News Archives: January, 2011

Several more mutual fund complexes have filed to liquidate minor money market mutual funds according to Strategic Insight's Fund Filing and the SEC's EDGAR database. The former reported late last week that Alger Money Market Fund, HSBC Investors CA Tax-Free Money Market Fund, and Pioneer Tax-Free Money Market Fund will all liquidate in coming months. Crane Data also received word that the BB&T Funds will be changing their name to the Sterling Capital Funds on Feb. 1. We've also begun seeing the first disclosures of "Form N-MFP," which contains the "shadow" NAVs of funds from Nov. 30. So far, almost all the "shadow" NAVs we've seen are 1.000 or higher, though we have seen just a handful of 0.9999 entries and one 0.998x entry.

The Alger Money Market Fund filing says, "The Board of Trustees of the Trust has also approved liquidation of each of Alger Convertible Fund and Alger Money Market Fund. After the close of trading on the New York Stock Exchange on January 27, 2011, the Funds will be closed to further investment, excluding reinvestment of any dividends and distributions. Additionally, Convertible Fund will begin to sell its portfolio holdings and invest all of its assets in cash or cash equivalents (such as commercial paper or money market instruments). It is anticipated that the Funds' assets will be distributed to investors on or about February 28, 2011."

The filing adds, "Shareholders may choose to exchange their shares of the Funds for shares of another of the Alger Family of Funds prior to the Funds' liquidation. Exchange or liquidation of shares may be a taxable event to shareholders. Investors are urged to consult their own tax advisers as to the federal, state, and local tax consequences of the liquidations." Note that Crane Data does not track Alger MMF due to its very small size ($31 million).

The filing for the $46 million HSBC CA Tax-Free MMF says, "On December 7, 2010, the Board of Trustees of HSBC Investor Funds authorized HSBC Global Asset Management (USA), Inc., the investment adviser of the HSBC Investor California Tax-Free Money Market Fund, to take steps towards the liquidation of the Fund. The Adviser expects that the Fund will be liquidated on or about March 15, 2011. On or before the Liquidation Date, all portfolio securities of the Fund will be converted to cash or cash equivalents, and the Fund will cease investing its assets in accordance with the stated investment policies. The Fund will promptly wind up its business and affairs.... A shareholder may voluntarily redeem his or her shares prior to the Liquidation Date to the extent that the shareholder wishes to do so. The Fund no longer sells shares to new investors, including through exchanges into the Fund from other funds of HSBC Investor Funds. Investors may continue to redeem shares of the Fund. Once the Fund has been liquidated, all references to the Fund are deleted from this Prospectus."

The $45 million Pioneer Tax Exempt MMF filing says, "The trustees of the fund have authorized the liquidation of the fund. It is anticipated that the fund will be liquidated on or about March 25, 2011. Effective February 1, 2011, the fund will not accept purchase requests to establish new accounts in the fund. The fund will accept purchase requests for existing accounts until the Liquidation Date."

The BB&T Funds, the 52nd largest money fund manager with $1.05 billion, will be "rebranded to the Sterling Capital Funds" on Feb. 1, according to a notice sent to fund reporters. A previous BB&T filing said, "Effective immediately, Sterling Capital Management LLC (“Sterling Capital”) replaces BB&T Asset Management, Inc. as the investment adviser and administrator to the BB&T Funds (the “Funds”). References in the Prospectuses to “BB&T Asset Management, Inc.” and “BB&T Asset Management” are replaced with “Sterling Capital Management LLC” and “Sterling Capital”, respectively."

The BB&T website comments, "We are pleased to announce that effective October 1, 2010 BB&T Asset Management (former advisor to the BB&T Funds) was consolidated and merged into Sterling Capital Management LLC. The combined organization will operate as Sterling Capital Management LLC and is the newly named advisor to the BB&T Funds."

Finally, watch for more details on the SEC's postings of the new Form N-MFP. (Check the EDGAR Search Page, enter a fund Symbol or name, and look for "Form N-MFP" to access. Shadow NAVs are item number 25 in the filing.) Crane Data is in the process of adding these "shadow" NAVs and some other information from Form N-MFP to this month's `Money Fund Intelligence XLS, so subscribers should look for our full listing there.

The FCIC, an agency created to "examine the causes, domestic and global, of the current financial and economic crisis in the United States," released its comprehensive 633-page report entitled, "Financial Crisis Inquiry Report" yesterday. The press release, entitled, "Financial Crisis Inquiry Commission Releases Report on the Causes of the Financial Crisis," says in its subtitle, "This Crisis was Avoidable – a Result of Human Actions, Inactions and Misjudgments; Warning Signs Were Ignored." It adds, "Today the Financial Crisis Inquiry Commission delivered the results of its investigation into the causes of the financial and economic crisis." The work contains a number of references to money market funds, commercial paper and events in the money markets during 2007 and 2008.

The release comments, "The Commission concluded that the crisis was avoidable and was caused by: Widespread failures in financial regulation, including the Federal Reserve's failure to stem the tide of toxic mortgages; Dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk; An explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis; Key policy makers ill prepared for the crisis, lacking a full understanding of the financial system they oversaw; And systemic breaches in accountability and ethics at all levels."

Chapter 2 on "Shadow Banking," gives some money fund history, saying, "In the '70's, Merrill Lynch, Fidelity, Vanguard, and others persuaded consumers and businesses to abandon banks and thrifts for higher returns. These firms -- eager to find new businesses, particularly after the Securities and Exchange Commission (SEC) abolished fixed commissions on stock trades in 1975 -- created money market mutual funds that invested these depositors' money in short-term, safe securities such as Treasury bonds and highly rated corporate debt, and the funds paid higher interest rates than banks and thrifts were allowed to pay. The funds functioned like bank accounts, although with a different mechanism: customers bought shares redeemable daily at a stable value. In 1977, Merrill Lynch introduced something even more like a bank account: 'cash management accounts' allowed customers to write checks. Other money market mutual funds quickly followed. These funds differed from bank and thrift deposits in one important respect: they were not protected by FDIC deposit insurance. Nevertheless, consumers liked the higher interest rates, and the stature of the funds' sponsors reassured them."

Chapter 13, "Summer 2007: Disruptions in Funding," says on page 252, "In August, the turmoil in asset-backed commercial paper markets hit the market for structured investment vehicles, or SIVs, even though most of these programs had little subprime mortgage exposure. SIVs had a stable history since their introduction in 1988. These investments had weathered a number of credit crises -- even through early summer of 2007.... SIVs held significant amounts of highly liquid assets and marked those assets to market prices daily or weekly, which allowed them to operate without explicit liquidity support from their sponsors. The SIV sector tripled in assets between 2004 and 2007. On the eve of the crisis, there were 36 SIVs with almost $400 billion in assets."

Page 253 continues, "The next dominoes were the money market funds and other funds. Most were sponsored by investment banks, bank holding companies, or 'mutual fund complexes' such as Fidelity, Vanguard, and Federated. Under SEC regulations, money market funds that serve retail investors must keep two sets of accounting books, one reflecting the price they paid for securities and the other the fund's mark-to-market value (the 'shadow price,' in market parlance). However, funds do not have to disclose the shadow price unless the fund's net asset value (NAV) has fallen by 0.05 below $1 (to $0.995) per share. Such a decline in market value is known as 'breaking the buck' and generally leads to a fund's collapse. It can happen, for example, if just 5% of a fund's portfolio is in an investment that loses just 10% of its value. So a fund manager cannot afford big risks."

It adds, "But SIVs were considered very safe investments -- they always had been -- and were widely held by money market funds. In fall 2007, dozens of money market funds faced losses on SIVs and other asset-backed commercial paper. To prevent their funds from breaking the buck, at least 44 sponsors, including large banks such as Bank of America, US Bancorp, and SunTrust, purchased SIV assets from their money market funds. Similar dramas played out in the less-regulated realm of the money market sector known as enhanced cash funds.... As the market turned, some of these funds did break the buck, while the sponsors of others stepped in to support their value. The $5 billion GE Asset Management Trust Enhanced Cash Trust, a GE-sponsored fund that managed GE's own pension and employee benefit assets, ran aground in the summer.... Bank of America supported its Strategic Cash Portfolio -- the nation's largest enhanced cash fund."

Finally, on page 254, the report describes, "An interesting case study is provided by the meteoric rise and decline of the Credit Suisse Institutional Money Market Prime Fund. The fund sought to attract investors through Internet-based trading platforms called 'portals,' which supplied an estimated $300 billion to money market funds and other funds. Investors used these portals to quickly move their cash to the highest-yielding fund. Posting a higher return could attract significant funds: one money market fund manager later compared the use of portal money to 'drinking from a fire hose.' But the money could vanish just as quickly. The Credit Suisse fund posted the highest returns in the industry during the 12 months before the liquidity crisis, and increased its assets from about $5 billion in the summer of 2006 to more than $25 billion in the summer of 2007. To deliver those high returns and attract investors, though, it focused on structured finance products, including CDOs and SIVs such as Cheyne. When investors became concerned about such assets, they yanked about $10 billion out of the fund in August 2007 alone. Credit Suisse, the Swiss bank that sponsored the fund, was forced to bail it out, purchasing $5.7 billion of assets in August. The episode highlights the risks of money market funds' relying on 'hot money' -- that is, institutional investors who move quickly in and out of funds in search of the highest returns." Look for more excerpts, including the Bankruptcy of Lehman, next week.

Later this morning the Financial Crisis Inquiry Commission will release its report on "the causes of the financial and economic crisis" (at 10am), which we believe will discuss problems in the money markets and in money market funds. Until then, we excerpt from some of the smaller fund company Comment Letters on the President's Working Group Report on Money Market Fund Reform. Our apologies to those we didn't get a chance to highlight, but below we cite some passages in the USAA and Thrivent letters.

Matthew Freund, Senior Vice President, Investment Portfolio Management, USAA Investment Management Company writes, "The essential characteristics of MMFs, including liquidity and a stable NAV, must be preserved in any further structural changes or regulatory efforts. It is these essential characteristics combined with the rigorous securities laws and rules that have allowed MMFs to remain not only a commercially successful product and vital part of retail investors' portfolios, but also a necessary component of financing within the capital markets."

He continues, "To the extent MMFs require further changes to address their susceptibility to systemic liquidity events, USAA echoes the views of industry participants and the Investment Company Institute (ICI) in urging that any structural changes to MMFs, intended to address systemic events, preserve the essential characteristics of MMFs through appropriate prudential measures, within the parameters of a stable NAV. USAA generally agrees with the ICI's proposed creation, structure and function of an industry funded back-up liquidity facility. For the reasons set forth below, USAA proposes that any mandatory liquidity facility initial capitalization and ongoing commitment fees (the fees) be variable so that those MMFs that pose the greater potential 'systemic risk,' as borne out in the most recent financial turmoil, pay proportionally higher fees than those MMFs that pose significantly less systemic risk."

USAA explains, "The fees should be tied to the risks posed by the participating MMF in a manner similar to the standards applied in underwriting an insurance risk. Therefore, in considering a mandatory liquidity facility for MMFs, the Financial Stability Oversight Commission and the Securities and Exchange Commission (Commission) should ensure that the fees are tailored to the risks presented historically by similarly situated MMFs. For example, retail MMFs that have historically been less susceptible to liquidity crises would have a lower risk profile and therefore a lower required fee for participation in the liquidity facility."

Russell W. Swansen, President, Thrivent Mutual Funds comments on the crisis, "Historically, short-term market liquidity was provided by active participation of the dealer community and the depth of buyers and sellers active within the short-term debt market. The secondary market functions well only when there are sufficient buyers and sellers of similar sizes. Over the years, however, some participants have become so large that there are fewer buyers remaining in the market that can absorb their positions. At the same time, the dealer community has become increasingly reluctant to inventory such billion dollar positions. Thus, as a fund grows larger, the secondary market for its positions becomes thinner, and its portfolio becomes less liquid."

He adds, "As a fund grows larger, it often also outstrips its adviser's ability to provide financial support to the fund, either by purchasing distressed securities or investing directly in the fund to provide liquidity to meet redemptions. This is a dangerous cycle, because as a fund becomes larger, it achieves economies of scale that reduce expenses and increase potential yield, which in tum drives further asset growth. However, as assets continue to grow in a large fund, its potential impact on the financial market increases while at the same time its liquidity -- and often the ability of the adviser or its affiliates to support the fund -- is decreasing."

On Tuesday, the Investment Company Institute hosted a webinar entitled, "Stable NAVs and Shadow Prices of U.​S. Money Market Funds and published a press release entitlted, "Money Market Funds' "Shadow Prices" Fluctuate Regularly; Historical Data Show Limited Movement A Variety of Factors Can Affect Funds' Portfolios." Both discuss a new paper from the mutual fund trade group entitled, "Pricing of U.S. Money Market Funds," which discusses the history of "shadow" pricing and the factors behind the (usually) minor deviations underneath the funds' stable $1.00 per share prices and which attempts to educate investors and fund professionals on the pending Jan. 31 disclosure of money funds' shadow NAVs.

ICI's release says, "Forthcoming disclosures are likely to increase investors' awareness of money market funds' portfolios and pricing. To help investors understand these disclosures, a new research report by ICI, "Pricing of U.S. Money Market Funds", conducts economic analysis and examines historical data on funds' per-share market value, known as the 'shadow price.' The ability to offer shares at a stable $1.00 net asset value (NAV) is a core feature of money market funds. Under securities laws, a money market fund can offer shares at a stable $1.00 NAV as long as its per-share market value, also known as its 'shadow price,' stays within a range of one-half cent of $1.00—between $0.9950 and $1.0050."

It explains, "The report finds that events large enough to move per-share market values by $0.0050 are extremely rare. The report's economic analysis shows that four factors likely to change a fund's market value are falling or rising interest rates, a `portfolio's dollar-weighted average maturity, investors selling or purchasing shares, and a credit event, such as a ratings upgrade or downgrade or a default, affecting a security in the fund's portfolio. The report's examination of historical data finds that money market funds' shadow prices did fluctuate during the past decade, but that the changes were within a narrow range. Analyzing a sample of prime money market funds holding one-quarter of industry assets, the report finds that the funds' average per-share market value moved between $0.9980 and $1.0020 during the decade from 2000 to 2010, a period when the financial markets experienced wide variations in interest rates and asset prices."

Chief Economist Brian Reid comments, "Money market funds' per-share market values can and do deviate from $1.0000, but these changes are typically small. Money market funds hold high-quality, short-term securities and manage their portfolios to limit interest rate risk, credit risk, and liquidity risk. These factors help to limit the movements in funds' shadow prices."

ICI's release continues, "Money market funds have routinely calculated per-share market values for decades and disclosed them in semi-annual reports. These values are called shadow prices because they typically very closely track or 'shadow' the stable $1.00 net asset value that money market funds seek to maintain. Nevertheless, for many investors, their first exposure to money market funds' per-share market values will be on January 31, when the Securities and Exchange Commission will publish a snapshot of funds' shadow prices from November 30. The new monthly disclosure is required by the Securities and Exchange Commission's amendments in January 2010 to Rule 2a-7, the regulation that governs money market funds and sets the structure that allows them to offer a stable $1.00 NAV."

ICI President Paul Schott Stevens says, "Money market funds are even better positioned today than they were two years ago to handle stressful market developments. This is because the amendments to Rule 2a-7 strengthened money market funds by raising standards for credit quality, liquidity, and maturity. While regulations and portfolio management limit funds' risk, investors need to understand that money market funds are not guaranteed, as is fully disclosed in every money market fund prospectus. We hope that the public release of shadow pricing data will remind the public of that fact."

They also say, "ICI research finds that large, sudden changes in market conditions are necessary before a money market fund's market value would change by as much as $0.0050 and force the fund to consider whether to reprice its shares to less or more than $1.00 per share -- a development known as 'breaking the dollar' or 'breaking the buck.' ICI modeling, based on reasonable assumptions about money market funds' portfolio composition and maturity, finds that: Short-term interest rates must rise by more than 300 basis points (3 percentage points) in one day, absent any other changes in market conditions, to reduce a fund's per-share market value to $0.9950. Investor net redemptions must reach 80 percent of a fund's assets to reduce a fund's shadow price to $0.9950, absent any other changes in market conditions, and given an initial shadow price of $0.9990. A 100 basis point (1 percentage point) increase in interest rates combined with investor redemptions of 70 percent of a fund's assets would be necessary to reduce a fund's shadow price to $0.9950."

Finally, ICI writes, "Average shadow prices for prime money market funds in the sample -- those taxable funds that invest in corporate securities as well as government securities -- varied between $1.0020 and $0.9980 during the decade from 2000 to 2010.... Experience during the 2008 financial crisis demonstrates that `money market funds' shadow prices did not provide early warning of severe financial shocks. In the week ending September 10, 2008 -- two business days before the failure of Lehman Brothers -- 90 percent of prime money market funds in the sample had per-share market values within 5 basis points of $1.0000 (between $0.9996 and $1.0005). Even the following week, after Lehman Brothers had failed, 93 percent of prime funds in the sample had per-share market values greater than $0.9975, and none had a shadow price within 10 basis points of $0.9950."

Tuesday promises to be a full day for those interested in money market mutual funds. BlackRock announced Q4 earnings this morning and will host a conference call at 9am, where CEO Larry Fink will likely comment on a number of issues involving money funds. (Look for quotes to be added after the call.) There are also two Webinars discussing the pending "shadow" NAV disclosures, one from ICI at noon and one from AFP with BlackRock money fund managers at 3:30.

BlackRock's earnings release had little on "cash," but it did say, "Cash management flows remained subdued, although average AUM increased approximately 4%. Reported net inflows include the stable value fund referenced above, which is being invested in cash temporarily. [Earlier the release said, 'Results in the Americas institutional channel were muted by the transfer of the stable value AUM to cash management.'] Excluding the transfer and related outflows from the fund, cash management had net withdrawals of $6.2 billion, reflecting client re-risking and year-end cyclicality. We expect rates to remain low and flows to remain muted at best."

As we said in Friday's "Link of the Day," quoting a notice sent to reporters, "The Investment Company Institute (CI) will host a webinar and conference call on Tuesday, January 25 to present new research on money market funds, titled Stable NAVs and Shadow Prices of U.S. Money Market Funds. This paper explains and examines the factors that can impact money market funds' per-share market values, known as 'shadow prices.' On January 31, 2011, the SEC will begin publishing a snapshot of money market funds' shadow price data with a 60-day lag -- a requirement that was included in the SEC'​s adoption of new regulations in January 2010 to require enhanced liquidity, credit quality and maturity standards for money market funds."

The press update (which hasn't been posted on the ICI website) continued, "ICI Chief Economist Brian Reid will host the webinar and call with members of the media and public beginning at 12:00 p.m. EST.... Webinar participants can view the slides, listen to the presentation and participate in the Q&A via the web address below:"

The AFP Webinar, entitled, "Mark-to-Market NAV for Money Market Funds: What does it really mean?" will also take place Tuesday, January 25 but from 3:30-4:30 p.m. ET. The description says, "Per the 2a-7 money market fund rule changes as directed by the SEC, the mark-to-market NAV will begin being reported (60 days in arrears) in early February. Hear from a member of BlackRock's cash management team as they present some of the factors that influence the mark-to-market NAV and its characteristic daily fluctuations, as well as what shareholders should consider in assessing the market value."

Watch for more coverage later today and tomorrow.... See also, our Crane Data News from Jan. 21, "BlackRock Posts Shadow NAV Piece, Shows Range Rarely Breaks 0.999", which said, "BlackRock ... published a new "Viewpoint" recently that discusses the "shadow" NAV. Entitled, "The New Regulatory Regime for Money Market Funds: A Window into the Mark-to-Market NAV." It says, "Since the inception of money market funds several decades ago, a stable net asset value per share (NAV) has been a defining feature of this investment vehicle. Shareholders of money market funds managed in accordance with Rule 2a-7 under the Investment Company Act of 1940 subscribe and redeem shares at a net asset value of $1.00 per share. While money market funds seek to achieve a stable net asset value of $​1.​00 per share, there is no guarantee that it will be maintained."

Investment Company Institute President & CEO Paul Schott Stevens writes an opinion piece in this week's Investment News entitled, "Don't mess with money market funds". He says, "Money market funds have served as a low-cost, efficient cash management tool prized by all types of investors since 1983. Key to this success has been these funds' stable net asset value per share, typically $1. The Securities and Exchange Commission and other agencies are pondering whether money market funds would weather the next crisis better if those funds were forced to abandon the stable $1 value and float their NAVs."

The article continues, "The mutual fund industry, which manages $2.8 trillion in assets in money market funds, is of one mind on this issue: We all agree that forcing money market funds to abandon their stable per-share value is a terrible idea. But there is no need to listen to us on this score. Listen instead to schools. Listen to supermarkets. Listen to cities and states, and listen to a wide range of businesses."

Stevens explains, "Over the past two years, these voices and others have resounded against floating NAVs. Let's start with investors in money market funds: businesses, governments, households, nonprofit organizations, pension funds and others who seek both liquidity and preservation of capital. They have spoken directly to regulators, overwhelmingly in opposition to floating NAVs."

He says, "Take the education sector. The stable $1 NAV, as the Association of Public and Land-grant Universities told SEC officials, provides a 'low-cost, convenient and reliable cash management tool.' For K-12 schools, a floating NAV would lead to 'needless complication of the reporting systems of public schools and local government entities to reflect variations of value that are inconsequential,' the Pennsylvania School District Liquid Asset Fund said."

Then he asks, "How about business? The Association for Financial Professionals Inc., which speaks for thousands of corporate treasury officials, noted to the SEC that the investment decisions of many buyers of money market funds are driven by return of principal rather than return on principal. Thus, the association said, 'the potential of principal loss would preclude money market funds with a floating NAV from being an approved investment alternative' for a large number of institutional investors."

He explains, "Not surprisingly, businesses and governments that depend on money market funds for vital short-term financing also have expressed serious concerns about changes that could disrupt the market for their securities. The National Association of College and University Business Officers has warned the SEC that loss of a stable NAV investment option 'could alter both the number of investors and the amount of capital that could be invested in debt issued by colleges and universities, potentially raising the cost of capital for our members.'"

Finally, Stevens writes, "Just this month, Caremark LLC, CVS Corp., Safeway Inc. and 14 other blue-chip companies -- along with several groups representing treasurers in the corporate, educational and nonprofit sectors -- told the SEC that mandating a floating NAV 'would make short-term financing for American business less efficient and far more costly, ensuring a severe setback for an economy emerging from recession.' We in the fund industry couldn't agree more. But don't take our word for it; take theirs."

BlackRock, the 5th largest manager of U.S. money funds with $174 billion and the 2nd largest manager of "offshore" money funds with $80 billion, published a new "Viewpoint" recently that discusses the "shadow" NAV. Entitled, "The New Regulatory Regime for Money Market Funds: A Window into the Mark-to-Market NAV," it says, "Since the inception of money market funds several decades ago, a stable net asset value per share (NAV) has been a defining feature of this investment vehicle. Shareholders of money market funds managed in accordance with Rule 2a-7 under the Investment Company Act of 1940 subscribe and redeem shares at a net asset value of $1.00 per share. While money market funds seek to achieve a stable net asset value of $1.00 per share, there is no guarantee that it will be maintained."

The BlackRock paper explains, "In the wake of the market events of 2008, the U.S. Securities and Exchange Commission (SEC) approved changes to Rule 2a-7, added new disclosure requirements and took other actions in 2010 intended to strengthen the regulatory framework governing money market funds. Broad in scope, these changes imposed tighter restrictions on money market funds' portfolio maturity, credit quality and liquidity guidelines, expanded portfolio disclosure requirements and increased transparency to investors. A key element in increasing transparency was the requirement that money market funds file the mark-to-market -- or 'shadow' -- NAV of their portfolios with the SEC on a monthly rather than semi-annual basis. The SEC will make this information public on a time-lagged basis."

It states, "In this paper, we review some of the factors that influence the mark-to-market NAV and its characteristic daily fluctuations. Ultimately, we believe that the new regulatory regime will prove beneficial to investors by supplying them with more detailed information on fund managers' investment philosophies and approaches to risk management."

Under a section entitled, "What Makes the Mark-to-Market NAV Fluctuate?," BlackRock says, "A money market fund's mark-to-market NAV can fluctuate for a number of reasons. One major factor is monetary policy. Monetary policy is the process by which a central bank regulates the control of money and interest rates in an economy. Within the U.S., this is carried out by the Federal Reserve Board (FRB), which sets short-term interest rates (longer-term rates are set by the capital markets). Because money market funds hold short duration securities, the values of their portfolio securities are affected when the FRB moves short-term interest rates. When interest rates move up or down, the value of fixed-income securities held by money market funds moves as well -- typically in the opposite direction of interest rates. As a result, rising rates will tend to move security prices and the mark-to-market NAV downwards, while conversely, falling rates will cause security prices to rise. Because the instruments involved are comparatively short in duration, these movements in the mark-to-market NAV tend to be small."

The piece continues, "Market conditions and investor expectations also influence a fund's mark-to-market NAV. When market liquidity changes -- or borrowing becomes cheaper or more expensive -- the prices of securities held within a portfolio can fluctuate. Changes in market conditions can impact both the broader markets and individual securities and sectors in those markets. Such changes will also influence money market funds' daily mark-to-market NAVs. Investor subscriptions and redemptions also have an impact day to day. This is because funds buy and sell portfolio securities based on shareholder subscriptions and redemptions. If different funds are buying or selling at different points in the interest-rate cycle, this could contribute to differences in the mark-to-market NAVs between those funds."

BlackRock also says, "To show how different economic conditions can influence a money market fund's daily mark-to-market NAV, we compiled data from January 2002 to October 2010 for a representative BlackRock institutional fund to construct the chart [`see page 2 of full document].... The fund is a taxable 'Prime' money market fund that invests in a wide variety of money market instruments, including certificates of deposit, time deposits, commercial paper, and treasury and agency obligations."

They add, "In analyzing historical NAVs such as those plotted in the chart [see page 2 of full document for chart], it is important to note that even during the great credit crisis that began in mid-2007, the representative fund's mark-to-market NAV did not exceed 50% of the one-half of one cent threshold needed for the fund to break the buck. At its lowest point in September 2008, the mark-to-market NAV of the fund was $0.9975; however, for the great majority of the period covered by the chart, the representative fund's mark-to-market NAV remained comfortably within one-tenth of one cent above or below the stable NAV of $1.00."

The article tells us, "BlackRock has welcomed the SEC's changes to Rule 2a-7, including the new rules requiring more frequent disclosure of mark-to-market NAVs. We believe that transparency is critical for investor confidence and that an increased understanding of how money market funds have worked in practice should help reinforce investors' understanding of these products and the regulatory framework critical to maintaining the integrity of the product."

Finally, BlackRock adds, "We encourage investors to review published mark-to-market NAV data with the understanding that different money market funds' mark-to-market NAVs will naturally differ from each other. Each money market fund has different dynamics in terms of its portfolio composition and shareholder base. In the vast majority of cases the Rule 2a-7 structure has historically allowed money market funds to keep a stable $1.00 NAV in place despite these differences. Accordingly, we maintain our belief that money market funds continue to provide shareholders with an important source of short-term liquidity and investment diversification."

Note that BlackRock's Co-Heads of Cash & Securities Lending, Simon Mendelson and Rich Hoerner, will host a Webinar entitled, "Mark-to-Market NAV for Money Market Funds: What does it really mean?" on Tuesday, January 25, from 3:30-4:30pm. The description says, "Per the 2a-7 money market fund rule changes as directed by the SEC, the mark-to-market NAV will begin being reported (60 days in arrears) in early February. Some of the factors that influence the mark-to-market NAV and its characteristic daily fluctuations, as well as what shareholders should consider in assessing the market value will be reviewed in this in-depth webinar presented by senior members from Blackrock."

Over the past week-and-a-half, we have featured many of the important comment letters on the "President's Working Group Report on Money Market Fund Reform." Today, we feature our own submission, "Comment Letter to the S.E.C. on the Money Market Fund Reform Options. Crane Data President & Publisher Peter Crane wrote, "I appreciate the opportunity to weigh in on the recently released 'Report of the President's Working Group on Financial Markets: Money Market Fund Reform Options' and offer my opinion and thoughts on the future of money market mutual fund regulations."

Crane commented, "I have been writing about and tracking money market mutual funds for 17 years and currently run Crane Data LLC. Our Money Fund Intelligence newsletter has covered the money market mutual fund industry since its launch in 2006, and our website,, offers daily news about money market funds."

The letter continued, "Crane Data believes that most of the options laid out by the PWG report, particularly the floating NAV and special purpose bank options, would cause much more harm than good. These alternatives would not remove or seriously reduce the risk of a widespread panic or run in financial markets, and they likely would cause large disruptions to investors and recipients of funding in the money markets. I believe the floating rate, as well as the dual system options, would actually increase the likelihood of market runs and panics by highlighting very small losses in supposedly conservative investments. In fact, we feel this was the very trigger of the recent Subprime Liquidity Crisis. As small losses and freezes began, investors lost faith in supposedly conservative investments, such as ultra-short bond funds, auction rate securities and 'enhanced cash' funds. Subsequent runs from these vehicles caused far more damage than any issues with underlying mortgage or bond investments."

We explained, "Crane Data thinks that the private liquidity facility represents the only safe and sane option for making money market funds safer. Insurance would be an attractive option, but this likely presents too many challenges in implementing.... Crane Data recently surveyed [and] Subscribers unsurprisingly oppose and believe that a floating NAV would be the most harmful option discussed in the PWG report.... We review our survey findings below."

Our "Money Fund Intelligence Subscriber Survey: Regulatory Reforms and the 2011 Outlook" found, "1. This question is in regard to the U.S. Treasury's long-awaited 'Report of the President's Working Group on Financial Markets: Money Market Fund Reform Options' paper, which details 'a number of options for reforms related to money market funds.' Which of the options do you think is the best alternative for money market mutual fund regulation? Floating net asset values (8%), Private emergency liquidity facilities for MMFs (50%), Mandatory redemptions in kind (4%), Insurance for MMFs (15%), A two-tier system of MMFs with enhanced protection for stable NAV funds (27%), A two-tier system of MMFs with stable NAV MMFs reserved for retail investors (4%), Regulating stable NAV MMFs as special purpose banks (4%), Enhanced constraints on unregulated MMF substitutes (23%), Other, please specify (8%)."

It continued, "2. How would you rank these options for Money Market Fund Regulatory Reform? (10 being the highest) Floating net asset values (2.2 avg.), Private emergency liquidity facilities for MMFs (6.3), Mandatory redemptions (3.4), Insurance (4.8), A two-tier ... stable NAV funds (4.5), A two-tier system ... retail investors (3.2), Regulating ... as special purpose banks (2.8), Enhanced constraints (5.3). 3. Which of these options do you think would do the most harm? Floating net asset values (88%), Private emergency liquidity facilities (8%), Mandatory redemptions in kind (20%), Insurance for MMFs (20%), A two-tier system of MMFs with enhanced protection for stable NAV funds (8%), A two-tier system of MMFs with stable NAV MMFs reserved for retail investors (16%), Regulating stable NAV MMFs as special purpose banks (32%), Enhanced constraints on unregulated MMF substitutes (0%), Other (0%). 4. On a scale of 1 to 10 (highest), how important is the $1.00 stable value to money market mutual funds? 9.8 was the average score."

We also asked, "5. What is the most important issue facing money market funds today? Regulatory changes (56%), Consolidation (8%), Ultra-low interest rates (60%), Rising rates (0%), Competition from banks or new products (16%), Other (4%). 6. What is your outlook for the future of money market mutual funds? Very bearish (0%), Bearish (36%), Neutral (16%), Bullish (48%), Very Bullish (0%). 7. How much do you expect money fund assets to increase or decrease in 2011? Decrease by over 20% (4%), Decrease by 10-20% (32%), Decrease by 0-10% (16%), Little or no change (8%), Increase by 0-10% (28%), Increase by 10-20% (12%), Increase by over 20% (0%). 8. What is your title or job function? Money fund portfolio manager, analyst or trader (40%), Money fund sales or marketing (8%), Money fund business development or board (8%), Money market security issuer or dealer (4%), Money fund investors (16%), Money fund service provider (4%), Money fund rater or regulator (8%), Other (20%)."

Finally, we wrote, "I'd be happy to discuss these results and issues in more detail. Crane Data appreciates the time and effort put into these difficult issues by regulators and industry participants, and we wish you luck in finding a solution that decreases the risks of money funds but preserves their positive qualities."

Moody's Investors Service published a press release entitled, "Update on Money Market Fund Ratings Methodology" yesterday, which indicates that the ratings agency is backing away from its controversial proposals to switch from its AAA money fund rating scale and to heavily weight sponsor support in ratings. The release says, "In September 2010, Moody's Investors Service published a Request for Comment on a proposal to change its global rating methodology for money market funds. A broad range of comments have been received, reflecting feedback from investors, sponsors, consultants, trade groups and regulators on this proposal. With the comment period now over and comments under review, Moody's would like to update the market on its plans for revising the methodology. The proposed revisions to Moody's rating methodology reflected experience gained from the tumultuous period in late 2008 when disruptions in short-term funding markets caused market value declines and record outflows from prime money market funds."

It continues, "Against this backdrop, Moody's proposed to update its money fund methodology and requested market feedback on a number of key changes, including: Ratings determination based on two distinct analytic assessments -- the portfolio credit profile (based on the credit quality of the fund's assets), and portfolio stability profile (including market and liquidity risks); A set of objective measures to be used in a composite evaluation of these two key factors for the purpose of making rating distinctions; Explicitly factoring a sponsor's creditworthiness into the rating, especially for top rated funds, to reflect the extensive history of sponsors' financial and operational support; and Introduction of a new set of rating symbols to reflect the distinct meaning of our money market fund ratings compared to Moody's credit ratings on long-term bonds."

"Moody's has received substantial feedback on our proposal to change the methodology for rating money market funds, via written commentary, through teleconference briefings and phone conversations, and at a number of roundtables we sponsored following the release of our Request for Comment. Among the more prominent themes that emerged from these communications were the following: There was broad support for our proposed expansion and formalization of specific portfolio metrics as the basis for determining ratings, and for the periodic disclosure of those metrics as part of our research in the money market sector. The market supported the identification of differentiating factors among funds," says the release.

Moody's explains, "While some investors told us that their investment governance process could accommodate a new set of rating symbols, many indicated that their current investment guidelines and/or indenture covenants referenced Moody's more traditional rating symbols and that revising those investment guidelines would be extremely difficult, if even possible. While recognizing the rationale for emphasizing the distinction between money fund ratings and long-term credit ratings, many suggested that a modifier added to our current rating symbols -- rather than an entirely new set of symbols -- would adequately distinguish them from credit ratings. We heard from a number of market participants that, by long-established market convention, particular meaning has become attached to -- and portfolio guidelines developed around -- "the highest rating category". Because of this, they noted that our proposal to further segment within the highest rating category by introducing an MF1+ rating could be confusing to investors and disruptive to the market."

They also add, "Some expressed concern over our intention to consider sponsorship as a factor in our money market fund ratings. These respondents argued that despite a long history of sponsor support as a critical factor in preserving money market fund stability, future support is less certain, assessment of sponsors involves judgment, and our considering sponsorship could cause investors to over-rely on sponsors' implicit support for their funds. A number of respondents offered specific comments on the computation of our proposed fund portfolio metrics and/or the calibration of those metrics relative to the component rating factor categories."

The release continues, "Moody's appreciates the attention paid to our proposal for updating our approach to rating money market funds and the time taken by numerous investors and other market participants to share with us their feedback on its specific elements. Having carefully considered market feedback, we intend to publish a final methodology that is consistent with the analytic approach outlined in our Request for Comment, but reflects certain changes to the calibration and representation of the ratings. We believe that this approach will benefit investors by increasing emphasis on market value and liquidity risks while also minimizing market disruption by preserving some key attributes of our existing rating system."

Moody's adds, "The main changes we intend to incorporate into our final methodology are: The top rating category will not be segmented as had been originally proposed. We will represent the ratings using symbols more consistent with our current system and market convention, using a "mf" modifier to highlight the distinct meaning of these managed fund ratings (namely, Aaa-mf, Aa-mf, A-mf, Baa-mf, B-mf, C-mf). This symbol system limits the potential for market disruption while still addressing one requirement of the Dodd-Frank financial reform Act -- to use distinct symbols for ratings with distinct meanings."

They write, "The methodology is re-designed to reflect a fund's own characteristics and thus strong sponsorship will not enhance a fund's rating. At the same time, we expect funds to operate in a stable environment, with minimal incremental risk stemming from their sponsor's own operational, market or funding challenges. In that context, the quality of a fund's sponsor will continue to be a factor in our ratings, including our expectation that funds rated in the top rating category (Aaa-mf) would be sponsored by firms having an investment-grade or equivalent credit profile. However, we anticipate only a modest number of funds to receive lower ratings because of a negative impact from our sponsor assessment. While the rating factors proposed in our Request for Comment will remain intact, we may incorporate minor revisions in the calculation of some of these factors based on feedback received; we are currently reviewing and testing these items."

Finally, it says, "Moody's expects to finalize and release our revised rating methodology for money market funds during the first quarter of 2011. After its release, we will obtain updated information from rated funds and begin to evaluate those funds using the revised approach. Because updating ratings will require both expanded analysis using new information and changes to Moody's systems and databases to accommodate the altered rating symbols, we currently anticipate publishing updated ratings under the new methodology in the second quarter, but will update the market further in the event that our timeline changes."

As expected, comment letters on the "President's Working Group Report on Money Market Fund Reform" almost unanimously oppose the possibility of a floating rate NAV for money market mutual funds. Today, we excerpt from one of the most eloquent critiques of the radical change concept. J. Charles Cardona, President, The Dreyfus Corporation writes, "We commend the PWG's fair and balanced consideration of the potential for each Policy Option to reduce money market funds' susceptibility to runs. We were particularly pleased that the PWG was guided by a concern for mitigating possible adverse consequences of further regulatory change, such as the potential flight of assets from money market funds to less regulated or unregulated vehicles, and that the PWG recognized potentially effective Policy Options for reducing systemic risk without requiring the extreme act of transitioning to a floating net asset value for money market funds."

Dreyfus explains, "We believe first and foremost that it is unnecessary to obsolete Rule 2a-7, stable NAV money market funds in order to reduce systemic risk. Accordingly, we do not support the Policy Option of adopting a floating NAV for money market funds, which we believe would be problematic to implement, and which poses other significant negative consequences."

The letter says, "We believe the Report has accurately identified the reasons why transitioning from a stable NAV to a floating NAV for money market funds may not mitigate systemic risk. First, we agree that this Policy Option could not be implemented without causing systemic stress to the financial markets and to the economy. There is no one, practical solution for implementing this change that would not be systemically disruptive to the markets and the economy. Secondly, we believe a floating NAV would reduce systemic risk only nominally, because floating NAV investments that would continue to be used for ready liquidity would still be subject to runs as those investors seek to 'get out first' in order to minimize losses. Thirdly, we believe that if the Commission were to mandate a floating NAV it would eliminate the liquidity vehicle of choice for millions of retail and institutional investors while only shifting systemic risk to those liquidity vehicles that would replace the stable NAV money market fund."

Cardona comments, "We strongly agree with the statement in the Report that the transition from a stable NAV to a floating NAV itself would be systemically risky, because we believe that implementing this Policy Option would precipitate the movement of at least hundreds of billions of dollars to alternative (regulated or unregulated) liquidity sources. Conversely, we strongly disagree with the following statements in the Report which are offered as a justification for moving to a floating NAV: '... making gains and losses a regular occurrence, as they are in other mutual funds ... could alter investor expectations and [make them] more accustomed to and tolerant of NAV fluctuations and less prone to sudden, destabilizing reactions' [and] 'investors would have less of an incentive to run from money market funds with floating NAVs than from those with stable, rounded NAVs.'"

He explains, "Liquidity investing, by its very nature, is loss-averse. Moving to a floating NAV will not change the nature of liquidity investing -- it will only relocate it to different vehicles, where the same intolerance for loss will be evidenced during periods of unusual market stress that threaten the stability of liquidity balances broadly. In an environment where floating NAV funds have replaced stable NAV funds, we believe floating NAV funds also would be likely to experience 'sudden, destabiliting reattions' during periods of unusual market stress. While the 'investor left behind' in a stable NAV fund likely faces a loss of about 1% (before the fund liquidates and winds up its affairs), a floating NAV fund also can have 'investors left behind' who can be subject to deeper downside market value risk with a small likelihood that those losses could be recovered through capital gains. Faced with that risk, substantial net redemption activity during periods of unusual market stress would be foreseeable in floating NAV funds."

Dreyfus adds, "In part, our opinions are based on feedback from our fund shareholders. For example, as noted in our comment letter to the Commission in September 2009 on the proposed amendments to Rule 2a-7, we surveyed 37 of the largest Dreyfus institutional money market fund shareholders (with over $60 billion invested) and asked them, inter alia, whether their respective businesses could continue to utilize a money market fund for short-term liquidity needs if a floating NAV was introduced. We reported that two-thirds of these shareholders said they would seek an alternative liquidity investment. Of these respondents, 50% said they could not tolerate the principal risk associated with a floating NAV, 16% cited systems support obstacles (mainly, cash sweep accounts), and 8% cited relevant investment guidelines that would prohibit that transaction."

The letter continues, "We believe these results support the view that floating NAV money market funds would not serve the liquidity needs of investors, and that moving to a floating NAV would precipitate the prompt transfer billions of dollars from stable NAV money market funds to other liquidity vehicles that do not have the protections afforded by Rule 2a-7, which itself would have significant systemic implications. Further, we refer to the statement in the Report that 'there is no direct evidence on the likely effect of a floating NAV on the demand for money market funds' and suggest that our survey offer[s] relevant 'direct evidence' that the demand for money market funds would be substantially lower if a floating NAV replaced the stable NAV."

Finally, Dreyfus writes, "We also disagree with the suggestion in the Report that moving to a floating NAV is advisable in order to dispel investor expectations that money market funds are 'risk-free cash equivalents' and make them less systemically vulnerable. We do not believe that investors, particularly institutional investors, believe that money market funds are risk-free investments. To the contrary, institutional investors have increased their demand for due diligence meetings and have demonstrated greater vigilance about portfolio holdings and strategies (among other aspects of money fund investing). We believe this behavior evidences a strong appreciation for the risk of loss inherent in stable NAV money market fund investments and, like investors past net redemption activity during periods of unusual market stress, is inconsistent with the belief that their investment is 'risk-free.'"

Below, we excerpt from our most recent "Fund Profile, a "Q&A With Federated CEO Chris Donahue.... This month, Money Fund Intelligence interviews Chris Donahue, President & CEO of Federated Investors, Inc. Federated is one of the largest and oldest managers of money market funds, and Donahue has been working in the business virtually since its inception almost four decades ago. We discuss the challenges confronting money funds and the outlook for funds in the coming year.

Q: How long has Federated been involved in running money funds? How long have you been involved? "[Bruce] Bent and [Harry] Brown came to Pittsburgh in '71 or '72 and showed that product to Cliff Brown who was the head of research here, and Cliff Brown pulled open his drawer and said, 'Hey, I got one of those right here.' But our guys couldn't figure out how to make it work at that point, and Brown and Bent did. So when they actually raised a bunch of money, then we, along with a couple others, became in effect the second money market funds in roughly January of '74."

He continues, "This history created a culture that has withstood decades of change and volatility in the marketplace. We understood early on that these products were as much cash management tools as they were investments. We discovered that in the late '70s, when interest rates on money funds dropped bellow passbook rates. Most of our competitors got out of the sales function of competing for a bank trust department because everyone thought the money would just flop over into the bank. By talking to clients, we realized that the yield difference between the fund and passbook rate was not a factor if they were doing cash management systems. So the vast majority of that money stayed and has been with us for three and a half decades."

Q: How did Federated weather the 2007-2008 storm? Donahue tells us, "The first thing that has to happen is that the credit work is king. So, yes, you can do the Government funds and the Treasury funds, but at the end of the day the credit work is king. That is the most important thing in weathering the storm. The intermediary model, for us, has worked very well because you end up with good sales and good uses of the product, because you have to explain exactly what's going on and how it's going to work with the intermediary."

He adds, "But mind you, all of the money that we have, and I think others have, is money seeking daily liquidity at par. It's just that some of that money is more seeking interest than it is seeking daily liquidity at par. We tend to have more of the clients who are really seeking daily liquidity at par. The yield comes along after that."

Q: What's the biggest challenge in managing money funds today vs. historically? Donahue answers, "The biggest challenge is ... avoiding stray bullets. Stray bullets are fired by regulators, legislators, and marketplaces. This has always been the case. When we started with money funds in the '70s, we had a polite disputes with the S.E.C. in the hearing on amortized cost, with the Federal Reserve as to whether or not money funds were required to set reserves ... and state fiduciary concerns about whether putting money into money funds was an improper delegation of authority. These were all forms of stray bullets."

"Today we just have another collection. They all have different names and different labels, but it is the same kind of thing. One of the biggest challenges in money funds today is of course the artificially low yields.... That is the reality of the marketplace. Our structure has enabled us to do that, and yet it's still a challenge because you're not getting compensated for all the work you're doing."

Q: How long can you survive in these low rates? He responds, "We could survive indefinitely with this because of the business model. If you look at an institutional fund on average, if you posit an institutional fund at 20 basis points, then posit third party costs -- State Street, the transfer agent, directors, lawyers, accountants, registration costs, things like that -- call it 3 bps, and then an administrative service fee to Federated of about 7 bps, these added together equal 10. We call those the core expenses. As long as the marketplace has yields above 10 bps we are not subsidizing the fund. The fund is paying its core expenses."

Donahue explains, "Now of course, there is, at 10 bps, nothing left in yield for the shareholder, nothing left in investment advisory fee for Federated, and therefore nothing left to share with an intermediary who has the cost of cash management. So it's not a happy moment. But it's one that could last indefinitely because the fund is functioning at a high quality level and is paying its expenses."

He adds, "We were certainly told by our clients that, even when the interest rates paid on the Government fund were zero during the first quarter of '09, that unlike others, we did not close our funds. The reason was that our clients were overwhelmingly using it as a cash management tool. They understood that it wasn't going to be zero forever ... but they stayed with us right through it and we kept the funds open for that purpose. So it is the strength of the business model and the customers that enable us to answer that question. Although we don't want to, we can sustain this indefinitely."

Like everyone else in the money fund industry, we're trying to find time to read all 52 of the response letters on the President's Working Group Report on Money Market Fund Reform. Given this week's blizzard in Boston and the launch of our new Crane's Money Fund University Thursday, we've chosen to focus on the big important ones first. Today we highlight the letters from the largest money fund manager in the world, JP Morgan, and the largest money fund manager in the country, Fidelity Investments.

The JPM letter, written by George Gatch, says, "J.P. Morgan Asset Management appreciates the opportunity to comment on the President's Working Group Report on Money Market Fund Reform. J.P. Morgan is one of the largest money market fund managers in the world, with fund assets under management of $456 billion ... including the JPMorgan Prime Money Market Fund, the industry's largest money market fund, with assets of $133 billion. We commend the President's Working Group's efforts to report on and analyze the potential advantages and disadvantages of options that seek to mitigate the risks of industry-wide runs on money market funds. We agree with the President's Working Group that the significance of [money market funds] in U.S. financial systems suggests that the changes must be considered carefully. We believe that it is critical to strike the proper balance between achieving that goal and ensuring that money market funds remain a stable and viable part of our financial system."

It continues, "Over the past two years, J.P. Morgan has worked closely with the Investment Company Institute and other industry groups to consider issues relating to the money market fund industry. J.P. Morgan was part of the ICI Money Market Working Group that issued, in March 2009, extensive recommendations to strengthen money market funds in response to the market crisis of 2008. J.P Morgan also submitted its own comment letter, in September 2009, and worked closely with the ICI on the ICI's comment letter to the Securities and Exchange Commission in response to the SEC's proposed amendments to Rule 2a-7 of the 1940 Act."

Gatch says, "J.P. Morgan more recently has been involved with efforts to develop an industry-sponsored liquidity facility to provide liquidity to 'prime' money market funds in periods of unusual market conditions. We believe that the Liquidity Facility is the best single option presented in the Report to address the objective of further mitigating the risk of runs on money market funds, without damaging money markets funds' ability to operate in their current structure and continue their important role in the financial markets.... We are particularly concerned with the option of a floating NAV. The success of money market funds over the past decades has been due to the combination of competitive market yields with the ease and convenience of transacting at a $1.00 NAV."

Finally, he adds, "We expect that the implementation and operation of the Liquidity Facility will result in ongoing costs to money market funds and shareholders. As with the recent changes to Rule 2a-7 noted above, we believe that those costs are appropriate in that they will promote the stability of money market funds without significantly diminishing the viability of money market funds as a short-term investment option for investors. We acknowledge that the Liquidity Facility, although simple in concept, has the potential to be complex in structure and operation, and has a number of issues that need to be thoughtfully addressed including capacity, governance, structure and pricing. We believe, however, that those issues can be satisfactorily addressed, and urge our industry colleagues and regulators to work towards finding solutions."

Fidelity Investment's Scott Goebel writes, "Fidelity Investments appreciates the opportunity to provide comments to the Securities and Exchange Commission on the Report of the President's Working Group on Money Market Fund Reform Options. Fidelity is the largest money market mutual fund provider in the country, with more than $450 billion in MMF assets under management. As of November 30, 2010, funds we manage represent more than 16% of MMF assets. More than 13 million customers, who include retirees, parents saving for college and active investors, use Fidelity's MMFs as a core brokerage account or cash investment vehicle. We believe that our focus on stability of principal, liquidity and shareholder return, in that order, have delivered great value to our shareholders over our more than 30 years in the MMF business. Continued viability of MMFs is important to investors, issuers and financial markets, and it is important to us."

Goebel says, "The PWG has requested 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.' Fidelity recognizes the balanced approach taken by the PWG in drafting the PWG Report. Most importantly, the PWG Report concludes that there is no easy additional change to regulation of MMFs that will insulate the funds from the risk of potential losses in the future. In fact, the PWG Report points out that such an outcome is neither desirable nor achievable -- and that 'preventing any individual MMF from ever breaking the buck is not a practical policy objective.' However, Fidelity believes that the options identified in the PWG Report ultimately will not reduce the risk to MMFs of large, unexpected redemptions and in some cases could actually cause shareholders to redeem more quickly."

The Fidelity letter says, "The least desirable option is any proposal that involves floating the NAV of MMFs, either for all funds or for some funds in a two-tier structure.... Imposing a floating NAV on MMFs will create, rather than reduce, systemic risk by increasing concentration of short-term assets in the banking system. Some believe that in a period of market turmoil, funds with floating NAVs would be at lower risk of significant redemptions from shareholders. We are not aware of empirical evidence to support this belief."

Finally, it adds, "We have concerns that the costs, infrastructure and complications associated with private liquidity facilities are not worth the minimal liquidity that would be provided. Although we are not aware of a proposal for a private liquidity facility that we support, we understand that some financial regulators may wish to establish an emergency infrastructure that would allow the federal government to act in an extreme crisis.... Given the unprecedented difficulties the banking industry has experienced recently, it seems bizarre to propose that MMFs operate more like banks, which have absorbed hundreds of billions of dollars in government loans and handouts."

They explain, "Although Fidelity has concerns that the options described in the PWG Report are not advisable, we believe the creation of a well designed reserve within MMFs could further improve the stability and viability of MMFs. This reserve would be funded by a holdback of a portion of a fund's income, similar in size to the amount shareholders paid for the Guarantee Program. The holdback would be disclosed in the MMF prospectus, as either a shareholder 'charge' or 'fee'. Each fund's reserve would be used to protect shareholders of the fund in the event of an unrealized or realized loss in that fund."

Federated Investors has published a new article entitled, "'Shadow NAV' is no mystery," which says, "In the world of money market funds, the term 'shadow pricing' is often heard by investors -- and just as often misunderstood. Although it sounds mysterious, shadow pricing is simply the precise calculation of a money market fund's net asset value (NAV), reflecting the current market prices of the underlying securities that are in the fund's portfolio."

The piece continues, "For this reason, shadow pricing, which is used to create a fund's 'shadow NAV,' means the same as another, less dramatic-sounding term: mark-to-market pricing. The SEC now requires all money market funds to report their shadow NAVs, or mark-to-market NAVs, on a monthly basis. The SEC will subsequently share these mark-to-market NAVs with the public after a 60-day delay."

Federated explains, "Mark-to-market pricing isn't new. For decades money market funds have been required to obtain market prices as a way to verify that the stated NAV of a fund, commonly $1.00 and derived by using what is called the amortized cost pricing method of accounting, accurately reflects the fund's fair value in the market. Because money market fund assets are of short duration -- the weighted average maturity of a fund's portfolio of securities can't exceed 60 days -- the fund's amortized cost price (the stated NAV) and the underlying market price (the shadow NAV) should be virtually identical. Money market funds attempt to keep their NAV stabilized at $1.00 per share; the mark-to-market or 'shadow' price simply carries this calculation out to four decimal places -- $1.0002, for example, or $0.9998."

The piece includes a Q&A, and asks, "Should investors be concerned about a money market fund with a shadow NAV other than $1.0000? It answers, "No, because the value of the fund will end up being rounded to a dollar. For example, a money market fund with a mark-to-market, or shadow, price of $1.0004 will equal $1.00 when rounded to two decimal places instead of four. Likewise, a shadow NAV of $0.9985 rounds to a $1.00 NAV. In fact, we anticipate that the reported shadow NAVs for most money market funds will likely appear as something other than $1.0000. Furthermore, we believe money market fund investors and the SEC will benefit from seeing the shadow price because it will provide statistical confirmation of the stability of a $1.00 NAV, which for recordkeeping, accounting and valuation purposes, is critical to the nearly $3 trillion money market fund industry."

Federated's article also asks, "What do we mean by using the amortized cost pricing method to value a money fund? They respond, "The amortized cost price of a money market fund reflects the par value, or the stated face value, of the underlying securities in the fund's portfolio, plus any premium paid or minus any discount given at the time the securities were purchased. The amount of the premium or discount is then amortized, or spread out, daily over the remaining life of the security. This method of accounting brings the security's value closer to par as the security approaches its maturity date. Because SEC Rule 2a-7 requires the underlying securities of a money market fund to be of high-quality and short-term in nature, the amortized cost method essentially assumes that the securities will deviate little in value from their purchase to their maturity."

They also ask, "How can the mark-to-market/shadow price affect a money market fund's $1.00 share price? Federated answers, "Under SEC rules, the board of trustees of a money market fund must periodically review the fund's amortized cost price to ensure that the $1.00 NAV fairly reflects the market price of the fund portfolio’s underlying securities. If the market price (the shadow NAV) deviates from the amortized cost-calculated NAV by .50% or more -- that is, $1.0050 and above or $0.9950 and below -- the trustees must consider what action to take, though they are not required to stop using the amortized cost method. A fund will only 'break a dollar' if the trustees determine that a $1.00 NAV no longer fairly reflects the market value of the fund's portfolio, or that the deviation from $1.00 could result in material dilution or other unfair results to the fund's shareholders."

Finally, they ask, "What is Form N-MFP?" Federated says, "It is the new reporting form that money market funds must file with the SEC by the fifth business day of each month. It will include, among other things, the fund's portfolio holdings as of the last business day of the previous month, each holding's market value, and each fund's mark-to-market/shadow NAV. For Federated's money market funds, the first Form N-MFPs -- with shadow NAVs calculated as of November 30, 2010 -- were reported to the SEC by the December 7, 2010 deadline. The information reported on the forms will become publicly available at the end of January 2011 on the SEC website (, and will be accessible through"

A host of responses were filed just ahead of last night's deadline for Comment on the President's Working Group Report on Money Market Fund Reform. (See a listing of the comment letters here.) As expected, many are fund managers and the vast majority have stated their opposition to a floating NAV for money market funds. Support also appears strong for the "private liquidity facility" option. Below, we excerpt from the Investment Company Institute's 58-page response, which for the first time provides public details on its "liquidity exchange facility" (LF) concept.

ICI's press release says, "A new, private facility to provide a liquidity backstop for prime money market funds is the most promising solution to bolster the resilience of these funds in times of severe market stress, the Investment Company Institute (ICI) said in a letter submitted today to the Securities and Exchange Commission. The letter responds to an SEC request for comments on the options for money market fund reform outlined in the President's Working Group on Financial Markets (PWG) Report on Money Market Fund Reform Options (Report)."

President and CEO Paul Schott Stevens comments, "We commend all the members of the PWG for their thoughtful and thorough work on the Report, which affirms the crucial role money market funds play for investors and the U.S. economy. A liquidity facility would build on the important reforms, including higher liquidity requirements, put in place by the SEC in 2010. The blueprint for a liquidity facility reflects the strong support of ICI and many of its members. We believe this approach, an option first suggested by the Treasury Department in mid-2009, holds the most promise for further strengthening money market funds in times of severe market stress, with the least negative impact."

The ICI's letter explains, "The Investment Company Institute is pleased to provide its views on the October 2010 Report of the President's Working Group on Financial Markets on Money Market Fund Reform Options. The Report affirms that money market funds -- which seek to offer investors stability of principal, liquidity, and a market-based rate of return, all at a reasonable cost -- serve as an effective cash management tool for investors, and as an indispensable source of short-term financing for the U.S. economy. ICI and its members are committed to working with policymakers to bolster money market funds' resilience to severe market stress so as to assure their continued ability to serve these purposes. We hope our comments below will be helpful to the constituent members of FSOC as they consider how best to advance toward this important policy goal."

It continues, "As indicated in the SEC Release, the Report responds to a recommendation in a June 2009 Treasury Department paper on financial regulatory reform. The Treasury paper recommended that the PWG prepare a report assessing whether more fundamental changes were necessary to supplement anticipated SEC money market fund reforms. Notably, the Treasury paper urged caution in this effort. In particular, it recommended that the PWG carefully consider ways to mitigate any potential adverse effects of a stronger regulatory framework for money market funds, such as investor flight from these funds into unregulated or less regulated money market investment vehicles. Consistent with the Treasury recommendation, the Report reflects a thoughtful and cautious approach, which we commend. The Report identifies several possible reform measures and discusses in a very balanced fashion potential advantages and disadvantages of each one. It is telling that -- notwithstanding its sixteen-month incubation period -- the Report does not specifically endorse any particular course of action."

The comment adds, "ICI and its members have devoted significant attention to a specific option advanced in the Treasury paper. The paper called for exploring measures to require money market funds 'to obtain access to reliable emergency liquidity facilities from private sources.' Over the past 18 months, we have made substantial progress on developing a framework for such a facility, including how it could be structured, capitalized, governed, and operated. As discussed in detail later in this letter, we strongly endorse a liquidity facility for 'prime' money market funds as the means to provide further stability to money market funds."

ICI explains, "Over the past year and a half, ICI has worked to develop a model for an emergency liquidity facility for prime money market funds. Our proposed liquidity exchange facility ('LF') is an industry-sponsored solution intended to serve as a liquidity backstop for prime money market funds during times of unusual market stress. It would be formed as a state-chartered bank or trust company and capitalized through a combination of initial contributions from prime fund sponsors and ongoing commitment fees from member funds. The LF would gain additional capacity from the issuance of time deposits to third parties as well as access to the Federal Reserve discount window in the normal course. All prime money market funds would be required to participate in the LF."

They continue, "During times of unusual market stress, the LF would buy high-quality, short-term securities from prime money market funds at amortized cost. In so doing, the LF would (1) enable funds to meet redemptions while maintaining a stable $1.00 NAV -- even when markets are frozen -- and (2) help protect the broader money market by allowing funds to avoid the need to sell portfolio instruments into a challenging market. Also, the very existence of such a liquidity backstop could provide reassurance to investors and thereby limit the risk that liquidity concerns in a single fund might spur increased redemptions in all prime money market funds. Importantly, the LF is not intended to provide credit support; rather, it is intended to meet liquidity needs brought on by market stresses through the acquisition of high-quality instruments. Further, the LF would provide a liquidity backstop only after a substantial portion of a fund's legally mandated liquidity positions ... are utilized."

For other coverage, see Bloomberg's "Money Funds Push $24 Billion Backstop as Clash Looms Over Potential Rules" and The Wall Street Journal's "Industry Eyes Bank as Prop for Money Funds". Look for more comment excerpts and discussion in coming days.

The Vanguard Group is the latest organization to comment on the President's Working Group Report on Money Market Fund Reform (Release No. IC-29497; File No. 4-619). Chairman and CEO William McNabb writes, "We appreciate the opportunity to provide our comments to the Securities and Exchange Commission on the alternatives for money market fund reform set forth in the President's Working Group Report on Money Market Fund Reform.... On behalf of our shareholders, who currently invest approximately $194 billion in our money market funds, we are deeply committed to working with the financial regulatory authorities to strengthen the money market industry's ability to withstand the stresses of the next financial crisis." (See all the recent Comment Letters here.)

The comment explains, "We appreciate the balanced and thoughtful discussion of the various money market fund reform alternatives set forth in the PWG Report. We believe the report appropriately underscores the complexity involved in further reducing money market funds' potential susceptibility to runs, and demonstrates the very real danger that the potential 'cure' is worse than the 'disease.' It is important, therefore, that any reforms pursued by the Financial Stability Oversight Council carefully consider the consequences that such reforms may impose on the economy, financial markets, borrowers and investors. Careful and deliberate consideration of the downstream effects of any additional money market fund reform will help ensure that any changes will be positive and enduring, and will bolster rather than destroy a valuable cash management product for millions of investors and a much-needed source of financing for government, financial and corporate borrowers."

It continues, "At the outset, we believe it is important to note that, for money market funds, the 2008 financial crisis was a liquidity crisis, not a credit crisis. During the Fall of 2008, many institutional money market funds experienced large-scale redemptions and other money market funds saw reduced liquidity (i.e., the inability to find willing buyers and sellers for portfolio securities) for the securities of otherwise credit-worthy issuers.... The 2008 crisis revealed a weakness in the then-prevailing money market fund regulation, which did not explicitly require liquidity thresholds for money market funds. As detailed below, recent changes in money market fund regulation (which imposed new minimum liquidity levels for all money market funds) have greatly increased the funds' liquidity and ability to satisfy large redemption requests. The result of these initiatives is to make money market funds self-provisioned for liquidity, reducing the likelihood that a future systemic market disruption would threaten the liquidity of these funds and require government support."

McNabb adds, "In addition, as more particularly discussed below, we believe the money market fund industry has developed a blueprint for a private liquidity facility to further support money market funds in need of additional liquidity if market-wide illiquidity conditions were to recur. Proposals for a floating NAV do nothing to make money market funds more robust in the face of adverse liquidity conditions. They merely change accounting mechanics and make investment in and management of money market funds more complex."

He continues, "As acknowledged in the PWG Report, the Commission's recent amendments to Rule 2a-7 and certain other rules that govern money market funds under the Investment Company Act of 19402 have made money market funds more resilient to credit and liquidity pressures, and will help reduce the likelihood of runs. We believe the amendments to Rule 2a-7 and related money market fund rules, which we strongly supported, significantly improve a fund's ability to withstand unusually high redemption activity.... We believe the Commission's new money market fund rules appropriately allow money market funds to continue to finance the short-term needs of private and public borrowers while mitigating the risk that money market fund liquidity pressures would produce severe market-wide illiquidity."

The letter says, "As we have previously stated, we do not believe that the market-wide illiquidity that occurred in the 2008 market crisis resulted from money market fund activity, but rather from banking entities' unwillingness to accept each others' credit risk. Nonetheless, we understand that the PWG, Council and Commission believe more should be done to further mitigate the potential structural vulnerabilities of money market funds to runs. Of the possible reforms outlined in the PWG Report, Vanguard believes that the creation of a private emergency liquidity facility for prime money market funds is the best alternative that directly addresses the liquidity issue and, therefore, would be the most effective and appropriate option to address the potential for a run. We believe the implementation of a private emergency liquidity facility will most effectively complement revised Rule 2a-7, further strengthening the solid regulatory framework that has protected investors in money market funds for approximately 40 years."

It explains, "Vanguard supports the creation of a private liquidity facility for several reasons. A private liquidity facility could provide the necessary liquidity to satisfy shareholder redemptions, which under extremely rare market conditions, could cause a fund to use its 30% liquidity reserves, and prevent the liquidity pressures experienced by one fund from spreading to another. Quite simply, it's a solution that addresses the potential problem. A liquidity facility capitalized by money market funds and their sponsors would satisfy the PWG's request that money market funds internalize the cost of liquidity and would not put taxpayer dollars at risk. This solution also has the advantage of retaining the stable NAV, which in turn, retains the funds' appeal to investors seeking cash management options, which in turn, provides issuers like corporations, financial institutions, and governments with a reliable, low cost option for short term financing.

Finally, Vanguard writes, "The creation of a private liquidity facility would not require bank-like capital requirements to be maintained by funds or their sponsors, which the PWG Report very clearly recognized involved significant challenges. Importantly, the creation of a private liquidity facility would not cause dislocations in the financial markets, and would preserve money market funds as a source of relatively low-cost, short-term financing. Our support for the private liquidity facility is premised on the following conditions: 1. The money market fund industry is permitted to maintain the stable NAV; 2. Funds and their sponsors are not required to maintain bank-like capital requirements; 3. Participation in the liquidity facility is mandatory for all prime money market funds; 4. Cost of participation in the liquidity facility must be reasonable given prevailing market conditions; and 5. The liquidity facility is permitted to be capitalized over a reasonable time period. Based on these conditions, we strongly support the Investment Company Institute's proposal for a private liquidity facility, and urge the Council to give the proposal very careful consideration. We believe the ICI's work performed to date on this liquidity facility, in consultation with members of the PWG, has been significant and should serve as the blueprint for the ultimate liquidity facility that is adopted by the industry. Undoubtedly, much more work needs to be done before the liquidity facility becomes a reality; however, Vanguard is committed to working with the ICI and financial market regulators to pursue this option."

Ahead of today's deadline for comment letters, one of the first real batches of feedback was posted to the "President's Working Group Report on Money Market Fund Reform (Request for Comment)" website. (See last week's News, "Money Fund University Adds Session on PWG Report Comments, Future" for more details.) The latest letters posted include: offerings from two broker-dealers opposing the floating NAV -- Jeffrey M. Auld, President and CEO, SagePoint Financial, Inc. and Arthur Tambaro, President & CEO, Royal Alliance Associates, New York, New York; one from a municipal investor, Ramon Yi, Senior Director, Finance, Port of Houston Authority; and, an alternative opinion from former money fund executive, John M. Winters, CFA, Hingham, Massachusetts.

Royal Alliance Associates' Tambaro writes, "For almost three decades, money market funds have provided individuals, companies and other organizations with a powerful tool for managing cash, while also providing a crucial source of funding for American business. As financial intermediaries dealing with the needs of retail investors, businesses, and non-profit institutions, we are deeply aware of the value that these clients derive from money market funds." (The other brokerage letter contains similar language.)

He continues, "While we support steps to improve the regulatory framework governing money market funds, we oppose measures that would fundamentally alter them. One such step would be to force money market funds, directly or indirectly, to abandon their stable per-share value. We urge the Securities and Exchange Commission and the Financial Stability Oversight Council not to take this path, and to reject any reform options that would impose floating net asset values on money market funds. For the investors whom we serve, the benefits of money market funds are clear: They provide a high degree of liquidity, diversification, and stability in principal value, along with a market-based yield."

The Port of Texas' Yi says, "I am pleased to provide comments on the President’s Working Group Report on Money Market Fund Reform. I believe that any mandates forcing money market funds to abandon their traditional, stable net asset value would have a deleterious effect on the U.S. economy and financial markets. With over 30 years of experience in treasury and finance, including managing billions of dollars in cash, investments and debt for several large public corporations, I would not be comfortable recommending investing corporate cash in money market instruments with a floating NAV that pose a greater risk of loss of principal."

Finally, Winters writes in his extended minority report, "The Report on Money Market Fund Reform by the PWG is well‐written and there seems to be a clear understanding by its authors of what is at stake. 'Without additional reforms to more fully mitigate the risk of a run spreading among MMFs, the actions to support the MMF industry that the U.S. government took beginning in 2008 may create an expectation for similar government support during future financial crises, and the resulting moral hazard may make crises in the MMF industry more frequent than the historical record would suggest.' (PWG Report p. 18). The PWG Report discusses a number of policy options and describes possible reactions to each. But it fails to make recommendations and does not assess the probability of the market reactions nor estimate the dollar magnitude associated with each. Without such critical analysis, the Report will serve only as 'background information' for the real analysis that now must be undertaken by the FSOC."

He adds, "I am a huge fan of MMFs and spent most of my career working in the industry in one way or another. Since the MMF's inception in the early 1970's, it has become clear to me that the original product structure has been overwhelmed by risks that have grown faster than industry assets. Consider the fact that it holds the promise of a stable transaction price of $1.00 per share while it has $2.8 trillion of one‐day liabilities mismatched against portfolio securities with maturities out as far as 397 days. The maturity, liquidity, credit risk associated with that mismatch is enormous and there is no official emergency liquidity facility, no reserves, no capital, and no access to committed capital."

Crane Data publishes the January issue of its Money Fund Intelligence newsletter along with its year-end performance data this morning. The latest edition features the articles: "Survey on PWG, Outlook; Low Rates Biggest Issue," which reviews the results of our recent "Money Fund Intelligence Subscriber Survey: Regulatory Reforms and the 2011 Outlook; "Q&A With Federated CEO Chris Donahue," which discusses money funds with one of the highest profile names in the space; and, "Top MMFs of '10 Win 2nd Annual MFI Awards," which names the winners of 1-year, 5-year and 10-year top-performance spots in six different categories. We also review the top Crane Data News stories of 2010. We'll be updating our performance and rankings products today, and our new Portfolio Holdings product will be released around the 18th of this month.

Our lead story says, "With the Request for Comment period coming to a close this Monday, Crane Data again recently surveyed MFI subscribers and readers of about the "Report of the President's Working Group: Money Market Fund Reform Options" and about major issues facing money market funds. The responses indicate that ultra-low interest rates continue to surpass regulatory changes as the most important issue facing money funds (albeit barely). Subscribers also unsurprisingly oppose and believe that a floating NAV would be the most harmful option discussed in the PWG report.

The first survey question asks, "Which of the options do you think is the best alternative for money market mutual fund regulation? Floating net asset values (8%), Private emergency liquidity facilities for MMFs (50%), Mandatory redemptions in kind (4%), Insurance for MMFs (15%), A two-​tier system of MMFs with enhanced protection for stable NAV funds (27%), A two-​tier system of MMFs with stable NAV MMFs reserved for retail investors (4%), Regulating stable NAV MMFs as special purpose banks (4%), Enhanced constraints on unregulated MMF substitutes (23%), Other, please specify (8%)."

This month, `Money Fund Intelligence also interviews Chris Donahue, President & CEO of Federated Investors, Inc. Federated is one of the largest and oldest managers of money market funds, and Donahue has been working in the business virtually since its inception almost four decades ago. We discuss the challenges confronting money funds and the outlook for funds in the coming year. (Look for excerpts of this interview on next week.)

We again recognize some of the top-performing money funds of the past year and of the past decade with our second annual Money Fund Intelligence Awards. The winners are the No. 1-ranked funds based on 1-year, 5-year and 10-year returns, through Dec. 31, 2010, in a number of categories -- Prime Institutional, Government Institutional, Treasury Institutional, Prime Individual, Government Individual, and Treasury Individual. The top-performing fund overall (again) in 2010 and among Prime Institutional funds was Touchstone Institutional Money Market Fund (TINXX) with a return of 0.29%.

Finally, we look forward to seeing many of our newer readers at next week's Crane's Money Fund University at The Westin Jersey City Newport. The "basic training" educational event gets started on Thursday morning (1/13). Visit for details on this, and visit for information on our main conference event, which will be held June 22-24 in Philadelphia.

While there are still just a handful of serious responses to the "President's Working Group Report on Money Market Fund Reform (Request for Comment)" on the SEC's website, one of them appeared yesterday written by former Prudential portfolio manager and money fund veteran Joseph Tully. Tully's interesting and original letter discusses several points, including shadow pricing more frequently, tactics to prevent runs, and a possible loan facility. The response, however, spends very little discussing the PWG's delineated options.

Tully, who served as Managing Director and head of Prudential's Fixed Income Management's Money Market Desk for 14 years, writes, "One of the lessons the money fund industry learned during the September 2008 run on money market funds (MMFs) was that the industry is only as strong as its weakest link. In that case, and as documented in the President's Report, the Reserve Fund broke its $1 NAV due to mark to market losses on its holdings of Lehman Brothers Holdings, Inc. The fund also did not have a strong sponsor with the financial capability and willingness to bail out the fund. As a result of this lesson, it is in the Commission's interest to promote the "best practices" within the industry, particularly when these best practices can be encouraged relatively easily through interpretive bulletins of SEC rule 2a-7, if not outright changes in the rule."

In a section entitled, "Shadow Price Daily," he says, "For example, in paragraph (c)(8)(ii)(A)(1) of rule 2a-7, the frequency of shadow pricing (the act of valuing the MMF at current market prices to determine the extent of the deviation from the MMF's amortized cost per share) is solely determined by the board of directors. Shadow pricing serves as a gauge to measure how the fund's NAV is faring against the changes in the market value of the fund's underlying securities. Shadow pricing on a more frequent basis would provide a fund's advisor and its board of directors with valuable information to make more timely adjustments to the underlying portfolio, thus reducing the possibility of the mark to market deviation growing to unmanageably large levels."

He explains, "Currently, all non-2a-7 mutual funds must be market priced daily. I see no reason why MMFs should not be held to that same standard but for shadow pricing. In other words, shadow pricing should be performed at least daily, but contrary to other mutual funds, the MMFs will still maintain their $1.00 NAV if their per share deviation remains below 1/2 of one percent. I believe any industry objections to such a change will be muted. While the current methods of money fund accounting were originally designed to reduce administrative costs, current industry arguments to maintain the $1 NAV primarily address tax considerations and ease of use for shareholders. Furthermore, during the 2008 financial crisis and its subsequent price volatility, MMFs should have been shadow pricing on a daily basis anyway, so the infrastructure should be in place and administrative costs should be minimal."

Regarding money funds' "Susceptibility To Runs," Tully comments, "The President's Report specifically commented on MMFs susceptibility to runs, the chief catalyst being the perception that the fund might suffer a loss. Shareholders therefore have an incentive to withdraw their funds early, thus precipitating a run on the MMF. Laggards then absorb a greater share of the previously unrealized losses in the portfolio. This analysis is certainly correct, but incomplete in my opinion. Institutional shareholders utilize money funds as depositories for their day-to day operating expenses, such as payroll. The prospect of a money fund breaking a dollar and being forced to liquidate would result in a freeze in money fund redemptions.... The recent revision to rule 22e-3, which permits money funds to postpone redemptions in order to facilitate orderly liquidation is a very welcome change in promoting shareholder fairness, but the heightened risk of a freeze may also precipitate even earlier withdrawals by institutional shareholders with limited alternative sources of liquidity."

He adds, "As detailed in the President's Report, none of the suggested avenues of money market reform offer simple, effective solutions without possible counterproductive consequences. However as a general rule and in a perfect world, those who reap the benefits should also pay for the accompanying risks."

Finally, Tully writes, "Another possible avenue of reform would allow shareholders to access to their funds during stressful market conditions, but to do so by allowing them to borrow against their money fund shares. Obviously, such a mechanism would only be implemented in cases of extreme stress, a disruptive level of redemption activity for a particular fund, and while the fund's share price has not yet fallen below $1 per share.... Shareholders looking to redeem shares would instead be able to seamlessly borrow against (for example) 90% of their money fund share value from a third party financial institution. The remaining 10% would represent the shareholder's remaining 'equity' in the money fund, and would be available to absorb capital losses, if any."

Crane's Money Fund University, which takes place next Thursday and Friday (Jan. 13-14) at the Westin Jersey City Newport, recently added a session to review and discuss the President's Working Group on Financial Markets Report and its list of potential Money Market Fund Reform Options. The timing for a discussion couldn't be better as the vast majority of comment letters, which are due this Monday (and which have yet to be submitted), should be released just prior to the conference. Look for excerpts and reaction to feedback letters on the PWG Report on MMF Reform all next week. (Crane Data is currently wrapping up the results of its Subscriber Survey on "Regulatory Reforms and the 2011 Outlook" and should submit its comments later this week. We're still accepting survey responses.)

As we said in our Oct. 22 News "President's Working Group on Financial Mkts Gives MMF Reform Options", the PWG was tasked with "detailing a number of options for reforms related to money market funds [to] address the vulnerabilities of money market funds that contributed to the financial crisis in 2008." `While the report didn't strongly endorse any option, it appears to have discounted the possibility of a floating NAV and support the concept of a private liquidity facility. But we've yet to see the majority of comments on the PWG Report.

Our Nov. 4 News piece, "SEC Posts Request for Comment on PWG Report MMF Reform Options," said, "As contemplated by the President's Working Group report, the SEC is requesting public comment on the options described in the report, including the effectiveness of the options in mitigating any systemic risk or susceptibility to runs associated with money market funds, as well as their potential impact on money market fund investors, fund managers, issuers of short-term debt, and other stakeholders. Comment received will assist the SEC and the Financial Stability Oversight Council in their further analysis."

The Request for Comment continues, "The Securities and Exchange Commission is seeking comment on the options discussed in the report presenting the results of the President's Working Group on Financial Markets' study of possible money market fund reforms. Public comments on the options discussed in this report will help inform consideration of reform proposals addressing money market funds' susceptibility to runs.... Comments should be received on or before January 10, 2011." It adds, for further information, contact Daniele Marchesani or Sarah ten Siethoff at (202) 551-6792, Division of Investment Management, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-8549."

The inaugural Crane's Money Fund University will offer attendees an affordable and comprehensive two day, "basic training" course on money market mutual funds. (See for more details.) The two-day educational event will cover the history of money funds, interest rates, Rule 2a-7, ratings, rankings, money market instruments such as commercial paper and repo, and portfolio construction and credit analysis. Attendee registration for Crane's Money Fund University is $600, and sponsors and exhibitor include: BofA Global Capital Management, Fitch Ratings, Wells Fargo, Citi, Commerzbank, Fidelity, G.X. Clarke, Invesco, S&P, and ICD. (The session on the PWG Report and MMF Reforms will take place Thursday afternoon (Jan. 13) at 4:30pm and will be followed by cocktails.)

A January 1, 2011, press release entitled, "First American Funds Announces Important Changes," says, "First American Funds announced today that it will continue to serve the money market needs of its shareholders as its advisor strengthens its investment focus on short-term fixed-income investment strategies following Nuveen Investments' acquisition of First American Funds' long-term mutual funds on Dec. 31, 2010." (See Crane Data's July 30, 2010, News "U.S. Bancorp to Sell Long-Term Funds; Keep, Rename FAF Money Funds".)

The brief release adds, "First American Funds' advisor, formerly known as FAF Advisors, Inc., has changed its name to U.S. Bancorp Asset Management, Inc., a subsidiary of U.S. Bank National Association and an affiliate of U.S. Bancorp." No word yet on when the First American Funds themselves will be renamed U.S. Bancorp Funds. According to Crane Data's Money Fund Intelligence XLS, the First American Funds hold $42 billion in money funds as of Dec. 31, and the complex ranks 18th among the 79 managers of U.S. money market funds.

Under "About U.S. Bancorp Asset Management Products and Services," it says, "The investment products and capabilities of U.S. Bancorp Asset Management include institutional short-term fixed-income investment strategies; management of securities lending assets; closed-end funds; and advisory services for the First American Money Market Funds. Liquidity and cash-related investment vehicles are a core competency of the firm, which has achieved both significant expertise and scale, with more than $60 billion in short-term fixed-income and closed-end fund assets under management as of Sept. 30, 2010."

It continues, "U.S. Bancorp Asset Management's clients will see no change to the investment team that has supported them and provided consistent investment performance over the years. This team is headed by Joseph M. Ulrey III, who has been named chief executive officer of U.S. Bancorp Asset Management. Mr. Ulrey formerly served as chief financial officer of FAF Advisors.... U.S. Bancorp Asset Management will continue to benefit from the operating and financial strength of U.S. Bank as a parent. U.S. Bank is committed to investing in the resources necessary to manage and grow short-term fixed-income products and strategies going forward. U.S. Bancorp Asset Management will continue to have its headquarters at its present location in downtown Minneapolis."

A separate Jan. 3, 2011, press release entitled, "Nuveen Investments Completes Strategic Combination with FAF Advisors," says, "Nuveen Investments, a leading global provider of investment services to institutions as well as high-net-worth and affluent investors, today announced the completion on December 31, 2010, of the strategic combination with FAF Advisors and Nuveen Asset Management, the largest investment affiliate of Nuveen Investments. As part of this transaction, U.S. Bancorp -- the parent of FAF Advisors -- received a 9.5% stake in Nuveen Investments as well as additional cash consideration in exchange for the long term investment business of FAF Advisors, including investment-management responsibilities for the mutual funds of the First American Funds family."

Money market mutual fund assets rose by $22.39 billion to $2.810 trillion in the week ended Dec. 29, according to the Investment Company Institute's latest report. Money fund assets had decreased for two weeks in a row, falling $38.6 billion then $9.3 billion, following a jump of $25.4 billion in the first week of December. Year-to-date through Dec. 29, money fund assets have decreased by $483 billion, or 14.7%, but assets have managed to hold above or around the $2.8 trillion level since June 2010. Money fund assets hit a record high of $3.9 trillion in January 2009, plunged to $3.3 trillion by the end of 2009, then broke below the $3.0 trillion level in March of 2010.

ICI also released its latest monthly "Trends in Mutual Fund Investing," which showed that money market fund assets increased by $25.5 billion, or 0.9%, in November 2010 to $2.812 trillion. This represents the largest increase in assets since January 2009, when assets rose by over $90 billion. Year-to-date in 2010, money fund assets have decreased by $504 billion, or 15.2%, according to ICI's monthly data series.

ICI's monthly release says, "Money market funds had an inflow of $25.03 billion in November, compared with an outflow of $11.21 billion in October. Funds offered primarily to institutions had an inflow of $29.13 billion. Funds offered primarily to individuals had an outflow of $4.10 billion." Liquid assets of stock funds remain near a record low at 3.7% and the number of money funds covered by ICI dropped to 651 from 665 a month ago and from 710 at the start of the year.

The ICI also released (to subscribers only) its latest "Month-End Portfolio Holdings of Taxable Money Market Funds, which showed Repurchase Agreement holdings jumped in November 2010. Repos increased by $26.6 billion, or 4.8%, to $575.9 billion in the latest month and have increased by $86.3 billion, or 17.1% YTD. Repo, the only money fund holding to show an increase in 2010, remains the largest percentage of taxable money fund portfolios with 23.1% on average.

Certificates of Deposit, the second largest money fund holding, fell slightly to $562.4 billion, or 22.6%, and Commercial Paper, now the third largest, was flat at $384 billion, or 15.4%. U.S. Government Agency Securities fell by $26.0 billion, or 6.4%, to $383.0 billion, or 15.4% of taxable money fund assets. Treasury Bills and Securities increased by $21.7 billion, or 7.1%, to $326.1 billion, or 13.1% of assets. Notes (Bank and Corporate) increased by $1.7 billion to $161.3 billion, or 6.5% of assets, and Other investments inched higher to $85.6 billion, or 3.4%.

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