ICI's latest monthly "Trends in Mutual Fund Investing: October 2011," shows money fund assets declining modestly in October. (Month-to-date in November, though, money fund assets have increased by about $12 billion and have risen for 3 weeks in a row.) The mutual fund trade group also released its latest "Month-End Portfolio Holdings of Taxable Money Market Funds statistics, which shows a continued decline in CDs, and a continued increase in Treasury securities in October. In other news, online money market fund portal technology provider Cachematrix broke $100 billion in money fund assets, according to a release.
The ICI monthly report says, "The combined assets of the nation's mutual funds increased by $606.5 billion, or 5.5 percent, to $11.661 trillion in October, according to the Investment Company Institute's official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI.... Bond funds had an inflow of $11.41 billion in October, compared with an inflow of $9.63 billion in September.... Money market funds had an outflow of $22.50 billion in October, compared with an outflow of $10.69 billion in September. Funds offered primarily to institutions had an outflow of $18.29 billion. Funds offered primarily to individuals had an outflow of $4.21 billion."
The statistics show total money fund assets at $2.608 trillion as of Oct. 31, which represents 22.4% of all mutual fund assets. ICI's "Net New Cash Flow" figures show money fund assets with an outflow of $22.5 billion in Oct. vs. an outflow of $10.7 billion in Sept. Overall money fund assets declined by $21.9 billion (including dividends) in October while bond funds increased assets by $50.1 billion. ICI's flows show outflows of $203.3 billion YTD 2011 vs. an outflow of $540.0 billion YTD in 2010 through October. (Bond funds have increased by $218 billion YTD.) ICI's survey tracks 433 taxable and 209 tax-free money funds (642 total) vs. 449 taxable and 216 tax-free money funds a year earlier (665 total).
ICI's latest "Month-End Portfolio Holdings of Taxable Money Market Funds" shows that Repurchase Agreements (Repo), the largest holdings of taxable money funds, increased by $14.7 billion to $505.2 billion, or 21.8% of assets. The second largest segment, Certificates of Deposits, plunged in October (down $43.0 billion, or 9.0%), dropping to $437.1 billion, or 18.8% <b:>`_. (Eurodollar CDs, which we include in the above total, represent $70.1 billion, or 16.0% of all CDs, and they accounted for $18.6 billion of the drop in October.)
Treasury Securities now rank third among taxable money fund holdings with an increase of $30.6 billion to $412.6 billion (17.8%). U.S. Government Agency Securities are now the fourth-largest segment at 16.2%, or $377.2 billion; they decreased $15.5 billion, or 4.0%, in October. Commercial Paper (CP) holdings, which are in fifth place, increased by $8.5 billion, or 2.4%, to $365.8 billion. ICI's numbers show Average Maturities extended by two days to 41 days in October, while the number of shareholder accounts outstanding fell to 26.81 million.
In other news, money fund portal technology company Cachematrix put out a press release entitled, "Cachematrix Bank Portals Top $100 Billion in Total Money Fund Assets." The company says, "Cachematrix, the leading provider of money market fund and fixed income trading technology for banks and financial institutions, announced today that its banking partners have surpassed $100 Billion in institutional money market fund assets under management.... Corporations are increasingly requiring their banks to implement highly automated short term cash management via portal technology, because corporations place a premium on the safety, convenience and liquidity that money fund portals provide."
Cachematrix Founder and CEO George Hagerman says, "It is becoming very apparent that the impact of money funds for corporate cash managers goes beyond just seeking a good return. Corporations use money funds for convenience, efficiency, predictability, as well as yield. There is also an added sense of security that comes from centralizing investments through a known commodity, such as a relationship bank. This provides corporations with a heightened level of transparency at both the overall portfolio level, as well as within each underlying investment."
He adds, "With bank deposits hitting record highs, corporations are looking for alternative ways to further their relationship with their banks while still maintaining investment diversification. Our patented portal technology allows banks to provide their clients with a menu of diversified money fund investment options through a seamless system that automates and consolidates the investment process for their corporate clients."
The November issue of Crane Data's Money Fund Intelligence newsletter featured the article, "State Street's Fortuna on Fund Connect Portal." MFI interviewed Greg Fortuna, Managing Director at State Street Global Markets, and Peter McHugh, Vice President for the company's online money market fund trading "portal", Fund Connect, in Europe. Fund Connect announced the rollout of its Transparency Connect analytics module at earlier this month at the Association for Financial Professionals' (AFP) annual conference in Boston. Excerpts from our Q&A follow.
MFI: How long has State Street been in the money fund "portal" business? Fortuna: We were one of the first ones in the space and launched over 10 years ago. The original product was Global Link and was launched to distribute a series of funds that provided exposure to various European currencies. In 2001, we finalized a major overhaul that resulted in today's version of Fund Connect, which focuses on short-term funds in the U.S., Canada, Europe and Asia.
MFI: How much money does the company currently distribute? Fortuna: State Street has a significant presence in the 2a-7 marketplace. From a portal perspective, we've grown over the last two years, even in a challenging market environment.... We've seen growth, both domestically and also from an offshore perspective. Assets are approximately 65% domestic and 35% offshore. We are also seeing some risk aversion in our investor base, so we still see flows going into government and treasury funds. That is a growing sector right now, given the European debt crisis, and ongoing market volatility overall.
MFI: How many funds and families are on the platform? Fortuna: We have a diverse client base, but unfortunately we can't disclose the number of funds on the platform. We support fully disclosed direct trading, and we support omnibus trading, both omnibus through the custodian and also through a broker dealer account only. We also will support FBO [for the benefit of] trading. Pretty much any style of trading that our clients do, we support, and we do it in a way that provides the ability to use multiple styles with the same login information. McHugh: In addition, a lot of our clients, especially in Europe, have direct relationships with smaller fund companies, and we are more than willing to bring those companies on for those specific clients.
MFI: Do you offer investments besides money market funds? Fortuna: Fund Connect is part of State Street E-Exchange's suite of electronic trading products. We have always had products that worked together -- FX Connect, Money Market Connect to trade time deposits, Futures Connect, Fund Connect, etc. McHugh: As an example of our full-service approach, investors can redeem from a GBP money market fund, select an FX bank partner from over 70 banks from Currenex or FX Connect and through custom integration can receive the proceeds from their redemption in USD with the click of a mouse.
MFI: Tell us about the new features. What have you added? Fortuna: The newest addition to the Fund Connect platform is our Transparency Connect offering. With the ongoing volatility in global markets, whether it's the European debt crisis or individual exposure concerns, we now have what we feel is a comprehensive and intuitive solution for our clients. We cover funds in multiple currencies and our Transparency Connect is fully integrated with Fund Connect, so all exposures are shown pro-rata. Clients can click on any of the pie charts that in the system and see their individual exposure to any underlying holdings. The key to our new Transparency product is that everything is interactive. You can click on any slice of any chart in our program and drill down to the underlying holdings within it.
Among some of the other big changes we've done lately, we are integrated with pre-trade compliance and are always adding new features and functionalities, [such as] multiple levels of approvals that are asset based and proactive.... We have also built a portfolio function that allows users, in one easy to use view, to track their current holdings, their current accruals, and all the information on the fund's investments they have across the accounts and divisions they have set up within Fund Connect. Graphically, they can see their real time exposures to fund providers, funds, fund categories, regions, currencies, etc., so it provides a macro level of transparency.
Look for the second half of our money fund portal "profile" in coming days, or e-mail Pete to request the full article in the latest issue of Money Fund Intelligence.
Earlier this month, John Hawke of Arnold & Porter wrote a piece in American Banker entitled, "Leave Money Market Funds Alone!". Hawke says, "In the wake of the financial meltdown of 2008, an increasingly persistent attack on money market mutual funds is underway. Present and former high government officials, academics, and some editorial writers have joined the fray, each offering their own approach for reengineering the money fund industry. Common to all is an apparent failure to examine in depth -- or, at least, a lack of appreciation for -- the enormous disruption that would be caused by any of the various "remedies," or to make a conscientious cost-benefit analysis of the proposed changes -- changes that would inevitably threaten the continued viability, availability and utility of this extremely safe, efficient and popular investment vehicle."
He explains, "The "sky is falling" posture of the critics is based on the singular experience of 2008 when the Reserve Primary Fund "broke the buck" -- that is, suffered a drop in its net asset value (NAV) to something less than $1.00 -- because of its improvident investments in Lehman Brothers debt -- an investment undoubtedly made on the optimistic and erroneous assumption that the government would never let Lehman fail. When Lehman did fail in September 2008 -- twenty months into the financial crisis, in the midst of financial chaos of a sort that had not been experienced for many decades, and after the collapse of the subprime, securitization and auction rate markets, and the failure or forced sale of Countrywide, Bear Stearns, IndyMac, FreddieMac, FannieMae, Merrill Lynch and many banks -- the Reserve Fund's net asset value dropped to just under $1.00 per share."
Hawke continues, "Under normal circumstances -- and there had only been one prior incident of a fund breaking the buck -- this would not be of great consequence. Indeed, the ultimate loss to the fund's shareholders was virtually imperceptible -- less than one cent per share. Had money fund shareholders experienced a credit loss of such insignificance under other circumstances, caused by a credit failure involving a less prominent issuer, in a less turbulent environment, the market would almost certainly have ignored it. But in the midst of the financial crisis, when some of our largest institutions had already failed and others were on the brink, with a loss caused by the failure of a major and highly visible investment bank that did not get anticipated government support, many investors in other funds -- principally institutional investors -- concerned about the potential for their investments being frozen or their funds breaking the buck, redeemed out of money market funds, many moving to purely government funds. As a consequence even very healthy MMFs were faced with significant liquidity pressures."
He adds, "These pressures were not the result of deterioration of MMF portfolios -- they have had an excellent record of creditworthiness. The liquidity crunch was caused by an unusually large volume of redemptions, occasioned by severe uncertainties in a chaotic market, that threatened MMFs with losses as the result of having to liquidate perfectly good assets prior to their maturity in a "fire sale" environment. Critics now point to this experience as evidencing a need to effect fundamental changes to the structure of MMFs, including such things as abandoning the stable $1.00 per share NAV or requiring a subordinated capital buffer."
Hawke writes, "More important, these critics have paid little or no attention to the fact that MMFs serve a tremendously important role in the daily cash management of millions of brokerage, trust and other accounts. Institutional money managers and trustees rely heavily on MMFs for the temporary housing of cash balances, and their systems have been structured and calibrated on the assumption that these balances will receive dollar-in-dollar-out treatment. Moving MMFs to a floating NAV -- even if a floating NAV fund would continue to serve their needs -- would cause havoc for these users and, at the very least, would require enormous investments in the retooling of systems. The simple fact is that having a stable and predictable NAV is essential for a variety of automated internal and external transaction and accounting systems, and is critical for same- and next-day processing, for shortening settlement times, and for reducing float and counterparty risk among firms."
He says, "The premise behind the critics' floating NAV and subordinated capital proposals is that they will prevent "runs" – the rapid withdrawals of large amounts of MMF balances. But logic and evidence compel a contrary conclusion. Requiring a floating NAV would almost certainly cause investors that are prohibited from investing in floating NAV funds, and others who want the predictability and convenience of a fixed NAV, to head for the doors as soon as such a change were put in place, and any future downward movement in the NAV would be likely to trigger even more redemptions by those who stayed. During the financial crisis, floating NAV funds in Europe experienced rapid shareholder withdrawals similar to those seen at stable NAV funds."
Hawke continues, "The proposed "buffer" of subordinated capital is similarly off the mark. First proposed by a group of academics -- who have recently conceded that their original proposal was too complex and probably could not be made to work -- have cobbled together another comparably complex proposal that pays little or no attention to the impact it would have on the millions of institutional and individual users who have come to depend on the safety, efficiency and utility of MMFs. But more to the point, neither subordinated capital nor a floating NAV will stop runs. Only ready liquidity can deter and allow MMFs to cope with runs, and the proposals that have been suggested do not address liquidity."
He adds, "The SEC, however, has addressed liquidity, when it amended its Rule 2a-7 in 2010 to increase fund liquidity, credit quality and diversification.... The evidence is compelling that these changes are working. This past summer MMFs experienced large redemptions as investors reacted to the Greek debt crisis and the U.S. federal budget impasse. In June and July, investors redeemed over 10% of their prime MMF shares, a total in excess of $167 billion. Some MMFs experienced redemptions of between 20% and 45% of their assets. Yet no MMF broke a buck, and none was unable to meet redemptions.... [T]here is good reason to believe that the liquidity crunch that followed the Reserve Primary Fund -- an event of unprecedented magnitude -- could have been averted or significantly mitigated."
Hawke tells American Banker, "The SEC has also changed how it supervises MMFs. Analysts within the SEC now pore through portfolio data submitted electronically by all MMFs, looking for signs of potential trouble.... In addition, investors have access to MMFs "shadow NAVs," funds' mark-to-market valuations that are reported on a monthly basis. The SEC continues to refine its methods from experience and careful analysis of financial data. Its record with MMFs is far better than the record of bank regulators in maintaining the solvency of banks. Reengineering MMF regulation with untested structures will not enhance financial stability. It would make MMFs and our economy less efficient and more volatile, and would deprive tens of millions of investors and money managers of a liquidity and cash management vehicle on which they place great value and importance."
He adds, "It is important to recall that despite the events of 2008, not a penny of taxpayer money has been lost in the support of MMFs, and the likelihood of losses to taxpayers in the future is extremely remote. The emergency liquidity facilities that were put into place by Treasury and the Fed after the Reserve Fund breakdown did not cost the government anything -- indeed, they made a profit. This simply underscores the reality that MMF portfolios are basically required to be made up of high quality, short term instruments that will almost always liquidate at par at maturity."
Finally, Hawke writes, "At a time when markets are extremely skittish, it would be foolhardy in the absence of compelling need and a fully informed assessment of the consequences and the costs vs. benefits for policymakers to undermine MMFs. The SEC has been an effective overseer of MMFs, and its new regulation and surveillance operations appear to be working well. The critics should leave money funds alone and continue to evaluate the impact of the regulatory changes the SEC has put in place."
We learned from the website PreserveMoneyMarketFunds.org that six Senators recently wrote a letter to SEC Chairman Mary Schapiro urging her not to implement a floating NAV regime for money market funds. The letter was signed by Senators Michael F. Bennet (D-Col.), Patrick J. Toomey (R-Pa.), Mike Crapo (R-Id.), Jon Tester (D-Mont.), Mark Kirk (R-Ill.), and Robert Menendez (D-NJ). They write, "We write to express our concerns about proposals to float the net asset value (NAY) of money market mutual funds (MMMF) or to impose inappropriate bank-like requirements on these funds. It is our understanding that the Securities and Exchange Commission (the Commission) is currently considering such regulatory changes."
The Senators explain, "Since the financial crisis peaked in the fall of 2008, the Commission has implemented reforms designed to improve the ability of money market funds to withstand market turmoil and heightened redemption pressure. These 2010 reforms increase MMMF liquidity by requiring, among other measures, that 10% of a fund's holdings are liquid daily (e.g. , cash or maturing instruments) and 30% of its holdings are liquid within five business days. This additional liquidity proved helpful during the recent debt ceiling deadline and market volatility surrounding Standard & Poor's downgrade of U.S. government securities, even though MMMFs faced no unanticipated redemption pressure."
The letter continues, "The Commission's actions to date enhance the safety and liquidity of money market funds as you noted when you implemented the reforms. However, we are concerned about additional actions contemplated by the Commission that could have adverse consequences on both investors and the capital markets. Specifically, forcing money market funds to abandon their stable $1.00 per share price and "float" their net asset value will likely have significant consequences for retail investors, companies, and municipalities. A floating NAV, for instance, would make money market fund sales tax-reportable events, substantially increasing the tax and recordkeeping burdens of investors while reducing the product's viability."
The six Senators add, "If money market funds lose their stable value, retail investors who want a stable-value cash investment may have fewer opportunities to access money market instruments. [A footnote here says: Investors currently hold some $2.6 trillion in money market funds at virtually zero yield, which clearly demonstrates investors' confidence in these funds and the importance of these funds in their financial plans.] On the other hand, institutions that want or require stable value could turn to private pools, in the United States and overseas, that promise to maintain a fixed price. These alternatives would be subject to significantly less oversight than money market funds."
They state, "At the same time, if money market funds are forced to float their NAVs, the flow of hundreds of billions of dollars in both corporate and municipal financing would likely be severely disrupted. This would make it more expensive to raise capital while potentially costing jobs and exacerbating the budget woes of communities around the nation- which could lead to reduced municipal services, higher taxes, or both. Consumer lending may also become less available and more expensive. Without money market funds, it is not apparent how consumer, commercial and municipal financing needs would be met. There is no readily apparent substitute for today's money market funds. Moreover, the benefits of a floating NAV may be only illusory-experience with floating NAV money market funds abroad has shown that funds with a floating NAV are not immune to redemption pressures."
Bennet & Co. continue, "Similarly, adopting inappropriate bank-like regulations for money market funds may also cause significant disruptions to the financial system as the money market fund industry may be forced to consolidate. Such actions could increase the amount of assets subject to the Federal safety net, reduce investor choice, and produce large pockets of concentrated risk into a small number of funds -- ironically, inflating too-big-to-fail risk."
Finally, the six add, "We recognize the pressure that the Commission is under to effect additional reform in this area, particularly in light of the current uncertainty in the worldwide financial markets. In this vein, we are willing to engage in a dialogue on the relevant issues. We urge you, however, not to rush to adopt solutions that could potentially create disruptions in our fragile economy, impair the ability of businesses to raise capital efficiently, harm retail investors, and increase stress on municipal budgets. Any further proposals should preserve the utility of money market funds for investors and avoid imposing costs that would make large numbers of advisers unwilling or unable to continue to sponsor these funds. Thank you for your consideration of these important issues."
After a 3-month hiatus, a couple of new comment letters have appeared on the Securities & Exchange Commission's President's Working Group Report on Money Market Fund Reform (Request for Comment) page. The most recent is a letter from Bill Spivey, President of Keystone ELF Inc. on a proposed "Liquidity Bridging Facility." Spivey writes, "It has been over three (3) years since the events of September 2008 altered the perceptions and operations of the Money Market Mutual Fund Industry. Change came in 2010 when the Securities and Exchange Commission set forth amendments to the 2a-7 regulations. The Industry generally has embraced these changes. Additional reforms proposed by the SEC and others, however, have created significant uncertainty for the Industry, uncertainty that the Industry would like to put behind it. That uncertainty generally is reflected in what appears to be a regulatory tug-of-war between those in favor of eliminating all risk to investors in money market funds, notwithstanding the historic performance and stability of the Industry as compared to the banking industry, and those in favor of allowing funds to manage their risks."
He explains, "We are asking the SEC that as it considers additional reforms for money market funds that it adopt rules that give money market funds, their investment advisers and sponsors significant latitude in how they may support and manage those funds. At Keystone, we do not believe that all risks can be eliminated from money market funds. As we recently have seen with U.S. Treasuries, there are no securities unaffected by the perceptions of risk. We also do not believe that all risks should be eliminated from money market funds. Although money market funds are intended primarily for the safeguarding of principal, most investors seek some return on their investments, even if that return is small, and without some risk, investors would receive no returns. Moreover, we do not believe that there is or should be a single panacea or one-size fits all solution for the entire Money Market Fund community. If additional reforms are viewed as necessary, the best proposal for additional support to the Industry is to allow a variety of options and let the market decide which one provides greater security relative to return."
Spivey continues, "Apart from the unsupported discussion to end the stable net asset value structure, there are several options still under consideration. On April 29, 2011 a comment letter was submitted jointly by Fidelity, Charles Schwab and Wells Fargo provided details supporting their NAV Buffer option, which is currently viewed as the most likely and supported option by the regulatory agencies. BlackRock also provided an excellent overview of the potential solutions in their August 2011 Viewpoint series, which included the infamous "rainbow" slide. These options discussed the NAV Buffer, a Special Purpose Entity proposal by BlackRock, and Subordinated Class Shares by the Squam Lake Group, but did not include further discussion of a private emergency liquidity facility ("ELF"). The intent of this letter is to discuss a different form of ELF."
He writes, "Support for the ELF option is reflected in many of the President's Working Group on Financial Markets - Money Market Reform Options response letters. The Industry acknowledges the great amount of time and effort spent by the Investment Company Institute to propose their ELF model in the form of a liquidity-exchange bank, but in its proposed form, the Federal Reserve denied direct access to the Discount Window. In light of the rejection of the ICI model, I believe there is another model for an ELF that could be supported by the Industry."
Spivey adds, "On April 14, 2011, I submitted a response letter to the PWG Report. It stated my support for some form of ELF, but not necessarily the ICI model. My experience with a Local Government Investment Pool ("LGIP"), which was affected by exposure to The Reserve Fund and the litigation that followed, led me to begin creating an alternative ELF model that Keystone refers to as a Liquidity Bridging Facility. The LBF would be structured as a conglomeration of participating MMF's. For lack of a better term, it is an external reserve. As an external source of support, it will increase accountability and decrease moral hazard for access to additional funds through established replenishment procedures. The LBF will provide cash for securities maturing within 12 months."
He says, "Administration would be provided by Keystone ELF Inc. Keystone would be the provider, administrator and facilitator of the LBF. Oversight responsibilities would be given to a Board of Trustees made up of participating Industry representatives to provide governance, insight and support. The Initial Capitalization would be gathered by private investors and other sources at an estimated level $800M to $1.6B. These numbers assume a 20% - 40% Industry participation rate. Discussions have already occurred with these sources and before further progress is made, interest for this model must be validated. On-going Capitalization comes from a monthly Commitment Fee expense to accumulate over time. This fee consists of a "Reserve" Pool (for lack of a better name) and an administrative portion for operations and expenses. The fee will be tiered according to market conditions. 83-97% of the commitment fee will be solely dedicated to the Reserve Pool, depending on market condition. In case of a "draw-down" event, overnight liquidity can be achieved. Also, it would be our intent to provide participating MMF's with the ability to test access to the LBF periodically."
Finally, Spivey writes, "We have listed the main attributes of the LBF that Keystone seeks to provide the Industry. In relation to the SEC, there is increasing pressure to move forward with additional options for liquidity in the near future. When the issue of determining the option or options available to the Industry is discussed, we respectfully request that the Liquidity Bridging Facility proposal by Keystone be included in those discussions. All MMF's are not alike. Options for additional support should be considered and granted to the Industry so that the market can decide the best option for their needs. Keystone would like the LBF model to be included in the proposals and would like to discuss the regulatory issues in presenting our model with your agency in the near future."
Todd Keister of the Federal Reserve Bank of New York wrote recently on the banks's "Liberty Street Economics Blog" a post entitled, "Why Is There a "Zero Lower Bound" on Interest Rates?." It says, "Economists often talk about nominal interest rates having a "zero lower bound," meaning they should not be expected to fall below zero. While there have been episodes -- both historical and recent -- in which some market interest rates became negative, these episodes have been fairly isolated. In this post, I explain why negative interest rates are possible in principle, but rare in practice. Financial markets are generally designed to operate under positive interest rates, and might experience significant disruptions if rates became negative. To avoid such disruptions, policymakers tend to keep short-term interest rates above zero even when trying to loosen monetary policy in other dimensions. These policy choices are the source of the zero lower bound."
Keister continues, "The standard description of the zero lower bound begins with the observation that the nominal interest rate offered by currency is always zero: If I hold on to a dollar bill, I'll still have one dollar tomorrow, next week, or next year. If I invest money at an interest rate of -2 percent, in contrast, one dollar of saving today would become only ninety-eight cents a year from now. Because everyone has the option to hold currency, the argument goes, no one would be willing to hold some other asset or investment that offers a negative interest rate. This argument is only part of the story, however. Safeguarding and transacting with large quantities of currency is costly.... Many individuals would likely be willing to keep funds in deposit accounts even if these accounts pay a negative interest rate or charge maintenance fees that make their effective interest rate negative."
He explains, "Large institutional investors are in a similar situation. They use a variety of short-term investments, such as lending funds in the "repo" (repurchase agreement) market and holding short-term Treasury bills, in much the same way individuals use checking accounts. These investments will remain attractive to large investors even at negative interest rates because of the security and convenience they offer relative to dealing in currency. Some repo rates did in fact become negative in 2003 ... and again more recently.... In other words, market interest rates can move somewhat below zero without triggering a massive switch into currency. Nevertheless, central banks typically maintain positive short-term interest rates even while using less conventional tools (such as large-scale asset purchases) to provide additional monetary stimulus."
The NY Fed blog adds, "The Federal Reserve, for example, currently pays an interest rate of 0.25 percent on the reserve balances that banks hold on deposit at the Fed. The ability to earn this interest gives banks an incentive to borrow funds in a range of markets (including the interbank market and the repo market) and thus has the effect of keeping market interest rates positive most of the time. The Federal Open Market Committee (FOMC) discussed the idea of reducing the interest on reserves (IOR) rate at its September meeting, but no action was taken. Reducing this rate would tend to lower short-term market interest rates and might push some rates below zero. The minutes from the meeting report that "many participants voiced concerns that reducing the IOR rate risked costly disruptions to money markets and to the intermediation of credit, and that the magnitude of such effects would be difficult to predict.""
Finally, Keister says, "Some examples of areas where disruptions could potentially arise in U.S. financial markets are: Money market mutual funds: Money market funds operate under rules that make it difficult for them to pay negative interest rates to their investors, either directly or by assessing fees. Many of these funds would likely close down if the interest rates they earn on their assets were to fall to zero or below, possibly disrupting the flow of credit to some borrowers."
In other news, Fitch Ratings released a statement entitled, "Corporate Commercial Paper Filling Money Market Void". It says, "While waning demand for bank-issued commercial paper (CP) has reduced investor exposure to short-term financial sector obligations in recent months, U.S. corporate borrowers have begun, in part, to fill an important void in the CP market. Fitch Ratings sees the potential for a recent pick-up in Tier 2 (F2) corporate issuance to continue as money market funds and other institutions reach for yield in short-term credit markets."
They add, "Faced with an unhappy choice between near-zero rates on short-term Treasury obligations and a desire to limit further exposure to higher yielding bank instruments subject to sovereign contagion risk, CP investors have continued to look beyond traditional issuers to meet performance objectives. Given their healthy liquidity positions and improved leverage profiles, many Tier 2 corporates, with low investment-grade issuer default ratings (IDRs), have become increasingly attractive as alternative short-term investments. Although the aggregate amount of CP outstanding has been cut sharply since 2007, Federal Reserve data have continued to track a steady rise in nonfinancial CP issuance, particularly in the months since April, as the European debt crisis has intensified."
Fitch explains, "Of particular interest is the rising level of Tier 2 CP outstanding. While the CP market is still dominated by highly rated Tier 1 companies, Tier 2 CP outstanding has grown steadily in recent months.... Under SEC Rule 2a-7, money market exposure to eligible Tier 2 CP is limited in scope. However, given the small amount of Tier 2 paper relative to Tier 1, issuance levels may have room to grow. As of Nov. 16, total Tier 1 CP eligible under Rule 2a-7 totaled $771 billion compared with $69 billion of Tier 2 paper.... Corporate CP still represents only about 20% of total obligations in a market dominated by banks and asset-backed paper. However, continued shifts in investor risk preferences may increase corporate CP issuance further and reduce short-term borrowing costs for some nontraditional issuers."
Ignites reported on Friday that Wells Fargo Advantage Funds plans to liquidate four municipal money market funds. They wrote, "The single-state funds that will be axed are the $54 million Minnesota Money Market Fund; the $99 million New Jersey Municipal Money Market Fund; the $174 million New York Municipal Money Market Fund; and the $83 million Pennsylvania Municipal Money Market Fund. Wells Fargo had $124 billion in money market fund assets at the end of October.... It continues to offer the $2.1 billion California Municipal Money Market Fund and several national municipal money market funds.... Municipal money market funds face the same low-interest-rate difficulties that all money funds have been dealing with." The article quotes Crane Data President Peter Crane, "The low-yield environment, in addition to fee waivers, is really just making the tax break ineffective -- meaning that nobody cares about exemption from taxation if there's no income to tax."
Wells Fargo says in its recent filing, entitled, "Wells Fargo Advantage Funds schedules liquidations of four single-state money market funds", "On November 16, 2011, the Board of Trustees of Wells Fargo Advantage Funds approved the liquidation of four single-state Wells Fargo Advantage Money Market Funds. The liquidations are expected to take place at the close of business on or around December 21, 2011. The funds to be liquidated are: Wells Fargo Advantage Minnesota Money Market Fund, Wells Fargo Advantage New Jersey Municipal Money Market Fund, Wells Fargo Advantage New York Municipal Money Market Fund, and Wells Fargo Advantage Pennsylvania Municipal Money Market Fund."
It explains in a Q&A, "Q: Why are these funds being liquidated? A. We believe that a liquidation of these funds is necessary given the current and projected asset levels of the funds. Difficulty in implementing the funds' investment strategies at these asset levels is the driving factor, and we believe this decision is in the best interest of shareholders. Q: What are the details of the liquidations? A: The liquidations of the funds are expected to occur at the close of business on or around December 21, 2011, in accordance with a written plan of liquidation and termination approved by the Board. No action is required on the part of shareholders of these funds. All of the shares that they own will be automatically redeemed.... In addition, these funds are now closed to new direct investors."
The Wells document also asks, "Q: How will shareholders be notified about the liquidations? A: On November 17, 2011, direct-to-fund shareholders will be mailed a notification describing the pending liquidation of their fund, including information about the expected date of redemption. Q: What potential tax consequences, if any, does the liquidation of the funds pose to shareholders? A: The funds may be required by the Internal Revenue Code to make a distribution of income and capital gains, if any, realized from liquidating the portfolio. The likelihood or amount of any distribution cannot be determined at this time. It is anticipated that any such distribution would be paid to shareholders prior to liquidation. Investors should consult their tax advisors to determine their specific tax consequences, if any. The liquidations will be treated as a sale of shares as of the liquidation date. Q: Are there alternative money market fund options that shareholders can consider? A: We invite you to explore our other money market fund offerings to meet your cash management needs."
In other news, Reuters writes "U.S. money funds seen at risk from Europe's debt storm". The article says, "When Lehman Brothers collapsed in 2008 and shattered the belief that U.S. money market funds would never "break the buck," Washington rushed to limit the damage. But as Europe's debt crisis threatens to put the U.S. financial system under strain again, U.S. policymakers are worried they cannot turn to those same, impromptu tools to shore up the $2.6 trillion money markets industry."
The piece quotes Richmond Federal Reserve Bank Jeffrey Lacker, who supposedly commented Wednesday, "We've done a lot to prepare the banking sector. I'm less confident about the money market funds and their ability to weather major problems at European institutions."
Reuters adds, "Less well known, and of concern to U.S. officials, is that the money funds cannot count on the protection measures that were pulled together to help them in 2008. The Treasury Department is barred from reprising a guarantee program under the terms of the 2008 bailout of the U.S. banking system. Congress, which agreed to the bailout only reluctantly, prohibited renewing the program on grounds that it was providing a false sense of security to investors who might expect government protection again in the future. The Federal Reserve is also unlikely to dust off either of two facilities it set up in 2008 to ensure money market funds had cash to meet redemption requests -- the Asset-Backed Commercial Paper Money Mutual Fund Liquidity Facility and the less-used Money Market Investor Funding Facility."
Earlier this week, Bank of America Merrill Lynch hosted a Banking and Financial Services Conference, which featured a number of investment company leaders. Two of them, Invesco President & CEO Marty Flanagan and BlackRock Chairman & CEO Larry Fink, briefly addressed money market fund issues in their Q&A sessions. We quote from their comments below.
Invesco's Marty Flanagan was asked on Tuesday, "There's been a lot of talk in the last couple of weeks about what the SEC may do with money markets.... I know you are involved with the ICI. Can you tell us what the ICI stands with regulations on money markets and how you think this all plays out? He answered, "That's a very topical question. You can see the end-game in sight. I think there is absolute dedication by the regulators that they really want an answer into next year. [Then] it might take the year to get done."
He continued, "The first round of regulations that was put in place, which most people know was greater liquidity, shortening duration, increasing quality.... It was beyond just a good idea. It was tested over the summer with the crisis in Europe. I think the feedback we are getting is that the regulators are feeling quite good about that outcome. That was not a make-believe test but a real test. So that is a good start."
Flanagan added, "They have continued to say that they want [more strengthening]. There is talk of elements of some round of buffers and the like. Anything to stop what they perceive as a run is really what they want to put in place, whether it be gates at the end or those types of things. It's unclear what the outcome will be. But I would say this, the principles that they are operating on is: they want broad participation in the money market business. They don't want it concentrated. They want many players in it. They want money funds to exist. They recognize how important it is to the financial eco-system, so that's a good thing. So I think that means the money funds will exist for the benefit of clients."
Finally, he said, "Where's the floating NAV idea? It feels like, from my perspective, this is my opinion, that it is likely off the table. The conclusion is that the knee-jerk reaction is what a great idea, but upon further study they've seen that it would not stop a run if that's the idea.... If you float the NAV, it's over.... Whatever the solution is, it needs to work in multiple capital environments."
Then on Wednesday, BlackRock's Fink, "I was wondering if you could comment on the money market reforms, that may or may not be coming?" Fink answered, "Well, they are coming. I can say that with certainty. Unfortunately, 2008 showed that money market funds are systemically risky. That is a fact; you can't deny it. The failure of The Reserve Fund and the subsequent run on all money market funds, if we did not have the Federal Reserve stabilize the system it would have been a real severe kick.... I have always believed, let's be factual about what happened and let's try to find a resolution. I am actually against the floating rate NAV as a solution. I think that it destroys a lot of the good things about money market funds. It would [push] a lot of money that would be leaving money market funds into banks."
He explained, "If we're trying to make banks too big to fail, things like destroying the money market fund industry would put all that money into the too big to fail banks. We need to find a resolution that works and we have always been a believer [that] to make money market funds competitive and safe, there needs to be associated capital. We have been asking our auditors, 'Can we set aside capital?' I think as far back as 7-8 years ago. They would not allow us to set aside capital because [that is] called managing earnings.... Under GAAP, you can't set aside a reserve when there is no need for a reserve.... So our view is we need some form of capital plan that should be done over a five year period of time. The SEC has already demanded a lot more transparency on money market funds."
Fink continued, "So, if we set aside some capital, let's say 50bps or 25bps.... We'll see where it comes out. The question is, 'How fast do you put that capital aside?' Can you do that through allocating a few basis points a year? Or can you do that through a guaranteed LOC from a bank? So how it is manifest, I don't know. But we are assuming at BlackRock that we are going to have a much more regulated entity. We assume there is going to be some form of change, whether is capital, which we believe is the right answer. [But] it could be a variable NAV, which we think would be damaging a least a subset of the money market fund industry."
A follow up question asked, "Will the business model work with capital?" Fink responded, "Yeah, sure. I think you are going to see fewer money market funds. We believe you are going to see a shrinkage in the amount of money market fund entities, but the bigger, capitalized entities should be fine."
HSBC Global Asset Management published a paper entitled, "Liquidity Fees: A proposal to reform money market funds," which says, "This paper proposes the introduction of a liquidity fee on money market funds (MMFs); an initiative that could make MMFs more resilient under extreme market conditions and position them to withstand another deep and widespread loss of liquidity in the money markets." The Summary explains, "Since 2008, regulators and industry participants have been debating how to improve the robustness of money market funds (MMFs). In this paper we propose that MMFs could be made significantly more robust if they were empowered to impose a 'liquidity fee' on redeeming shareholders, during periods of market dislocation. Although the paper focuses on US-domiciled MMFs ('2a-7 funds'), our proposal is also relevant to non-US MMFs, such as those domiciled in the European Union."
HSBC continues, "2a-7 funds provide an important service to investors (including corporate treasurers, financial institutions, sovereign wealth funds and others who have large cash balances they wish to place). These investors often prefer to diversify their cash investments in order to manage credit risk. 2a-7 funds offer an attractive solution, providing diversification and a degree of term premium, both of which might be difficult for investors to achieve on a standalone basis. In most respects an investment in a 2a-7 fund is like that in any other investment fund; the monies invested are unambiguously at the investor's risk, and returns are equal to the return on the fund as a whole."
They tell us, "However, there are two subtle, but important differences between the operation of a 2a-7 fund and a typical investment fund. First, the pricing mechanism of a 2a-7 fund means that an investor who invests today and then experiences a sudden need for cash tomorrow can redeem with minimal risk of loss of principal, even if interest rates and/or credit spreads have risen in the intervening period. Second, and more generally, there is a de facto mutualisation or cross subsidisation of risk and return between the investors in a 2a-7 fund: in essence, term premium accrues to all regardless of holding period whilst at the same time all investors have immediate access to their cash."
Authors Jonathan Curry, Chris Cheetham, Travis Barker, and Christopher Martin write, "These two features work well and to the mutual benefit of all investors in almost all circumstances. However, in some circumstances they fail to appropriately price risk, and therefore can result in risk transference. Specifically, when markets are dislocated, costs that ought to be attributed to a redeeming shareholder are externalised on remaining shareholders and on the wider market. Our proposal for a liquidity fee is intended to internalise those costs, and ensure they are paid by the redeeming shareholder and not transferred elsewhere. Since this will result in more effective pricing of risk (in this case, liquidity risk) we believe it will act as a market-based mechanism for improving the robustness and fairness of 2a-7 funds."
They explain, "Like any other investment fund, the value of a share in 2a-7 fund is a function of the value of its portfolio. Since shares in 2a-7 funds are priced to two decimal places, they are sensitive to mark-to-market movements of 50bps (half of one percent) or more in the underlying portfolio. Because it is rare for the portfolio of a 2a-7 fund to move by as much as 50bps, its share price tends to remain constant, hence the description of the fund as tending to have a 'constant' NAV. In September 2008, funding pressure on the banking system meant that the market value of 2a-7 prime funds deteriorated -- but not by as much as 50bps. Therefore, investors were able to continue to redeem from the funds at a constant price, and switch their proceeds into 2a-7 treasury funds, or elsewhere. But in fact, investor redemptions exacerbated the funding pressure of the banking system, which caused a further deterioration in the market value of 2a-7 prime funds. In effect, investors had a free option to switch, by externalising the cost of their redemptions on remaining investors in the fund, and on the market as a whole."
HSBC adds, "The objective of a liquidity fee is to internalise those costs, i.e. to remove the free option and ensure that the costs associated with redemptions are borne by redeeming investors. This will have three important consequences: First, a liquidity fee makes redemptions less likely. Specifically, since redemptions will be properly priced, investors will consider their needs more carefully; unless they believe that certain cost of the liquidity fee is less than the potential cost of remaining in a fund, then they will be unlikely to redeem. Second, a liquidity fee eliminates the 'run dynamic'. Specifically, in the absence of a liquidity fee, there is a first mover advantage.... By requiring investors to pay the full cost of their redemption, the first mover advantage is eliminated, as is the run dynamic. Third, a liquidity fee enhances investor protection, because even if investors do decide to redeem, their decision will be valued in such a way as to equalise remaining investors in the MMF."
Finally, HSBC says, "To conclude, we recommend that 2a-7 funds should have language in their prospectus that requires the Board of Directors to decide whether to impose a liquidity fee if the mid-value per share falls below USD 0.9975. We believe this would have a number of advantages: A liquidity fee makes redemptions less likely. Specifically, since redemptions will be properly priced, investors will consider their needs more carefully; unless they believe that certain cost of the liquidity fee is less than the potential cost of remaining in a fund, then they will be unlikely to redeem. A liquidity fee re-mutualises taking risk between investors by removing the 'first mover' advantage and eliminating the run dynamic. A liquidity fee enhances investor protection, because even if investors do decide to redeem, their decision will be valued in such a way as to equalise remaining investors in the MMF. Finally, a liquidity fee unambiguously ensures that the risks of investment remain with investors, and are not transferred on to the market, tax payers or fund managers."
A recent research piece by Barclays Capital Strategist Joseph Abate argues for more Treasury supply in a piece entitled, "The case for more bills." Abate writes, "With the SFP bill program on hold and no slackening in the appetite of money funds and other risk-averse investors, we expect bills to remain well bid for the "foreseeable future". But is there a case for increasing issuance?" He notes, "As the bill universe has shrunk, the bid-to-cover ratio at auctions has nearly doubled since 2002, and yields have plunged to 0%. Heightened risk aversion has increased the demand for bills, compounding the lack of supply. In the current environment, ABCP and repo are imperfect substitutes. Money fund managers are struggling to balance investor demand for non-deposit near riskless investments against the shortage of eligible securities. In addition to the empirical case for more bills, given their demand, there may also be a "macro-prudential" role for increasing bill supply. Boosting the supply of bills would enable money funds to reduce their heavy bank exposure while at the same time decreasing systemic risk."
Abate explains, "As the Treasury has sought to lengthen the average maturity of the debt outstanding, it has cut back on bill issuance. Net issuance of bills fell nearly $300bn in 2011 and as a proportion of total outstanding Treasury debt has contracted to its lowest level in nearly 50 years. The decline bill supply this year was exaggerated by the expiration of the $200bn Supplemental Financing Program.... As increasing the debt ceiling became a political landmine, the program was terminated in March. And even though the Treasury now has the capacity under the debt ceiling to bring the SFP program back, it has decided not to -- at least for the "foreseeable future.... [N]et bill supply may contract further beyond March -- especially if the coupon calendar is left unchanged and the deficit comes in lower than expected."
He tells us, "As bill supply has shrunk, the sector has gotten richer, with secondary market yields pinned near zero for months. The bid-to-cover ratio at bill auctions has nearly doubled since 2002 -- climbing from under 2.5 when bills accounted for a fairly steady 20-25% of aggregate Treasury debt to over 4.6 this year. At recent 3m and 6m bill auctions, the bid-to cover ratio approached 5 -- that, is there was 5x the demand for the securities relative to the amount on offer. Similarly, the Treasury recently asked TBAC members for their opinion on "allowing negative rate bidding in bill auctions." Even allowing that the 10% supply figure is not a forecast, the continued scarcity of bills as the Treasury lengthens the average maturity of the outstanding is likely to keep them expensive and demand at weekly auctions brisk."
Abate continues on the "Money fund dilemma," "A "money-like" asset is any instrument that offers same-day liquidity and absolute security of principal return. And while Treasury bills are the money-like asset most commonly thought of, financial institutions have created instruments that are close substitutes. These include investments in money funds and bank deposits, as well as any asset whose short tenor and collateralization makes it nearly as safe and liquid as bills. Under most circumstances, these near-money instruments are fairly close substitutes for bills, which explains why, for instance, repo, commercial paper, and deposits all trade close to bill yields. The near moneyness of bills has a large effect on their yields. For 1m bills, during 1990-2006, the moneyness reduced their yield an estimated 30bp over what would be implied based on an asset pricing model derived from Treasury coupons."
He adds, "But as risk aversion picked up this summer, investors began to reconsider the near moneyness of their private sector substitutes. Money fund managers have reduced their holdings of commercial paper, deposits and repo from certain banks and regions. Since the end of May, total financial paper outstanding has contracted 21%, or $125bn, and money fund holdings of foreign bank deposits and CP have declined 18%. At the same time, aggregate money fund balances, although down slightly, have been remarkably stable in part because the funds have nearly 50% of their investments in securities with less than 7d left to maturity -- in effect, becoming even more "money-like." The stability in their balances and the shrinking universe of eligible assets has created a big headache for managers who are left picking over the reduced supply of government-guaranteed paper like shoppers after a holiday sale."
Abate writes, "Moreover, ABCP and repo are only imperfect substitutes for meeting this demand because their supply is also shrinking. The amount of AB-CP outstanding is just 29% of its 2007 peak, as balance sheet accounting rule changes and lingering aversion have kept issuance light and heavily skewed toward non-US financials. With so much scrutiny on the geographical distribution of their holdings and the heavy financial company exposure in their portfolios, ramping up AB-CP holdings now is doubtful. Similarly, regulators are pushing banks to term out their funding and reduce their reliance on the repo and short term unsecured wholesale funding markets. Tight limits on intra-day credit and close attention to balance sheet leverage may steadily shrink the size of the tri-party repo market."
He notes, "At the same time, Moody's notes that there has been a sharp decline in issuance caused by the consolidation in the banking sector, as well as a reduction in VRDNs caused by municipalities terming out their debt in the low rate environment and concerns about the banks providing the liquidity support on the structure. As a result, we believe there is a strong empirical case for increasing the supply of bills -- at least temporarily -- to meet the surge in demand caused by the increase in risk aversion."
Abate says, "However, there may also be other reasons for increasing the supply of bills, or at least letting it return to the 20-25% share of total Treasury debt outstanding in 2002-06. The standard argument given for lengthening the maturity profile of the Treasury's debt is to reduce rollover risk -- the risk that the combination of rising interest rates and frequent auctions would sharply increase the Treasury's debt service burden if it relied too heavily on bills (or FRNs, for that matter). But a series of recent articles has noted that there could also be a "macroprudential" role for debt management and the issuance of bills."
He continues, "As noted above, financial institutions can create near-money instruments that in normal times are close substitutes for government paper. However, as Greenwood, Hanson, and Stein (among others) note, these institutions have an incentive to over-issue this paper. The consequences from over-issuance of private sector near-money creates destabilizing asset fire sales in times of financial stress as the issuing institution attempts to meet its short-term claims by rapidly selling off its assets, for instance, by liquidating the collateral underlying repo transactions. Pozsar notes, for instance, that this incentive, together with the very strong appetite from institutional investors for near-money, contributed to the growth of the "shadow banking" sector in the years leading up to the 2008 financial crisis and may have contributed to its depth. It follows that if one goal of policy is to reduce this incentive for banks to over-issue near-money, then increasing the supply of short-duration government debt could crowd some of it out."
Finally, Abate concludes, "Instead, by starving the market of government near-money, the Treasury is unintentionally increasing the incentive banks have to issue substitutes. And even though high level of risk aversion may be preventing over-issuance currently, there is no guarantee that in the future, the gap between the supply and demand for government near-money will not be increasingly met by the private sector. This, in turn, increases systemic risk. As a result, we judge there is a strong case (both empirically and from the perspective of reducing systemic risk) to be made for increasing bill supply."
In recent prospectus updates and supplements, we've noticed several funds mentioning the ability to "recapture" waived fees and warning investors of this "recoupment risk". SEC filings from HighMark, Huntington and Schwab are among those that mention the ability to recover fee waivers over the next three years in the fund's fee tables. Huntington even lists "Recoupment Risk among its "Principal Investment Risks," saying, "The Advisor entered into an agreement with the Fund effective June 15, 2009, whereby the Advisor agreed to waive all or a portion of its investment advisory fee and/or to reimburse certain operating expenses of the Fund to the extent necessary to ensure that the Fund maintains a positive yield of at least 0.01%. The Advisor shall be entitled to recoup from the Fund any waived and/or reimbursed amounts pursuant to the agreement for a period of up to three (3) years from the date of the waiver and/or reimbursement. This recoupment could negatively affect the Fund's future yield. The Advisor may terminate the agreement at any time upon thirty (30) days prior written notice to the Fund."
Schwab says in a footnote on its "Money Market Funds" page, "The investment advisor and/or its affiliates have voluntarily waived and/or reimbursed expenses in excess of their current contractual commitment in an effort to maintain a positive net yield for the fund or each share class of the fund, as applicable. These voluntary waivers and reimbursements may be modified or terminated at any time, and are subject to future recapture by the investment advisor and/or its affiliates. Fee waivers and/or expense reimbursements (whether contractual or voluntary) have the effect of increasing a fund's net yield; without such fee waivers and/or expense reimbursements, the fund's seven-day yield would have been lower. Please see the prospectus for more details."
Schwab Cash Reserves also writes in its prospectus, "Under an agreement with the fund, the investment adviser and/or its affiliates may recapture from the assets of the fund, any of these expenses or fees they have voluntarily waived and/or reimbursed until the third anniversary of the end of the fiscal year in which such waiver and/or reimbursement occurs, subject to certain limitations. These reimbursement payments by the fund to the investment adviser and/or its affiliates are considered "non-routine expenses" and are not subject to any operating expense limitations in effect for the fund at the time of such payment. This recapture could negatively affect the fund's future yield."
HighMark Funds says in its prospectus, "HighMark Capital Management, Inc., investment adviser of the Fund, has contractually agreed to waive fees and reimburse expenses to the extent total operating expenses of Class A Shares of the Fund (excluding portfolio brokerage and transaction costs, taxes relating to transacting in foreign securities, if any, extraordinary expenses and any expenses indirectly incurred by the Fund through investments in certain pooled investment vehicles) exceed 0.80%, for the period from December 1, 2010 to November 30, 2011, at which time the Adviser will determine whether or not to renew or revise it. In addition to the current expense limitations described above, the Adviser may also waive fees and/or reimburse expenses in excess of its current fee waiver or reimbursement commitment to the extent necessary to maintain the net yield of the Fund and/or one or more classes of Shares of the Fund at a certain level as determined by the Adviser. The Adviser may recoup from the Fund any of the fees and expenses it has waived and/or reimbursed pursuant to any of the foregoing until the end of the third fiscal year after the end of the fiscal year in which such waiver and/or reimbursement occurs, subject to certain limitations. This recoupment could reduce the Fund's future yield."
Finally, a supplement to HighMark's 100% U.S. Treasury Money Market Fund adds, "Due to the continued low interest rate environment and the current investment restrictions of HighMark 100% U.S. Treasury Money Market Fund, HighMark Funds is evaluating various alternatives with respect to the operation of the Fund. These alternatives may include: 1) Merging the Fund into another series of HighMark Funds, such as HighMark Treasury Plus Money Market Fund; 2) Changing the name of the Fund and its corresponding investment restrictions so that the Fund would no longer be restricted from purchasing securities other than short-term obligations issued or guaranteed as to payment of principal and interest by the full faith and credit of the U.S. Treasury; 3) Liquidating the Fund; 4) Continuing the current investment strategies of the Fund; and 5) Exploring other options for the Fund. HighMark Funds will carefully review these alternatives and expects to make a determination as to the appropriate course of action at some point before September 30, 2011. Each Prospectus will be supplemented or amended to reflect any changes to the Fund prior to the effective date of those changes."
Deutsche Bank Strategist William Prophet released an update on October money market fund portfolio holdings late last week entitled, "You'll Miss Me When I'm Gone." He says, "The latest month-end holdings of large U.S. money funds show that many of the recent trends remain firmly in place. In particular; USD funding is continuing to disappear for European banks and what remains is getting shorter. This, combined with the fact that stricter industry regulation is on the way should encourage structurally higher short-term rates (and wider spreads)." We also quote from a story from Bloomberg's sampling of October holdings Bloomber holdings update. (Crane Data's Money Fund Wisdom subscribers should look for our November Money Fund Portfolio Holdings series (with 10/31/11 data) to be e-mailed Tuesday morning.)
DB's Prophet writes, "There are a lot of rather alarming trends within the latest month-end U.S. money market holdings data, but none more so than [a chart which] shows the change in the maturity profile of French bank CD's sitting on the balance sheet of the funds within our tracking universe. [It shows 80% of CDs maturing from 0-1 month vs. 17% in June.] [A] few months ago the vast majority of European bank CD's on money fund balance sheets had French names associated with them. But the numbers continued getting smaller through month-end October and at this point, unsecured U.S. money fund exposure to banks in France is practically down to nothing.
He explains, "[O]ne of the questions we typically get (and an issue that has generally not received much attention) is what the money funds are buying. In other words; every month we discuss how much this or that asset went down on U.S. money fund balance sheets, but rarely do we discuss what went up.... [Another chart] shows the percent holdings of select assets on all U.S. money fund balance sheets; that is, not just prime funds. So these trends could be reflecting a shift out of prime funds and into government funds for example. But anyway, notice how indeed the recent rise in Treasury & Agency security holdings has more or less completely offset the decline in CDs. And so the money fund industry has really been dialing down the risk."
Another article on holdings, "U.S. Prime Money-Market Funds Pull $8 Billion From Deutsche Bank," explains, "The biggest U.S. prime money-market funds cut their investments in Deutsche Bank AG by $8.1 billion in October, the largest drop among 35 of the largest banks in Europe, the U.S., Japan and Canada, Bloomberg analysis shows. The amount of Deutsche Bank short-term obligations held by the eight biggest U.S. funds eligible to purchase corporate debt, which included offerings from Fidelity Investments, JPMorgan Chase & Co. and BlackRock Inc., declined by 56 percent to $6.3 billion from Sept. 30 to Oct. 31, according to monthly portfolio updates compiled by Bloomberg and published in today's Bloomberg Risk newsletter."
The piece adds, "French banks saw their money-market funding decline 25 percent on the month to $16 billion. The drop followed a 44 percent decline in September. Over the last twelve months the eight big money funds have pulled 78 percent, or $61.3 billion, of their funding from French banks."
Finally, in other news, see the Crane Data's Peter Crane on Bloomberg TV Thursday. He discussed the safety of money funds, potential regulatory changes, European concerns and the history of "breaking the buck." Crane speaks with Lisa Murphy and Adam Johnson on Bloomberg Television's "Street Smart."
Crane Data's Peter Crane appeared on Bloomberg TV late yesterday afternoon. He discusses the safety of money funds, potential regulatory changes, European concerns and the history of "breaking the buck." Bloomberg writes, "Peter Crane, president of Crane Data LLC, talks about the risks involved in investing in money market funds. Crane also discusses regulation of the funds. He speaks with Lisa Murphy and Adam Johnson on Bloomberg Television's "Street Smart." Click here to link to the video.
Fidelity Investments, the largest money fund manager with over $418 in assets according to Money Fund Intelligence XLS, recently named new Presidents to its Bond and Money Market Groups, moving former Money Market President Bob Brown over to head its Bond group and promoting Nancy Prior to head of Money Markets. The press release says, "Fidelity Asset Management, one of the world's leading global institutional multi-asset class managers, today announced leadership appointments within its Fixed Income Division, which includes the company's Bond Group and Money Market Group.
It explains, "These appointments include: Robert P. Brown has been named president of Fidelity's Bond Group, succeeding Christopher Sullivan. Brown was previously president of Money Markets. Nancy D. Prior has been promoted to president of Money Markets, succeeding Brown. Most recently, Prior was a managing director of Credit Research. Christopher Sullivan has been named head of Institutional Fixed Income, a newly created role. David E. Hamlin has been promoted to head of Research for Fixed Income, a newly created role. Hamlin was previously a managing director of Credit Research."
Charles S. Morrison, president of Fidelity's Fixed Income Division says, "The fixed income markets have grown ever more complex in recent years, while our bond and money market businesses have grown substantially. Enhancing our fixed income structure and expanding our leadership team with these experienced investment professionals strengthens an already exceptional organization and better positions us to seize global growth opportunities, while continuing to help us meet the evolving fixed income needs of our institutional and retail clients."
In other news, a press release entitled, "Deutsche Bank's Institutional Asset Management Business Unveils New Standard for Money Market Fund Reporting," tells us, "DB Advisors, Deutsche Bank's institutional asset management business, today unveiled the latest in a series of pioneering enhancements to its money market reporting capabilities at the Association of Financial Professionals Annual Conference in Boston. Supplementing existing analyses of fund composition and risk metrics, the new reporting capabilities include duration contribution by country, support providers for variable rate demand notes and other features."
Deutsche continues, "Increasingly, corporate treasurers have come to rely on their fund providers for clear and insightful analysis of their liquidity assets. With this in mind, DB Advisors has embarked on a series of industry-leading reporting enhancements aimed at helping clients actively manage their investment needs. Reports are generated on a weekly basis, but can be produced daily, if market conditions require."
The release adds, "The new reports show information such as country and industry concentration, and go well beyond. For example, duration contribution of holdings by country and sector, and a breakdown of exposure to the Eurozone sovereign and banking sectors, offer useful insights. DB Advisors' reporting also includes highly detailed security-specific information, including asset-backed commercial paper sponsors, credit and liquidity support and variable rate demand obligation support."
Joe Sarbinowski, Head of Global Liquidity Management at DB Advisors, comments, "This level of analysis sets a new high water mark for the industry. It allows corporate treasurers and other clients to make informed decisions about their liquidity positions without having to sift through hordes of data. Innovative use of technology has allowed us to bring to our clients the clearest, most comprehensive information available. We believe the scope of risk metrics we provide is unmatched in the industry."
J.P. Morgan Securities published its latest "Update on prime money fund holdings for October 2011" last night, saying, "Prime money market funds saw assets under management (AUM) shrink again in October, but continued to cut global bank exposures at a quicker pace. Prime MMF AUM dropped $21bn to $1,428bn at the end of October and is down $178bn YTD. Prime fund exposures to all forms of bank credit (CP, CD, ABCP, repo, time deposits, and other notes) dropped approximately $41bn during October, and are down $260bn YTD. The fact that bank exposures continue to contract faster than AUM is a sign that fund managers remain very conservative and concerned about global bank exposures to the Eurozone. Total global bank credit exposures as a percentage of prime MMF AUM fell by 2% in October and 10% since the end of April but global bank CP and CD exposures as a percentage of prime MMF AUM has remained steady over the last two months after falling 9% from its peak at the end of April."
Authors Alex Roever, Teresa Ho and Chong Sin tell us, "Prime funds cut exposures to Eurozone banks by $24bn during October, but the rate at which managers trimmed exposure was slower than in recent months. Eurozone bank exposures in prime funds fell $72bn and $50bn, respectively, in September and August, and are down $261bn since May. The slowing pace of Eurozone liquidations supports our view that most prime fund managers are allowing existing Eurozone exposures to run off while a few remain actively engaged with the Eurozone banks, mostly in very short tenors."
They add, "Exposure to all foreign bank commercial paper and certificates of deposit (CP and CD) dropped only $9bn in October, and is down $202bn YTD. The $9bn monthly drop masks a decline in Eurozone CP and CD holdings of $23bn during October, which was partly offset by increases in other jurisdictions. We estimate prime MMF holdings of Eurozone bank CP and CD declined from a $373bn at the end of April to $117bn at the end of October. Over the same time frame, Federal Reserve data suggests that the amount of all USD foreign financial CP and CD outstandings fell by about $344bn. This implies prime funds accounted for about 74% of the aggregate pullback in CP and CD holdings of all USD money market investors."
Finally, JPMorgan's note says, "French banks again experienced the greatest contraction in the Eurozone, although it too was small relative to reductions in prior months. French bank exposures across all credit products fell by $10bn, while CP and CD exposures fell by $11bn, which was about 50% less than what we expected would run off based on September's month-end data. October data reveal that some prime fund managers rolled over maturing French paper into very short tenors. 87% of French bank paper across all forms of bank credit are set to mature within the next month. Based on recent experience, a significant fraction of this is likely to be rolled rather than run off."
In other news, Fitch Ratings published a comment entitled, "SEC Money Market Fund Reform Broadly Positive for Credit". It says, "Fitch views the potential U.S. money market fund (MMF) regulations expected to be put forth by the Securities and Exchange Commission (SEC) as positive from a ratings perspective. Still, the changes could have secondary effects on the industry, which require further consideration. SEC Chairman Mary Schapiro said Monday that the agency plans to propose new requirements for the MMF industry within the next few months. They include the addition of capital buffers and a change from constant net asset value (CNAV) to variable net asset value (VNAV) funds.
The piece adds, "Fitch thinks that while capital buffers would clearly provide additional credit and liquidity support, they could also potentially introduce increased costs and new conflicts between traditional MMF investors and those providing the capital buffers. Increased costs may create pressure on fund managers to reach for additional yield in order to maintain the overall economics of the product. Conflicts of interest could challenge a fund manager to maintain liquidity and capital preservation for shareholders while maximizing returns for capital investors. Fitch would also need to consider how a capital buffer could alter a fund sponsor's willingness to provide support to a MMF."
U.S. Securities & Exchange Commission Chairman Mary Schapiro spoke at length about Future Money Market Fund Reform yesterday afternoon at SIFMA's 2011 Annual Meeting in New York. Schapiro commented, "I wanted to take this opportunity to address an important policy issue that has not been fully resolved following the financial crisis of 2008. That policy issue relates to money market funds -- and the SEC's ongoing efforts, in close coordination with the Financial Stability Oversight Council, to pursue further structural reform of these vehicles. The purpose of this reform would be to improve market resiliency by reducing money market funds' susceptibility to runs and providing for a greater cushion in the case of a poor credit decision or decrease in short-term liquidity."
She said, "The financial crisis revealed shortcomings in the functioning of the short-term credit markets. And money market funds represented a weakness. Structural flaws were exposed. The crisis began with the failure of a large investment bank, followed by a run on a single money market fund that spread. Within days, the short-term credit market was frozen. Just as the SEC has taken substantial steps to address market structure inadequacies in the equity markets that were revealed on May 6 of last year, we have an obligation to evaluate and address weaknesses in the short-term credit market, and the $2.6 trillion money market fund industry, in particular."
Schapiro explained, "Money market funds are investment vehicles that are widely used by both retail and institutional investors for cash management needs. The delineating feature of money market funds is that they seek to maintain a stable $1.00 net asset value. SEC rules permit these funds to use amortized cost accounting in order to maintain that stable net asset value. As a result, investors can transact in the fund on an efficient basis, and essentially use a money market fund as a liquid cash account. These funds work very well almost all of the time, handling significant inflows and outflows on a daily basis. This general success long allowed money market funds to be regarded as a sleepy, low-risk part of the financial world, growing to nearly $4 trillion in assets at their height."
She continued, "Money market funds catapulted into the public consciousness in September of 2008 -- in the midst of the financial crisis. It was then that the Reserve Primary Fund "broke the buck," triggering a wide-scale run on institutional prime money market funds. The significant role of money market funds in the financial system became very clear, as sizable redemptions and uncertainty about counterparties led money market fund managers to retreat en masse from the commercial paper market. Banks, corporations and others who relied on money market funds as a source of short-term financing were suddenly locked out of the market. To make matters worse, many money market funds were scrambling to liquidate assets in order to meet the redemption demands of nervous investors."
Schapiro's speech said, "During the week of September 15, 2008, investors withdrew approximately $310 billion from prime money market funds, with the heaviest redemptions coming from money market funds with large institutional investors. These redemptions represented 15 percent of those funds' assets, and on an individual basis, certain money market funds saw assets under management drop by more than one-third in less than a week. The run was halted by the announcement of the Treasury Temporary Money Market Fund Guarantee Program, which temporarily guaranteed money market fund account balances as of September 19, 2008. In addition, government facilities were put in place to provide liquidity to the commercial paper market in which prime money market funds invest."
She continued, "Following the crisis, the SEC enacted significant reforms to our money market fund regulations. Through this effort, we tightened credit quality standards, shortened weighted average maturities, and for the first time imposed a liquidity requirement on money market funds. Those reforms, which we adopted in February 2010, have been in effect for over a year. And they have made a substantial difference, particularly in the liquidity profiles of money market funds. The reforms were "tested" this summer when money market funds remained resilient despite substantial redemptions, and large changes in day-to-day flows."
She added, "As part of our reforms, the SEC also adopted new reporting requirements that provide public transparency so investors can see their money market funds' exposures. The reporting also enables the SEC and other regulators to better monitor trends in money market funds' holdings and risk profiles. Complementing these developments, we have provided investors access to money market funds' mark-to-market valuations, known as the "shadow NAV." This information is reported on a monthly basis, with a 60-day lag to the public. The public shadow NAV information is expected, in part, to help sensitize investors to the fact that money market fund shares actually are interests in pools of investments that fluctuate in value, although those fluctuations generally are very small and measured in decimal point increments."
Schapiro told SIFMA, "While the SEC's new money market fund reforms were a critical first step, and many voices have said "you've done enough," I believe additional steps should be taken to address the structural features that make money market funds vulnerable to runs. While I've listened to commenters who say we have done enough, I remember the destabilizing events that followed the breaking of the buck by the Reserve Primary Fund and the need for unprecedented government support. We all should be committed to preventing that from occurring again."
She continued, "A money market fund's $1.00 stable NAV is brittle. Money market funds have no committed source of stability to draw upon, except for the discretionary support of their sponsors. This support may be there, or it may not. And there certainly is no current legal requirement that sponsor support or any other back-up exist. In addition, investors, particularly institutional investors, often treat the $1.00 NAV as an all-or-nothing proposition -- and run at the first sign of trouble. Notwithstanding their generally strong record, there is a lingering concern about how money market funds will stand up in a significant financial crisis or whether a particular money market fund holding unexpectedly could default, making matters worse. There still is concern that a money market fund portfolio manager simply could make a mistake."
Schapiro explained, "Despite our first round of reforms, risks remain because, even though every money market fund prospectus says the fund is not guaranteed and that investors may lose money, investors want, and have come to expect, their dollar -- not something shy of that. In addition, I think everyone agrees that our country should never again be in the position of having to choose between providing support to private market participants, including money market funds, or risking a breakdown of the broader financial system. We need to remember that the focus on additional structural reform is not an indictment of the benefits that money market funds provide to investors -- or a critique of their managers. Instead, it is a recognition -- informed by the events of 2008 -- that money market funds, because of their size and their role in the short-term credit markets, are significantly intertwined with the U.S. economy and the global marketplace."
She continued, "As was stated in the FSOC Annual Report issued in July, the SEC -- working with FSOC -- is evaluating options to address the structural vulnerabilities posed by money market funds. We are focused in particular on a capital buffer option to serve as a cushion for money market funds in times of emergency and floating NAVs, which would eliminate the expectation of stability that accompanies the $1.00 stable NAV. Both of these reform options would ensure that investors who use money market funds realize the costs that might be imposed during rare market events. The current focus on these two reform options is the result of a long and careful review conducted jointly with fellow financial regulators. In October 2010, the President's Working Group released a Report on Money Market Funds. That report discussed a series of possible reform options to address the systemic risks money market funds can pose. In November 2010, the SEC requested public comment on those reform options, in an effort to better understand their pros and cons."
She added, "The SEC also held a very informative public Roundtable on Money Market Funds and Systemic Risk in May of this year. Participants at the Roundtable included FSOC members and their designates, foreign financial regulators, money market fund industry participants, academics and investors. At the time the PWG Report was published, there were numerous reform options on the table. And then additional ones were suggested by commenters along the way. At this point, however, floating NAVs and capital buffers, possibly combined with redemption restrictions, seem to be the options with the greatest viability.
Schapiro also said, "Many have asserted that forcing money market funds to float their NAVs is draconian -- and would end money market funds as we know them. I agree that money market funds would change dramatically as a result. They would no longer look like a specialized product. They would look like any other mutual fund, although with very short-term, high-quality portfolio holdings. I also have sympathy for the fact that floating the NAV potentially would deprive investors' access to a stable net asset value product that has met many of their needs. While floating NAVs would reinforce what money market funds are -- an investment -- and what they are not -- a guaranteed product -- this option poses challenges for policymakers, particularly in fostering an orderly transition from stable NAVs to floating NAVs."
She explained, "Another option, a capital buffer for money market funds, also holds promise. And much of the SEC staff's energy, working jointly with staff from other FSOC member agencies, is focused on developing a meaningful capital buffer reform proposal. In addition, a capital buffer potentially could be combined with redemption restrictions in order to address incentives to run that may not be curtailed by a capital buffer alone. An express and transparent capital buffer would make explicit what for many, but not all, money market funds is implicit today: namely that there is a source of capital available to the fund in times of emergency. Today that source of capital comes from discretionary sponsor support. If a money market fund held a troubled security, for example, the fund's sponsor -- or the sponsor's well-capitalized parent -- might buy the security out of the fund's portfolio."
She continued, "Clearly such activity saved investors from losses and was in their interests. But it also had the perverse effect of lulling investors into the belief that losses were extremely remote, if not somehow impossible, due to sponsor support. The problem, as illustrated in 2008, is that sponsor support has been provided at the discretion of the sponsor. There is no dedicated, transparent, and sizable source of capital on which money markets fund can draw in times of trouble. A dedicated capital buffer, or similar structure, could provide that type of cushion. It could mitigate the incentive for investors to run since there would be dedicated resources to address any losses in the fund. A sudden market or interest rate fluctuation would not have the potential dramatic "break the buck" effect that it could have today. It also would reduce the potential moral hazard and uncertainty that revolves around a fund possibly breaking the buck in the current environment."
She told the audience, "In assessing potential capital buffer structures, we are examining the pros and cons of various sources of the capital. The capital in a money market fund could come from (1) the fund's sponsor, (2) the fund's shareholders, or (3) the market, through the issuance of debt or a subordinated equity class. In addition, we are closely examining the appropriate size of any capital buffer. A challenge is how to establish a capital buffer that offers meaningful protection against unexpected events, without over-protecting and unnecessarily interfering with the prudent and efficient portfolio management of the fund. We also face the challenges of developing and implementing money market reforms in a low or nearly "no" interest rate environment. Reform needs to be implementable now, yet workable in all interest rate environments."
Finally, Schapiro said, "I look forward to making substantial progress on our money market fund reform initiative in the coming months so that we can issue a proposal in very short order. We cannot let this issue linger. Once the SEC issues any reform proposal, a critical step will be hearing from interested parties through the public comment process. We definitely value the input of market experts, market participants and the investors that we are sworn to protect. We want and need your input. The issues we face are not easy. If they were, further structural money market reforms would be implemented by now. But just because something is a challenge, or is unpopular, does not mean that we should not do it. As a financial regulator, I feel a responsibility to learn every lesson and take every step to address the shortcomings revealed in the last crisis, in part to avoid the next. Money market funds, while perhaps not the cause of the downward spiral of events, certainly exacerbated the financial breakdown. I believe that we at the SEC need to be leaders in continuing to pursue money market fund reform. And I look forward to sharing a reform proposal with you soon."
The November issue of Crane Data's Money Fund Intelligence newsletter was sent to subscribers on Saturday along with our October 31 performance data, rankings and indexes. (Our 10/31 Money Fund Portfolio Holdings will be published on Nov. 14.) The latest publication includes the articles, "Banks, Bonds Continue Drawing Cash From MFs," which discusses the outflows from money funds and big inflows into bank savings and bond funds; "State Street's Fortuna on Fund Connect Portal," our monthly fund "profile" which again features one of the large online money market trading "portals"; and, "Fund CEOs on Regulations Say Squam Out, Buffer In," which reviews recent comments on possible regulatory changes for money funds. (Note that we published over the weekend because several of our staff will be at the Association for Financial Professionals Annual Conference in Boston Sunday, Nov. 6 through Wed., Nov. 9. Look for us at Booth #1805 and see Pete Crane present on "Under The Cash Hood: Looking Beyond Yield at Money Market Mutual Fund Holdings" Monday at 4pm.)
Our lead article says, "Money market mutual fund assets were down moderately (-$18.7 billion) in October, though assets remain above $2.6 trillion -- the same level they rebounded to the week following the resolution of the debt ceiling crisis (8/10). But competitors on both sides -- banks and bonds -- continue to attract assets at a strong pace." Two charts in MFI show asset changes year-to-date (through 9/30/11) in money funds, bank money market deposit accounts (MMDAs), and bond funds; and a longer term view of asset changes in money funds vs. bank MMDAs."
The November issue also comments, "This month we feature another online money market trading "portal" in our "profile" interview. Money Fund Intelligence interviews Greg Fortuna, Managing Director at State Street Global Markets, and Peter McHugh, Vice President for the company’s Fund Connect platform in Europe. Fund Connect is announcing the rollout of its Transparency Connect analytics module at this week's Association for Financial Professionals' (AFP) annual conference. Our Q&A follows."
Finally, we write, "While there's no official word on the next round of money fund regulations, a couple of fund industry heavyweights weighed in recently on the topic. On recent quarterly earnings call, both BlackRock and Federated's management made comments regarding possible future regulatory changes. We reprint and excerpt them here."
Our monthly Money Fund Intelligence XLS, which contains a host of performance statistics on money funds, rankings and our Crane Indexes, has already been uploaded to the website and e-mailed to clients, and our Money Fund Wisdom database has been updated with October 31, 2011 data. Watch for more excerpts from our latest MFI in coming weeks, or e-mail email@example.com to request the latest issue.
Money market mutual funds declined modestly in the latest week but they remain slightly above their level on Aug. 10, the week following the resolution of the U.S. debt ceiling debate. ICI's latest weekly report says, "Total money market mutual fund assets decreased by $11.93 billion to $2.622 trillion for the week ended Wednesday, November 2, the Investment Company Institute reported today. Taxable government funds decreased by $670 million, taxable non-government funds decreased by $12.40 billion, and tax-exempt funds increased by $1.14 billion." Below, we also discuss this weekend's Association for Financial Professionals annual conference, the largest gathering of treasury professionals, which will attract a number of money funds, portals and cash investors to Boston, Mass., from Sunday, Nov. 6, through Wednesday, Nov. 9.
Year-to-date, money market mutual fund assets have declined by $188 billion, or 6.7%, and over the past 52 weeks money funds have declined by $178 billion, or 6.3%. Over the past 2 years (104 weeks), money fund assets have declined by $716 billion, or 21.5%, over the past 3 years (156 weeks) assets have declined by $994 billion, or 27.5%, but over 4 years (208 weeks) assets have declined by $339 billion, or 11.4% (according to ICI's weekly series).
ICI's new weekly says, "Assets of retail money market funds decreased by $1.39 billion to $935.98 billion. Taxable government money market fund assets in the retail category decreased by $1.57 billion to $196.35 billion, taxable non-government money market fund assets decreased by $930 million to $546.00 billion, and tax-exempt fund assets increased by $1.11 billion to $193.63 billion. Assets of institutional money market funds decreased by $10.55 billion to $1.686 trillion. Among institutional funds, taxable government money market fund assets increased by $900 million to $698.70 billion, taxable non-government money market fund assets decreased by $11.48 billion to $893.36 billion, and tax-exempt fund assets increased by $30 million to $94.41 billion."
In other news, this Sunday, Crane Data will join thousands of corporate treasury professionals and representatives from over 25 money market mutual fund managers and trading "portals" at the AFP Annual Conference. Look for a number of press releases and news accompanying the start of the conference early next week, and watch for our interview with State Street's Fund Connect portal on the launch of their Transparency Connect module in the pending November issue of Money Fund Intelligence. (We plan to publish MFI and our Oct. 31 performance data on Saturday, Nov. 5, since we'll be exhibiting at the conference Sunday through Tuesday.)
As we mentioned in our October 20 "Link of the Day," there are a number of sessions involving money market mutual funds and cash investing at AFP, including: "Under the Cash Hood: Looking Beyond Yield at Money Market Mutual Fund Holdings" by Crane Data's Peter Crane and Genzyme's Coleman Nee, Jr.; "Evaluating Risk in Money Market Funds" with BofA Funds' Dale Albright; "The Role of Commercial Paper in Short Term Markets: An Essential Source of Financing and Investing" with JPMorgan's John Kodweis; and, "How to Conduct a Due Diligence Meeting with a Money Market Fund Complex" with Morgan Stanley's Michael Cha.
Finally, note that the full agenda is now posted and registration is open for Crane's Money Fund University, a "basic training" in money markets and money funds, which will take place January 19-20, 2012, at the Hyatt Regency in Boston. The preliminary agenda for Crane's Money Fund Symposium will be released later this month and registration is now open at www.moneyfundsymposium.com. We also are in discussions to participate in a European Money Fund event later in 2012, so look for details on this too.
A press release entitled, "Putnam Launches Short Duration Income Fund to Help Address Marketplace Desire for Yield and Capital Preservation," says, "Putnam Investments today announced that it has launched the Putnam Short Duration Income Fund (PSDTX), which seeks to combine some of the most appealing characteristics of both money market funds and ultra-short bond funds, in an effort to meet a growing marketplace demand among both retail and institutional investors. The new Fund will strive for a higher rate of current income than is typical of money market funds and a have a greater focus on capital preservation than is usually associated with ultra short bond funds, with the goal of maintaining liquidity." Putnam's offering joins recent launches by JP Morgan, Fidelity, and Oppenheimer in entering the recently-resurrected "enhanced cash" space.
Robert Reynolds, President & CEO of Putnam Investments, comments, "In today’s environment, investors are demanding higher yields, but at the same time are understandably concerned about market risk. The Putnam Short Duration Income Fund is a unique offering that addresses each of these factors, seeking to generate a high rate of current income, while simultaneously working to preserve capital. It is a far more compelling investment vehicle than today's money market fund, filling a definite need in the market, and we expect that it will continue to be a powerful offering for years to come."
The press release explains, "Like many other types of funds, including money market funds, the Short Duration Income Fund offers a check-writing feature, through which investors may redeem shares by writing checks. This feature provides a convenient supplement to conventional bank checking accounts. In seeking to fulfill its objective, the Putnam Short Duration Income Fund will invest in a diversified portfolio of fixed-income securities composed of short duration, investment-grade money market, and other fixed income securities. Its primary benchmark will be the BofA Merrill Lynch U.S. Treasury Bill Index."
Putnam adds, "Among its more traditional short-term and money-market securities holdings, the Fund will invest in certificates of deposits, commercial paper, time deposits, repurchase agreements and U.S. government securities, including Treasury Bonds and other fixed income instruments. Additionally, the Fund will invest in asset-backed securities, investment-grade corporate bonds, sovereign debt, and will make prudent use of derivatives to help mitigate risk. The fund will make daily accruals and pay distributions monthly."
Reynolds also says, "The Putnam Short Duration Income Fund is an excellent alternative for investors -- individuals and corporations -- who generally want to try to strike a balance between generating greater yields through a broader range of investment grade securities, while focusing on the goal of managing risk and preserving capital."
Finally, the release adds, "The new fund will offer investors the benefits of the intensive fundamental research and proprietary risk management performed by a Putnam fixed-income team whose members have extensive expertise in money market securities and other short-term investments. It will be managed by a team of veteran Putnam portfolio managers, led by Michael V. Salm, Co-Head of Fixed-Income."
While the space has not attracted serious dollars to date, these vehicles, which tend to yield from 20 to 50 basis points, remain poised to benefit should money funds be further hampered by future regulatory changes. For more on recent entrants just beyond money funds, see our previous Crane Data News updates on the "enhanced cash" or "money fund plus" market: "JPMorgan Rolls Out Ultra-Short Money Mkt Fund, Enhanced Cash Fund" (10/1/10), "Fidelity Launches Conservative Income Bond Fund; New Enhanced Cash" (3/14/11), "Oppenheimer Short Duration Fund Launches; Dreyfus Closes Enhanced" (4/26/11), and "Guggenheim Launches Enhanced Ultra-Short Bond ETF, Latest Cash+" (6/3/11).
Ratings agency Standard & Poor's released a statement yesterday entitled, "Implementation Of The Revised Principal Stability Fund Ratings Criteria Has No Immediate Ratings Impact," which says, "Standard & Poor's Ratings Services said that it is not taking any rating actions today on the 487 global principal stability funds that it rates following the implementation of its revised criteria. Standard & Poor's refined its principal stability fund ratings (PSFR) criteria in June to better account for the risks in funds seeking to maintain principal stability. The criteria apply to principal stability fund ratings on funds globally, excluding Australia and New Zealand. Some of the criteria updates included: Enhancement of our qualitative review of management that includes measures to provide ratings differentiation based on management's resources, operational policies, risk management, and credit analysis; Establishment of explicit issuer ratings for counterparty transactions such as repurchase agreements; Refinement of maximum exposure per issuer; Adoption of weighted average maturity (WAM) to final, or WAM(F) criteria; Introduction of monthly stress-testing guidelines; Refinement of the treatment of municipal securities that we do not rate; Establishment of cure periods for when a quantitative criteria metric/threshold is breached; and, Elimination of the 'G' rating modifier."
S&P's update continues, "To be consistent with the revised criteria, some managers of our rated funds have altered their holdings and, in some cases, improved their resources, operational policies, risk management, or credit analyses during the five-month implementation period between June 8 and Nov. 1. The only rating actions that we took as a result of our revised PSFR criteria were on the 13 funds that we had rated 'AAAm-G'. We changed our ratings on these funds to 'AAAm' because we removed the 'G' from the PSFRs to avoid the potential for misinterpretation of what the 'G' signifies (i.e., strength within a particular rating category). The 'm-G' ratings were assigned when the portfolio consisted primarily of direct U.S. government securities."
Primary Credit Analysts Peter Rizzo and Joel Friedman explain, "When we published the final criteria in June, we said we believed that the criteria would have a limited impact on outstanding ratings, except in the cases of principal stability funds transacting with unrated counterparty exposures. The revised criteria state that the credit quality of the counterparty determines the credit quality of a repo (or repurchase agreement) because the timing and ownership of collateral is uncertain. Counterparty exposures that do not have an explicit issuer or counterparty credit rating of 'A-1' or 'A-1+' from Standard & Poor's or do not have a guarantee of their obligations from a Standard & Poor's-rated entity are "higher-risk investments." At the time we published the criteria, many of the counterparties that rated funds engaged with for repo were not explicitly rated. Since then, most of the counterparties have obtained 'A-1' or 'A-1+' ratings and, therefore, meet the minimum credit quality criteria for all investment-grade PSFRs."
They add, "Principal stability funds continue to be managed more conservatively than they had been in the past because of stricter regulatory standards, a prolonged period of low interest rates, and the ongoing uncertainty in global fixed-income markets stemming from the European sovereign debt problems and their impact on the wider financial markets. Specifically, we have seen that our rated principal stability funds are maintaining increased liquidity positions (through overnight deposits and collateralized repos), shorter overall average portfolio maturities, and greater issuer diversification. A PSFR, commonly referred to as a money market fund rating, is a forward-looking opinion about a fixed-income fund's ability to maintain principal value (that is, a stable net asset value). PSFRs have an "m" suffix (for example, 'AAAm') to distinguish them from Standard & Poor's issue or issuer credit ratings."
S&P also published a paper entitled, "The Process For Assigning And Monitoring Principal Stability Fund Ratings," which says, "In an effort to provide transparency to the ratings process for principal stability fund ratings (PSFRs), Standard & Poor's Ratings Services is clarifying the steps it takes to assign and monitor PSFRs as well as highlighting the definitions it uses in its criteria.... Since 1984, we have assigned principal stability fund ratings, fund credit quality ratings, and fund volatility ratings on fixed-income funds globally, including mutual funds, money market funds, enhanced cash funds, preferred trusts, government investment pools, separate accounts, exchange-traded funds, hedge funds, and unit investment trusts. The goal of our analysis is to understand the sources of risk in a managed fund's portfolio and investment strategy and to assess how these risks affect the fund's ability to meet its objectives. In our view, funds that seek to maintain a stable net asset value (NAV) and a PSFR should be managed conservatively with regard to average maturity, credit quality, and liquidity and should follow well-defined guidelines and investment policies.... Lower investment-grade rating categories ('AAm' to 'BBBm') reflect our view that a fund's strategy incorporates a slightly higher degree of risk."
A press release entitled, "BNY Mellon Launches Liquidity DIRECT Mobile for iPhone App," explains, "BNY Mellon, the global leader in investment management and investment services, today announced the launch of Liquidity DIRECT Mobile for iPhone, a new app that enables institutional investors to access via iPhone the cash management, account information reporting and transactional features of BNY Mellon's Liquidity DIRECT portal. The new app allows clients to invest, transfer and redeem cash in multiple currencies via a convenient, multi-touch display on their iPhone."
It explains, "The app also provides smartphone access to Liquidity DIRECT's extensive capabilities, enabling investors to obtain data on money market fund yields, credit ratings and other timely and vital investment information. To provide clients with comprehensive control over their accounts, Liquidity DIRECT Mobile for iPhone was designed with crucial security features, including a user authentication feature that will give clients access to other BNY Mellon businesses where they have an account. This new app continues a portal accessibility enhancement program that began earlier this year with the debut of an app that makes Liquidity DIRECT available via an iPad. An app making the portal accessible via Android smartphones is scheduled for launch later this year."
Jonathan Spirgel, executive vice president and global head of liquidity services, comments, "This new app continues a tradition of client-focused technological innovation that dates back to the debut of Liquidity DIRECT as one of the first and most robust liquidity management portals. Making investment information available at the touch of a finger and giving clients the ability to conduct transactions whenever and wherever they choose, our new app underscores our commitment to outstanding execution in support of our clients' investment process."
The release adds, "Liquidity DIRECT Mobile for iPhone is based on an investment portal that enables institutional clients to access a wide range of money market funds, invest directly in individual money market securities, and safekeep margin balances in counterparty transactions." Look for more announcements from online money market trading "portals" in the coming week. Crane Data expects several platforms to announce enhanced "transparency" initiatives and new features at the start of the annual Association for Financial Professionals (AFP) conference, which begins this Sunday in Boston.