank failure: Another potential liquidity risk may occur where the investor's money is in the custody of a network member that has failed."
They also ask, "What other concerns does Standard & Poor's have regarding CDARS CDs?" The FAQ responds, "Early breakage penalties: CDARS CDs can have penalties from 50% to 100% of the interest due depending on the CDs' maturity. Typically, the earlier a CDARS CD is broken prior to maturity, the greater the penalty. Because the interest penalty owed may be unearned at the time of the early breakage, the assessed penalty may result in a loss of initial principal. Coverage under relevant guidelines: The FDIC insurance limits are not based solely on the CDARS CD amount, but rather on the total aggregate exposure of an individual investor at a participating bank. We would take into account how investors determine whether their aggregate deposits (including their CDARS CD exposures) are within FDIC insurance limits and CDARS guidelines."
S&P continues, "How will Standard & Poor's evaluate CDARS CDs given your PSFR criteria? We will evaluate CDARS CDs similar to the analysis for other highly rated, short-term instruments.... From a credit perspective, we deem CDs issued through CDARS to be 'AAA/A-1+' equivalent. CDARS CDs count toward our 10% limited liquidity/illiquid basket for PSFRs because these CDs are nonmarketable securities, may impose fees for early withdrawal, and may have a delay in receiving monies from FDIC insurance payments."
Finally, they ask, "How would Standard & Poor's evaluate similar FDIC products?" S&P says, "In evaluating other similar types of FDIC products, such as the Institutional Deposits Corp.'s Insured Deposit Liquidity Account and Insured Network Deposits, we would take a similar approach in applying our criteria to assess such pooled FDIC-insured accounts." Note that Crane Data has yet to see any CDARS or "pooled FDIC insurance" products appear in money market mutual funds, but that some less-regulated pools appear to be dabbling in the sector.
We learned from ignites.com that Eagle Money Market Fund and Eagle Municipal Money Market Fund (formerly named Heritage) have filed to liquidate and that new "Eagle" share classes of JPMorgan funds have been filed. A prospectus supplement filing says, "On February 12, 2010, the Board of Trustees of Eagle Cash Trust approved calling a shareholder meeting to consider approving a plan to liquidate and terminate the Money Market Fund and the Municipal Money Market Fund. The Board approved the Plan, subject to shareholder approval, upon recommendation of Eagle Asset Management, Inc., the manager to the Trust."
It says, "Eagle recommends liquidating and terminating each Fund based on anticipated Fund shareholder redemptions which would reduce each Fund's size and economies of scale. Eagle does not believe that it can continue to conduct the business and operations of the Funds in an economically efficient manner upon the anticipated redemptions, and that the expense ratio of the Funds would no longer be competitive. As such, the Board concluded that it would be in the best interests of each Fund and their shareholders to liquidate and terminate each Fund."
The filing explains, "A financial intermediary whose customers own a substantial majority of the Funds' shares has advised Eagle that the Intermediary will no longer make available to its customers or support investments in the Funds after July 9, 2010 and that it plans to make available to its customers and support investments in a proprietary class (named the 'Eagle Class') of the JP Morgan Prime Money Market Fund and JP Morgan Tax Free Money Market Fund, managed by J.P. Morgan Investment Management, Inc. The Intermediary has advised that its customers may be redeemed from the Funds and reinvested in the New Funds. Eagle and J.P. Morgan will enter into an agreement under which Eagle and its affiliates will be compensated by the New Funds and J.P. Morgan for, among other things, distribution costs, shareholder record-keeping activities, Eagle's ongoing oversight of the services provided, and the coordination and administration of the funds."
The supplement adds, "The Plan is subject to shareholder approval. The Board anticipates holding a shareholder meeting on or about August 12, 2010, to seek approval of the Plan. If the Funds' shareholders approve the Plan, each Fund will liquidate its assets on or about August 27, 2010, and distribute cash pro rata to all remaining shareholders who have not previously redeemed all of their shares. Once the distributions are complete, the Funds will terminate." (See the JPMorgan prospectus filings for the new 'Eagle' classes here.)
The Eagle funds are affiliated with brokerage Raymond James, which recently "implemented an enhanced multibank sweep program that provides greater Federal Deposit Insurance Corporation (FDIC) insurance coverage and offers more competitive interest rates." The company's website says "available cash in your brokerage account will be deposited through [Promontory Interfinancial Network's] Insured Network Deposit service into interest-bearing deposit accounts at one or more banks."
An announcement released Monday morning by the New York Fed says, "The Federal Reserve Bank of New York today announced the beginning of a program to expand its counterparties for conducting reverse repurchase agreement transactions ('reverse repos'). This expansion is intended to enhance the capacity of such operations to drain reserves beyond what could likely be conducted through the New York Fed's traditional counterparties, the Primary Dealers."
The NY Fed says, "This announcement is pursuant to the October 19, 2009, Statement Regarding Reverse Repurchase Agreements, which announced that the New York Fed was studying the possibility of expanding its counterparties for these operations. The additional counterparties will not be eligible to participate in transactions conducted by the New York Fed other than reverse repos. This expansion of counterparties for the reverse repo program is a matter of prudent advance planning, and no inference should be drawn about the timing of any prospective monetary policy operation."
They continue, "The initial efforts of the New York Fed will be aimed at firms that typically provide large amounts of short-term funding to the financial markets. This approach will ensure that the Federal Reserve quickly achieves significant capacity for conducting reverse repo operations while allowing the Trading Desk at the New York Fed to utilize its current infrastructure for conducting and settling such operations. Over time, the New York Fed expects it will modify the counterparty criteria to include a broader set of counterparties."
The Fed explains, "In this context, the New York Fed also published today eligibility criteria for the first set of expanded counterparties, domestic money market mutual funds. The eligibility criteria are intended to identify funds that conduct sizable transactions in the tri-party repo market and that the New York Fed anticipates would participate meaningfully in any reverse repo program it may be directed to implement. (See the RRP Eligibility Criteria for Money Funds document for more details.) In the coming months, the New York Fed anticipates that it will publish criteria for additional types of firms and for expanded eligibility within previously identified types of firms. Moreover, it anticipates publishing a New York Fed Master Repo (legal) agreement for money market mutual funds in approximately one month."
Finally, they add, "The ultimate size and terms of reverse repo operations will depend on the directive from the Federal Open Market Committee to conduct such operations. In terms of operational details, the New York Fed anticipates that any transactions would be: offered to primary dealers and the broader set of counterparties, conducted at auction for a fixed (not floating) rate, settled through the tri-party repo system, and held against all major types of collateral in the System Open Market Account (SOMA), including Treasury securities, agency debt securities, and agency MBS securities. Further program parameters will be decided and announced at future dates. Related documents and information about counterparties for reverse repurchase agreements will be available at www.newyorkfed.org/markets/rrp_counterparties.html."
The New York Fed's Eligibility Criteria says money fund participants must have "net assets of no less than $20 billion for six consecutive months." Crane Data's latest Money Fund Intelligence XLS shows that 29 out of 329 taxable money fund portfolios are currently larger than $20 billion. These 29 portfolios represent $1.357 trillion in assets, or 52.2% of the total taxable assets outstanding. The 10 largest money fund portfolios (as of 2/28/10) include: JPMorgan Prime MM ($151.5B), Fidelity Cash Reserves ($128.0B), Vanguard Prime MMF ($109.9B), JPMorgan US Govt MM ($77.9B), Fidelity Instit MM: Prime MMP ($71.0B), BlackRock Lq TempFund ($69.4B), Fidelity Instit MM: MM Port ($67.9B), Fidelity Instit MM: Govt Port ($63.9B), Federated Government Obl ($47.6), and Federated Prime ObIigations ($42.7B).
This month in our March issue, Money Fund Intelligence revisits Western Asset Management, the ninth largest money fund manager worldwide and the 10th largest in the U.S. We interview money fund veteran and Lead Liquidity Portfolio Manager Kevin Kennedy, and Head of New York Operations & Client Service/Marketing Michael Van Raaphorst. We excerpt from the full article below.
Crane Data's flagship newsletter writes, "Western Asset Management was formed in December 2005 following the swap of Citigroup's asset management for Legg Mason's brokerage unit. The core liquidity management team, which manages over $140 billion, has been in place since the early 1990's. The funds will complete their rebranding by June, shedding the last vestiges of their former Citi monikers."
We first asked, "Q: What are the biggest challenges managing a money fund historically, and today? Kennedy, who has been in the business roughly 30 years, responds, "Historically, it has been managing effectively your average maturity throughout varying interest rate environments. That emphasis is shifting. There is more concern about liquidity and spread risk in today's environment. Some of those risks have been addressed by the amended 2a-7 guidelines, specifically the new liquidity requirements and the new Weighted Average Life (WAL) limitation for money market funds."
He continues, "Today's zero interest rate environment presents an unprecedented industry challenge. Coupled with the more restrictive 2a-7 rules, it certainly makes it more difficult as the industry could become more commoditized. Some of the fund strategies have been implemented in the past -- for instance using a longer Weighted Average Maturity (WAM) -- won't be available to us or our competition any longer."
Kennedy adds, "More recently, the markets have been working very well. Liquidity is plentiful and spreads are very narrow. Volatility remains a concern. Everybody, obviously, will remember what we've gone through. We are still extremely cautious when it comes down to various exposures. We believe that this will be viewed as the bigger risk going forward, not necessarily the Fed. Although when the Fed starts tightening, that will also be a significant challenge across the industry."
We also asked, "Q: Is the zero rate environment survivable? Kennedy comments, "It is. To tell you the truth if I thought the Fed would be on hold this long, I would've had my doubts.... But despite the fact that the industry has lost a sizeable chunk of assets, it's still a huge industry. I think that's a tribute to the confidence that investors have in money market funds in general. Retention has been good. Fee waivers are something that will continue for the next several months and that certainly strengthens the hand of the bigger players in the industry. Thankfully, we are one of those bigger players."
He tells us, "We think that the Fed will be more active in draining reserves, whether it be interest on deposits, reverse repos, or the issuance of SFP Treasury bills. All these things will be the first step towards bringing the fund's rate a little bit higher. Initially that'll just mean that it'll trade closer to the upper end of the 0 to 25 basis point target range. But that alone will provide a little bit of relief to the money fund industry."
Look for more excerpts from our Western Asset interview in coming days, or e-mail Pete to request the full article in the March issue of Money Fund Intelligence.
The March issue of Crane Data's Money Fund Intelligence newsletter goes out this morning (along with our MFI XLS, Crane Index and other monthly performance ranking products). The latest issue features the articles: "Final MMF Reforms Out: Funds Await Next Steps," "Looking for a Legg Up: The New Western Asset," and "Quotes on the Business of Money Market Funds." The monthly "News" also discusses the Crane Money Fund Indexes hitting new record lows, and asset outflows continuing from money funds. Money Fund Intelligence also features performance rankings and statistics on over 1,300 money market mutual funds.
As we've been discussing, The SEC released the full text of its final 'Money Market Fund Reform' rules last week, and the 220-page text contained no surprises. MFI recaps the new rules and discusses what might happen next. Visit the SEC's Final Rules page to see the whole text, and note that a new version, "Rule 2a-7 Amendments Adopted by SEC in February 2010 Marked to Show Changes from Previous Rule 2a-7" has been posted. (Watch for the more condensed Federal Register version to appear in coming days.)
This month, Money Fund Intelligence revisits Western Asset Management, the ninth largest money fund manager worldwide and the 10th largest in the U.S. We interview money fund veteran and Lead Liquidity Portfolio Manager Kevin Kennedy, and Head of New York Operations & Client Service/Marketing Michael Van Raaphorst. Look for excerpts from our "profile" in coming days, or e-mail firstname.lastname@example.org for the latest issue.
Our Crane Money Fund Indexes continue to set record lows, though help from the ultra-low yields may soon be on the way in the form of slightly higher Treasury and repo rates. The Crane 100 Index, an average of the 100 largest taxable money funds, had a record-low 7-day yield of 0.04% as of Feb. 28. The Crane 100 had a 30-day yield of 0.05% as of month-end, and a 1-year return of 0.19% through 2/28/10. Our broader Crane Money Fund Average yielded a mere 0.02% (7-day annualized) and 0.03% (30-day), respectively, at month-end.
As part of Ignites' Exchange webinar series, Crane Data's Peter Crane recently moderated a session entitled, "The Future of Money Funds," featuring Federated Investors' Debbie Cunningham and Goodwin Procter's John Hunt. Below, we excerpt from Hunt's comments on possible future regulatory changes and options. (Note: The full Exchange webinar is archived, available only to Ignites subscribers.)
Hunt asked, "Are there prospects for new regulations? I think it's very likely that there will be. I'll note that at the SEC's January 27th Open Meeting, Chairman Schapiro and other commissioners said as much. The SEC said as much as well in the adopting release to the recent money market fund rules. Exactly what those changes will be, however, is not really clear, and this is the portion of the program that involves the reading of tea leaves."
He said, "One change that the SEC is likely to propose will address the use of stable share prices for the purposes of sales and redemptions of money market fund shares. The SEC has been looking at this issue at least since it was raised in the Treasury's blueprint for financial reform.... [I]t has been a subject of discussion at the President's Working Group on Financial Markets, which includes representatives of the SEC. I think it's fair to say that changing the rules on the use of a stable share price will have a significant effect on money market funds, as well as the mutual fund industry. There are a number of people in the mutual fund industry that note the correlation of the growth of money market funds with the growth of mutual funds as a whole. As a result, any proposal that is perceived to have a significant and adverse effect on money market funds, I think will face extremely stiff resistance."
Hunt explained, "As I see it, any proposal to change the rules governing the use of stable share prices will likely involve one of two approaches. The first approach will be the nuclear option, and that is to ban their use entirely. As I said, this is likely to face stiff resistance. Another approach would be to create a two-tiered system of money market funds along the lines proposed by the American Bar Association in its comments to the proposed amendments last summer. Under this approach, one type of fund would be permitted to maintain a stable share price, but subject to strict risk-limiting conditions. The other type would be required to use the share price based on market value, but be permitted to adhere to more liberal risk-limiting conditions."
"Another change suggested by the Treasury's blueprint, which would be likely to come from outside the SEC, would involve required emergency liquidity facilities or some other type of credit support to money market funds. As I see it, changes along these lines could be a requirement that the funds' sponsor or adviser commit to purchase from the fund any security that is no longer an eligible security or which fails to meet certain minimal credit risk standards. Or it could be some other kind of support for the fund's share price if the shadow price falls below a specified threshold," he said.
Hunt told Ignites listeners, "I think a more likely option is some type of government support, either something like the government's temporary guarantee program established in October of 2008 in which most non-Treasury money market funds participated in, or some sort of insurance coverage for a specific dollar amount of an investor's interest in a fund, similar to FDIC insurance provided to bank deposits. A third option, which would be especially relevant I think for money market funds intended for retail investors, would require the funds to reorganize such as a special purpose bank as proposed by the Group of 30 in January 2008 with those banks receiving some kind of government backing."
Finally, he added, "In addition to those 'big picture' type of issues, I think there will be tinkering with Rule 2a-7 in the near-term and over the next several years.... I think there's a good chance that there could be additional guidance provided by the SEC on the new stress testing and know-your-customer requirements.... I think it's also possible that we could see further rulemaking to remove the references to NRSROs in Rule 2a-7 and related rules.... But you have to wonder whether they've given up on that prospect. Even if the SEC doesn't further limit or prohibit [second tier securities], I do think it's likely that in response to the new rules that there could be new kinds of products that are going to be designed for money market funds.... As these products start to test the limits of Rule 2a-7 ... I think it's likely that there could be further no-action relief."
Note: Hunt is scheduled to speak at Crane's Money Fund Symposium on July 26th on the topic of "Parent Backing, Bailouts, No-Action Letters."
Fidelity Investments, the largest manager of money market mutual funds with over $490 billion (according to Crane's Money Fund Intelligence XLS as of 2/28), mailed its annual "2009 Shareholder Update" earlier this week. The mutual fund behemoth says it ended 2009 with $1.502 trillion in assets under management; money funds represented almost $488 billion, or 32.5% of this total. We excerpt from the annual report, which contains a number of comments and statistics on money funds, below.
Chairman Edward C. Johnson 3d writes in his annual letter, "In 1974, we started offering money market funds to retain assets when the stock market was floundering. We were among the first to offer a stable $1 net asset value (NAV), and we added a check-writing feature to our money funds, figuring that if we made it easy for people to get their money out, they'd be more likely to put it in."
Johnson says, "Today, we believe -- unlike the views of some competitor institutions -- that money market mutual funds perform a critical function in the U.S. economy. Having an intelligently managed and competitive marketplace for the investment savings of institutions and individuals -- which comprises more than just the banking industry -- should lead to a healtier investment environment and better serve the financial interests of the country."
He continues, "The right amount of intelligent regulation of money market mutual funds can only be a major help to both investors and those responsible entities that need cash. A healthy marketplace leads to a fair marketplace, and Fidelity is generally supportive of industry and regulatory efforts aimed at improving the overall safety and liquidity of money market funds. However, we also believe that regulatory changes should be carefully weighed so as not to undermine the potential benefits of money market funds."
Finally, in its "Money Market Funds" commentary, the annual report says, "Fidelity's money market funds outpaced at least 80% of their competition for the 14th consecutive year. Liquidity demands, interest rate volatility and rcredit quality improved in 2009, creating a more stable environment for Fidelity's money market fund managers. The group once again successfully achieved its two primary goals -- preserving the $1 net asset value and maintaining shareholder liquidity."
Once again, we feature excerpts from the SEC's Money Market Fund Reforms, the new changes to money fund regulations, or Rule 2a-7 of the Investment Company Act of 1940. Today, we look at the Rule's new "Stress Testing" mandate.
The SEC writes, "We are adopting amendments to rule 2a-7 to require the board of directors of each money market fund to adopt procedures providing for periodic stress testing of the money market fund's portfolio. Almost all of the commenters who addressed this matter supported requiring stress testing of fund portfolios, although several suggested changes from our proposal. Under the amended rule, a fund must adopt procedures that provide for the periodic testing of the fund's ability to maintain a stable net asset value per share based upon certain hypothetical events. These include an increase in short-term interest rates, an increase in shareholder redemptions, a downgrade of or default on portfolio securities, and widening or narrowing of spreads between yields on an appropriate benchmark selected by the fund for overnight interest rates and commercial paper and other types of securities held by the fund."
They continue, "Commenters differed on whether we should specify details for stress testing in addition to these hypothetical events. Because different tests may be appropriate for different market conditions and different money market funds, we believe that the funds are better positioned to design and modify their stress testing systems and have not included more specific criteria in the rule."
The SEC explains, "The amendment requires the testing to be done at such intervals as the fund board of directors determines appropriate and reasonable in light of current market conditions. This is the same approach that rule 2a-7 takes with respect to the frequency of shadow pricing. The rule does not, however, specifically require the board to design the portfolio stress testing, as may have been suggested by our proposing release. We agree with the many commenters that asserted that the board may not have sufficient expertise to construct appropriate stress tests for a fund. Each board may, of course, consider the extent to which it wishes to become involved in design of the stress tests."
They explain, "The rule also requires that the board receive a report of the results of the stress testing at its next regularly scheduled meeting, as proposed, and more frequently, if appropriate, in light of the results. We have added the requirement for more frequent reporting in light of results because we believe that the board should be apprised of test results when they indicate that the magnitude of hypothetical events required to cause the fund to break a buck (such as changes in interest rates or shareholder redemptions or a combination of factors) is slight when compared with actual conditions."
Finally, the SEC writes, "As proposed, the report must include: (i) the date(s) on which the fund portfolio was tested; and (ii) the magnitude of each hypothetical event that would cause the money market fund to break the buck. The report also must include an assessment by the fund's adviser of the fund's ability to withstand the events (and concurrent occurrences of those events) that are reasonably likely to occur within the following year. Finally, as proposed, funds are required to maintain records of the stress testing for six years, the first two years in an easily accessible place."
Today, we examine the "Cost Benefit Analysis" section of the SEC's new Money Market Fund Reforms, which were released last Tuesday afternoon. (Note that the more condense "Federal Register" version of the rules has yet to be posted, but should be within days.) The SEC writes (starting on page 120), "The Commission is sensitive to the costs and benefits imposed by its rules. We have identified certain costs and benefits of the amendments and new rules."
It says of the new rules' "Benefits," "We believe that the amendments to rule 2a-7's risk-limiting conditions are likely to produce broad benefits for money market fund investors.... [C]ommenters agreed that the proposed rule 2a-7 amendments concerning second tier securities, maturity, and liquidity would benefit money market funds and their investors. The amendments should reduce money market funds' exposure to certain credit, interest rate, spread, and liquidity risks. For example, limiting money market funds' ability to acquire second tier securities will decrease money market funds' exposure to credit, spread, and liquidity risks. Reducing the maximum weighted average maturity of money market funds' portfolios will further decrease their interest rate sensitivity."
The rule continues, "It also will increase their ability to maintain a stable net asset value in the face of multiple shocks to a money market fund, such as a simultaneous widening of spreads and increase in redemptions, such as occurred during the fall of 2008. Introducing the weighted average life limitation on money market funds' portfolios will limit credit spread risk and interest rate spread risk to funds from longer term floating- or variable-rate securities. In addition, fund portfolios with a lower WAM and a 120-day maximum WAL will turn over more quickly, and the fund will be better able to increase its holdings of highly liquid securities in the face of illiquid markets than funds operating under a maximum 90 day WAM limitation."
The SEC says, "We believe that the new liquidity requirements will decrease liquidity risk. As discussed above, they are designed to increase a money market fund's ability to withstand illiquid markets by ensuring that the fund further limits its acquisitions of illiquid securities and that a certain percentage of its assets are held in daily and weekly liquid assets. Under the general liquidity requirement, moreover, each money market fund must assess its liquidity needs on an ongoing basis and take additional actions as appropriate in order to manage its liquidity. Together, these requirements should decrease the likelihood that a fund would have to realize losses from selling portfolio securities into an illiquid market to satisfy redemption requests, which could put pressure on the fund's ability to maintain a stable net asset value."
They say, "We believe that a reduction of these credit, interest rate, spread, and liquidity risks will better enable money market funds to weather market turbulence and maintain a stable net asset value per share. The amendments are designed to reduce the risk that a money market fund will break the buck, and thereby prevent losses to fund investors. To the extent that money market funds are more stable, they also will reduce systemic risk to the capital markets and provide a more stable source of financing for issuers of short-term credit instruments, thus promoting capital formation. If money market funds become more stable investments as a result of the rule amendments, they may attract further investment, increasing their role as a source of capital."
On "Costs" (see page 125), the SEC says, "We recognize that our amendments regarding second tier securities, portfolio maturity, and liquidity will impose costs on some money market funds. For example, yields might decrease in funds depending on their current positions in second tier securities, less liquid securities, and longer term instruments because those instruments typically offer above average yields. We note that the yield offered by a security is tied to its risk. It is important to consider our rule amendments' impact on money market fund yields in this context."