News Archives: December, 2011

The Investment Company Institute, the trade group representing mutual fund managers, released its latest weekly "Money Market Mutual Fund Assets" report and its latest monthly "Trends in Mutual Fund Investing" for November 2011. ICI's weekly data shows money market mutual fund assets increasing for the 8th straight week; assets have now regained the declines in July related to the Treasury debt ceiling debate and they're now poised to retake the $2.7 trillion barrier, which they last saw in June 2011. Assets increased by $43 billion in November, according to ICI's monthly, and they've increased by $35.5 billion in December through Wednesday (12/28), according to Crane Data's Money Fund Intelligence Daily. Below, we also discuss yesterday's name change of M&I's Marshall Money Market Funds to the new BMO Money Market Funds. (See also our Top 5 rankings above.)

ICI's weekly release says, "Total money market mutual fund assets increased by $2.57 billion to $2.695 trillion for the week ended Wednesday, December 28.... Taxable government funds increased by $6.00 billion, taxable non-government funds decreased by $3.64 billion, and tax-exempt funds increased by $210 million. Assets of retail money market funds decreased by $770 million to $938.93 billion.... Assets of institutional money market funds increased by $3.34 billion to $1.756 trillion. Among institutional funds, taxable government money market fund assets increased by $7.09 billion to $769.43 billion, taxable non-government money market fund assets decreased by $3.70 billion to $890.86 billion, and tax-exempt fund assets decreased by $50 million to $95.62 billion."

The Institute's monthly release comments, "The combined assets of the nation's mutual funds decreased by $55.0 billion, or 0.5 percent, to $11.608 trillion in November.... Money market funds had an inflow of $43.19 billion in November, compared with an outflow of $21.87 billion in October. Funds offered primarily to institutions had an inflow of $45.10 billion. Funds offered primarily to individuals had an outflow of $1.91 billion." Year-to-date through Nov. 30, ICI shows money fund assets decreasing by $150.5 billion while bond fund assets have increased by $216.5 billion <b:>`_.

ICI's weekly series shows money fund assets down by $115 billion, or 4.1%, YTD in 2011, with Institutional assets, which account for 65.2% of the total, down by $109 billion, or 5.8%, and Retail assets down by just $5 billion, or 0.6%. Since hitting a recent low of $2.568 trillion the week ended August 3 (in the midst of the debt ceiling scare), money fund assets have rebounded by $127 billion. Treasury Institutional money funds, which now account for 12.9% of all assets, have gained $34.6 billion since Oct. 31 and Government Institutional MMFs, which now account for 14.6% of total assets, have gained $40.5 billion, according to MFI Daily.

Also yesterday, the Marshall Funds officially changed their name to the BMO Funds, reflecting M&I's (Marshall & Ilsley's) new parent company, the Bank of Montreal. An earlier SEC filing says, "On November 2, 2011, the Board of Directors of Marshall Funds, Inc. approved certain matters with respect to specific Funds. Those matters are described below with reference to the relevant Fund. In addition, the Board also approved resolutions which change the name of each Fund to delete the word "Marshall" and replace it with "BMO." The change in the name of each Fund listed above will be effective on or about December 29, 2011. The rebranding of the Funds is consistent with other actions taken by Bank of Montreal to consolidate its brand in the United States, including rebranding Harris N.A. and M&I Marshall & Ilsley Bank as BMO Harris Bank N.A."

Marshall (now BMO) is the 36th largest manager of money funds (out of 77) with $4.69 billion in assets as of Nov. 30, according to our Money Fund Intelligence XLS. The name changes will appear on our pending January 2012 issue of Money Fund Intelligence and on tomorrow's MFI Daily (where they will be labelled as "Marshall (BMO)" temporarily). The funds currently tracked by Crane Data include: Marshall Govt MMkt Fund I (MGNXX), Marshall Govt MMkt Fund Y (MGYXX), Marshall Prime MMkt Fund A (MABXX), Marshall Prime MMkt Fund I (MAIXX), Marshall Prime MMkt Fund Y (MARXX), Marshall Tax-Free MMF I (MFIXX), and Marshall Tax-Free MMF Y (MTFXX).

On Tuesday, we reprinted the first half of our December Money Fund Intelligence interview with Wells Capital Management Head of Money Markets Dave Sylvester, Wells Fargo Advantage Funds President Karla Rabusch, and Head of Money Fund Distribution Brad Marcus. Today, we excerpt from the second half.... MFI: What's your outlook for the Fed? Sylvester: I think that the Fed has put a lot of focus on transparency in their communication policies, and yet that doesn't help if the message is inconsistent and unclear. While I appreciate the independence of the different Fed governors and appreciate a robust discussion of the issues as much as the next person, it probably doesn't help Fed policy to have a number of different messages in the market place. The investing public perceives the Fed as one organization and I think they expect to hear one message.

We still think that the Fed missed a huge opportunity 12 to 24 months ago. What they should've done at that point is raised rates ... and said, 'You know what? The crisis is over. We no longer have a need for these extraordinarily low rates. We are going to keep rates low -- 50bps, 1% -- we are going to keep them accommodative to aid economic growth, but the crisis is over.' That would have been a huge boost to confidence.... Instead they reemphasize how bad the crisis is, and then wonder why consumer and investor confidence is at lows. If the Fed thinks it's bad out there, why should the investing public believe otherwise?

MFI: How are fee waivers impacting Wells' money funds? Rabusch: Like our competitors, we certainly are impacted.... However, we are fortunate to be part of a well-diversified company with revenue streams from multiple products. MFI: Is Wells Fargo committed to the business? Rabusch: Wells Fargo is wholly committed to the mutual fund business. Our money market funds are a significant component of our investment product line-up. They serve as an important investment solution for clients across the enterprise, with more than 80% of our money market fund assets held by clients with other Wells Fargo relationships.

MFI: How does Well's size help? Marcus: Being affiliated with Wells Fargo, a well-respected and admired banking organization is in itself a benefit.... Through this association, we have access to many Wells Fargo customers within our retail and institutional franchise.... On the topic of size, being a top 10 money fund provider has its own inherent advantages. Fund scale is important to many investors that desire large funds and seek a diversified product line up.

Sylvester: One of the things that a larger asset base gives us is it enables us to afford a bigger team. When regulatory changes, rating agency changes or market challenges present themselves, we can bring together the resources to address whatever the issue is. Being part of Wells Fargo also gives us a geographic breadth. We have 26 team members located in offices in Minneapolis, Charlotte, and San Francisco who are devoted exclusively to money market funds. Having multiple offices give us an unparalleled business continuity plan, in that we have three active live sites in the U.S. every day, on different power grids, subject to and isolated from different natural disasters and other challenges to business continuity. It also gives us a global reach. For example, more recently with all the concern around European credits, we have been able to reach out to Wells Capital investment staff in London.

MFI: Tell us about your investor base. Marcus: Overall our customer base has been very stable, and as a result we've managed to grow market share.... A large portion of our distribution is through Wells Fargo entities, ranging from retail to institutional. Some of our distribution partners use our money fund products in a sweep capacity, while others take a position-traded approach. I believe that our diversified client base helps with the stability of our balances. We have also focused on expanding our external relationships with portals and intermediaries. We clearly recognize the value of this distribution and fortunately we have also seen growth in this segment.

MFI: What would you like to see from regulators? Rabusch: In January of this year, we submitted a letter to the Securities and Exchange Commission providing comments on the recommendations proposed by the President's Working Group in October 2010. In that letter we provided an outline of a proposal for a capital buffer as a means of alleviating liquidity stresses on individual funds. We've maintained for some time now that allowing money market funds to set aside reserves on a voluntary basis to protect against future losses would be a viable option for reducing the risk to money market funds of runs.

Also, in May of this year we submitted a joint comment letter along with Fidelity and Charles Schwab to the SEC again expressing support for the idea of adding a NAV buffer to money market mutual funds. We believe a NAV buffer would provide enhanced resiliency and shareholder protection for the funds. As the conversation and debate over viable reforms continues, we've remained actively engaged with the Investment Company Institute and other industry firms in discussing potential solutions. Above all, prudent investment of client assets remains our top priority.

Sylvester: We believe that money fund investors see a number of benefits and advantages to investing in money funds. Money funds provide liquidity; they provide a diversification vehicle; they provide an element of professional management and scrutiny to their investments. The advantages and benefits will be there regardless of the particular form that that investment takes. We are confident that the shareholders are attracted by those benefits and advantages, and that they are going to continue to do so. So we are very confident in the future of the Industry. We think the industry will come together to meet the concerns of the regulators as they are further and better identified. Despite the near-term uncertainty, we think the outlook for the industry is very positive.

Last week, the Federal Reserve Bank of New York published a "Staff Reports" paper on "Repo and Securities Lending" which discusses the market for repurchase agreements and securities lending and calls for more disclosure and data on the sector. Written by Tobias Adrian, Brian Begalle, Adam Copeland, and Antoine Martin, the paper says, "We provide an overview of the data requirements necessary to monitor repurchase agreements (repos) and securities lending markets for the purposes of informing policymakers and researchers about firm-level and systemic risk. We start by explaining the functioning of these markets, then argue that it is crucial to understand the institutional arrangements. Data collection is currently incomplete. A comprehensive collection should include six characteristics of repo and securities lending trades at the firm level: principal amount, interest rate, collateral type, haircut, tenor, and counterparty."

The Fed staffers explain, "The markets for repurchase agreements (repos) and securities lending (sec lending) are part of the collateralized U.S. dollar-denominated money markets. While smaller than other money market instruments, the markets for repos and sec lending are crucial for the trading of fixed income securities and equities.3 Repos are especially important for allowing arbitrage in the Treasury, agency, and agency mortgage-backed securities markets, thus enhancing price discovery and market liquidity. Securities lending markets play crucial roles for allowing shorting, both in fixed income and equity markets. Given the essential role of these markets to the functioning and efficiency of the financial system, it is important to better understand and monitor repo and sec lending."

They continue, "The main purpose of this paper is to provide an overview of data requirements necessary to monitor repo and sec lending markets, and so inform policymakers and researchers about firm-level and systemic risk. One of the conclusions emerging from the paper is the need to better understand the institutional arrangements in these markets. To that end, we find that existing data sources are incomplete. More comprehensive data collection is worthwhile to both deepen our understanding of the repo and sec lending markets and also monitor firm-level and systemic risk in these markets. Specifically, we argue that six shared characteristics of repo and sec lending trades need to be collected at the firm level: 1. principal amount, 2. interest rate, 3. collateral type, 4. haircut, 5. tenor, and 6. counterparty."

The NY Fed writes, "In addition to the above, we believe there would be value in collecting data at the firm level on the instruments in which securities lending cash collateral is invested. These data would create a complete picture of the repo and sec lending trades in the market, and so allow for a deeper understanding of the institutional arrangements in these markets, and for accurate measurement of firm-level risk. Further, these data would allow for measures of the interconnectedness of the repo and sec lending markets, which allow for better gauges of the systemic risk in these markets."

Their Conclusion says, "In a recent speech on the "Implications of the Financial Crisis for Economics," Chairman Bernanke distinguished between Economic science, Economic engineering, and Economic management. Specifically, "Economic science concerns itself primarily with theoretical and empirical generalizations about the behavior of individuals, institutions, markets, and national economies. Most academic research falls in this category. Economic engineering is about the design and analysis of frameworks for achieving specific economic objectives. Examples of such frameworks are the risk-management systems of financial institutions and the financial regulatory systems of the United States and other countries. Economic management involves the operation of economic frameworks in real time--for example, in the private sector, the management of complex financial institutions or, in the public sector, the day-to-day supervision of those institutions." He goes on to add that "With that taxonomy in hand, I would argue that the recent financial crisis was more a failure of economic engineering and economic management than of what I have called economic science."

It adds, "Our argument in this paper is consistent with the Chairman's view and suggests that we need both better data and a better understanding of the institutional arrangements and the economic engineering in which key economic actors operate. The two go hand in hand. Good data helps to illuminate market functioning and can be useful to detect changes in market practices that could increase risk. A good understanding of institutional arrangements may be necessary to make sense of the patterns identified by the data and can suggest the need for new data as market infrastructure evolves."

Finally, the New York Fed paper says, "Better data is particularly important for understanding repo and securities lending markets and monitoring developments that may be indicative of stress. Such early warning signals can be the basis for policy decisions that aim at stabilizing the financial system. These are the money markets at the heart of the market based financial system. While repo markets are primarily enhancing the efficiency of fixed income markets, securities lending markets play central roles for both fixed income and equity markets. Repo and securities lending markets are especially important for allowing arbitrage in the Treasury, agency, and agency MBS markets, thus enhancing price discovery, efficiency, and market liquidity. Securities lending markets play crucial roles for allowing shorting of securities. However, both markets also perform liquidity transformation roles and are thus exposed to the drying up of liquidity. The repo market experienced such liquidity shortages in the week prior to the Bear Stearns crisis, and the securities lending portfolio in Maiden Lane II illustrates the risk in liquidity mismatches of securities lending. The differences in behavior between the tri-party and the bilateral repo market underscore this point. In the bilateral market, stress manifested itself in the form of a large and rapid increase in haircuts, creating a generalize run on the market. In the tri-party repo market, haircut barely moved but some firms experienced dramatic decrease in the amount of financing they obtained in this market. Hence, the structure of each market, and the nature of their participants, appears to have an impact on how stress manifested itself. Understanding these differences remains important."

This month, Crane Data's flagship newsletter Money Fund Intelligence interviews Wells Capital Management Head of Money Markets Dave Sylvester, Wells Fargo Advantage Funds President Karla Rabusch, and Head of Money Fund Distribution Brad Marcus. In addition to being in the forefront among the regulatory debate, the Wells Fargo Funds Management Group has also set the bar high for shareholder openness and communication, publishing a monthly market update and recently revamping its website. Our Q&A follows.

MFI: What's the biggest challenge in managing a money fund? Sylvester: In the late '80's, we were getting into 9% treasury bills, double digit commercial paper rates, and virtually no risk. Defaults were very rare; the concept of systemic risk was fortunately far in the future. If you look at it now, it is a much different equation, because we have lots of risk and almost no return. So if we are thinking about portfolio management as analyzing the trade-off between risk and return, the focus now has got to be almost exclusively on risk. I think the job of managing money fund portfolios has effectively changed from an investment-related job almost exclusively to a risk management function.

Marcus: There is a lot of information in the marketplace and one challenge that we have is making sure that customers have the most current information so that they can make informed investment decisions. One of the ways that we do that is through a number of communications, including Dave Sylvester's monthly portfolio commentary. Another way that we provide transparency is through our daily portfolio holdings.... We introduced [daily holdings] in November 2008 and we've not wavered from providing that information to our customers. These and other useful resources are available through our redesigned web site,

Sylvester: The Wells Fargo Advantage Funds provide daily disclosure to our shareholders, which has broadened their access to information regarding their fund's holdings, allowing them to make more informed investing decisions for their liquidity needs. We have a very clear investment perspective that is demonstrated in our fund's investments and overall structure. As the fund manager, I am responsible for determining the portfolio's investments and positioning. The increase in transparency allows our shareholders to fully understand our positioning and allows them to select our funds as a representation of what they are seeking in the marketplace. Money funds can be criticized by different parties for extending or for not extending credit to parts of the markets, but what the transparency allows for is for shareholders to participate in that decision process through their investing.

MFI: What are you buying now? What aren't you buying? Sylvester: It seems like the list of what we are not buying gets longer every day, and the list of what we do buy gets shorter. We are certainly not alone in that. Like a lot of funds, we have to back away from European exposure to an increasing degree. What we have seen in the past is that headline risk can evolve pretty quickly into real risk. Even as short as money funds are structured in terms of the maturity of their investments, we really have to work to be in front of that. We can't simply react to credit events after they've happened. We have to anticipate them. Credit risk in money funds has always been asymmetrically negative. By that I mean there is very little opportunity for price appreciation from the improvement in credit quality of a security held in money fund, but there has always been lots of room for price downside from credit deterioration. In this environment, the odds are stacked against us even more.

We have been trying to be cognizant of what headline risks can evolve into real risks, and, not surprisingly, the focus has been on the financial sector. As financials have come under increasing stress, we've had to move to other areas of the market -- bricks and mortar industrial-type companies, increasingly U.S. Government securities -- areas that we might not have looked at necessarily in our prime funds four or five ago. We are all playing with the same deck, but we have a deck that is getting smaller and smaller. We are at a point now where the biggest card in the deck is a four, but we are all still in the game, and we all still have to play.

MFI: Has your composition changed? Sylvester: We came into all of this with a pretty conservative structure, so we haven't had that much structural change to the portfolio. If you look at our Heritage Money Market Fund, which is our largest prime fund, we have a weighted average maturity around 21 days, and a weighted average life of about 35 days. That is down five days or so over the last year. We're running over 50%, sometimes approaching 60%, in liquidity. We are also seeing industries in the portfolio that we wouldn't have seen a year ago -- food and beverage, drug companies, and others along those lines. We've been big users of municipal variable rate demand notes in that portfolio all along, and our allocation to that sector has been growing.

MFI: You filed to liquidate some small municipal funds recently. Was this just a critical mass decision? Marcus: Yes, that is correct. Given the current and projected asset levels of the funds, it was difficult to implement the fund strategies at those levels. We believe that this decision was in the best interest of our shareholders. We remain actively engaged in the muni markets with our national and California funds, and continue to have nine investment professionals focused exclusively on this market.

MFI: How about customer concerns with Europe, etc. Are you getting calls? Marcus: Our customers' questions seem to track news articles pretty closely, so their concerns reflect what is in the news at the time. I think that customers really want to understand the issues and implications, if any, and are really looking for information. We're not getting a lot of questions on yield. Clients understand the yield environment and are looking for safety and liquidity, which we feel our funds clearly offer.... We do a particularly good job in providing customers with an overall view of our holdings and [European] exposure, which is underweighted to the rest of the market.

Moody's Investors Service released a study entitled, "Money Market Funds Continue to Shrink Exposure to European Banks. Moody's press release accompanying the report is titled, "Moody's: Money fund managers acting to avoid risk from European debt crisis." It explains, "While the European debt crisis has intensified in recent months, money market funds have not been materially affected, Moody's Investors Service says in a new report." It adds, "At the end of October the funds had no direct exposure to financial institutions in Greece, Ireland or Portugal, and only one half of one percent exposure to Spanish and Italian financial institutions combined."

Author Rory Callagy comments, "Moody's-rated prime money market funds have worked to reduce their exposure to banks in the euro area, and have accelerated this process in recent months. By further shortening the maturities of their investments, money market funds have been able to manage down European bank exposures and redeploy assets into banks elsewhere. Yet despite their actions, money market funds do continue to face serious challenges.... While we believe the supply problem is manageable, the reduction in the number of high-quality issuers is making managers' efforts to diversify their holdings challenging."

The report says, "Exposure to European banks in Moody's rated money market funds are being winnowed down both by notional dollar amount and tenor. By further shortening the maturities of their investments, money market funds have been able to manage down European bank exposures, often redeploying funds away from stressed European banking systems and into stronger European banks and banks in countries such as Canada, Australia and Japan. Looking forward, active portfolio management should continue to reduce money market funds' exposure to the euro area and strengthen their liquidity profiles, which should put them in a stronger position to navigate future market stresses."

Moody's continues, "As market conditions remain volatile and investors are increasingly sensitive to the credit conditions of banks whose debt is included in their funds' portfolios, investor redemption rates are unpredictable. However, we believe Moody's-rated funds are well-positioned, having all but eliminated exposure to banks in the most sensitive European countries, and increased their liquidity levels, reaching in many cases 36% or higher overnight liquidity."

The report adds, "That said, money market fund managers continue to face challenges related to a narrowing universe of available investments and deterioration in overall portfolio credit quality. While we believe the that the constraints on qualifying assets are manageable, the decline in the overall volume of high-quality issuers is thwarting managers' efforts to diversify their portfolios. `With declining bank credit quality negatively affecting the credit quality of their portfolios, money fund managers continue to maintain large overnight liquidity positions and short tenors on certain bank holdings in order to compensate."

Callagy also writes, "We expect market uncertainty to remain elevated until a clear plan to resolve the major elements of Europe's sovereign debt crisis is agreed upon. Although the wide spectrum of views on the risks for euro area financial institutions makes it difficult to assess the impact of market uncertainty on money market funds, the data contained in this report provide an update on money market funds' management of these risks to date."

A press release sent out this morning entitled, "Federated Investors, Inc. to Grow Global Footprint with Planned Acquisition of Prime Rate Capital Management, LLP" and subtitled, "London-based Prime Rate Capital specializes in cash management products," says, "Federated Investors, Inc., one of the largest investment managers in the United States, reached an agreement to acquire Prime Rate Capital Management, LLP, a United Kingdom-based provider of institutional liquidity and fixed income products, from Matrix Group Limited. Prime Rate Capital Management's family of UCITS products includes Prime Rate Sterling Liquidity Fund, Prime Rate Euro Liquidity Fund and Prime Rate US Dollar Liquidity Fund, among other products. Financial terms of the agreement were not disclosed." (The Prime Rate Liquidity funds are tracked by our Money Fund Intelligence International, which covers "offshore" money market funds. See Crane Data's Dec. 19 News, "Fitch Rates Chinese Harvest MMF AAA, Places Prime Rate on Review".)

Federated's release continues, "Prime Rate Capital Management's AAA-rated liquidity funds, known as Qualifying Money Market Funds, serve the corporate and institutional market. The funds, totaling approximately GBP 1.5 billion ($2.4 billion USD) in assets, are rated AAA by both Fitch Ratings and Standard & Poor's."

Gordon Ceresino, president of Federated International Management Limited, comments, "The agreement will incorporate Prime Rate Capital's experienced team, insightful processes and excellence in liquidity management into Federated's money market business -- with euro, sterling and dollar-denominated UCITS products positioning us for future growth. After adding an additional sales person in our Frankfurt office earlier this year, Federated continues to seek opportunities to expand our global business in Europe and around the world."

The release adds, "With $189 billion in AAA-rated money market funds, Federated is the second-largest U.S. manager of money funds of the highest credit quality. Federated has 12% of the U.S. market share of AAA-rated money market funds, according to iMoneyNet."

Dennis Gepp, managing director and chief investment officer of Prime Rate Capital, explains, "We opted to join Federated because of the company's reputation as a premier global liquidity manager since the 1970s. Our clients and shareholders in the funds can be confident in Federated's stewardship and credit process, as it is one of the world's largest and most experienced managers of money market products."

David Royds, chairman and co-founder of Matrix Group adds, "Since its launch in 2007 we have very successfully built Prime Rate into one of the UK's fastest-growing and best-performing institutional cash management businesses, and this transaction represents an important milestone for Matrix and Prime Rate."

Finally, the release says, "The transaction is subject to review and approval by regulators, including the UK Financial Services Authority, as well as satisfaction of other customary and agreed-upon conditions, and is expected to be completed during the first quarter of 2012. It is intended that Prime Rate Capital Management's headquarters will remain in London, with the current investment management team operating as a subsidiary of Federated Holdings (UK) Limited, a group company of Federated Investors, Inc." (See also, "Fitch affirms 3 Prime Rate money market funds at 'AAAmmf' on Federated acquisition.")

As the SEC prepares to issue a second Money Market Fund Reform Proposal in "very short order" (see Mary Schapiro's recent speech), both lobbying and a flurry of comment letters have appeared following a lull in the debate. On the SEC's President's Working Group Report on Money Market Fund Reform (Request for Comment) web page, one of the recent additions comes from George Hagerman, CEO pf Cachematrix Holdings LLC, a company that provides software to online money fund trading portals. Hagerman's letter says, "From recent remarks at industry conferences, we understand that the U.S. Securities and Exchange Commission continues to evaluate structural reform of money market funds, including the options of mandating a floating net asset value and the use of capital buffers.... Cachematrix believes that the stable share price is a seminal feature of money market funds and that money market funds are a central feature of many cash management programs. We believe that the proposal to mandate a floating share price, if adopted, would result in dramatic and adverse changes to the money market fund industry with many unintended consequences, as discussed below. We believe that a comprehensive and fully informed assessment of the consequences of such a proposal, and the costs of implementation, is important to any regulatory reform effort."

He continues, "Money market funds represent a nearly $3 trillion sector, and serve as an important vehicle for corporate treasurers and other short-term investors in the daily cash management of millions of dollars of brokerage, trust and corporate accounts. The stable value of money market funds is an absolutely critical feature to such investors who place a high premium on stability and preservation of capital. Institutional money managers and trustees rely heavily on money market funds for the temporary investment of cash balances. Moreover, their systems, as well as the systems of the many service providers that support cash management functions, have been structured and calibrated on the assumption of a stable share price. If the SEC were to mandate a floating share price, money market funds would no longer meet the needs of certain of these investors, and currently there does not appear to be a viable alternative product to fill that gap."

Hagerman explains, "Second, even if a floating share price product would continue to serve the needs of certain of these investors, mandating a floating share price would wreak havoc on end users. A stable share price is critical to same-day and next-day processing, shortened settlement times, float management, and mitigation of counterparty risk among firms. In addition, an entire industry has programmed accounting, trading and settlement systems based on a stable share price. The cost for each bank to retool their sub-accounting systems to accommodate a fluctuating NAV could be in the millions of dollars. This does not take into account the costs that each bank would then pass on to the thousands of corporations that use money market trading systems."

He writes, "Third, individual investors would be similarly affected. Many money market fund sponsors offer, and many retail investors use, money market products in conjunction with other products such as checks, debit cards or bill-paying services. These uses would be significantly impaired in a floating share price environment. Over 30 million investors, with investments in excess of $2.6 trillion, have chosen money market funds over bank deposits for convenience, efficiency, predictability and yield. Notwithstanding the events following the Lehman bankruptcy, many investors continue to view money market funds as having less risk than bank deposits in excess of FDIC insurance limits. Over the many years that money market funds have existed, more than 2,800 banks have failed at a cost of over $188 billion to the federal government, while only two money market funds were unable to meet shareholder redemption requests at 100 cents on the dollar (one paid 96 cents and the other over 99 cents on the dollar to its shareholders) at no cost whatsoever to taxpayers."

Hagerman says, "Fourth, dramatic changes to the structure of money market funds could impair the market for other types of money market products. Stable $1.00 NAV money market funds are extremely important to investors in many types of short-term investment products, and many products have therefore been specifically designed to meet the requirements of Rule 2a-7. These products include, without limitation, commercial paper, variable rate demand instruments, inverse floating rate instruments and, more recently, variable rate demand preferred stock. To the extent that a floating share price makes money market funds less attractive and results in outflows from this product, there will likewise be a decrease in demand in other types of money market instruments, thereby disrupting short-term credit markets and increasing systemic risk."

He adds, "Finally, we note that many fund groups currently offer floating NAV fund products. These products also play an important, but different, role than stable price products. They serve different investor types with different needs than corporate treasurers and trust managers that place a premium on stability of share price. We believe that the fact that traditional money market funds have on balance retained market share since the third quarter of 2008, notwithstanding the relatively poor yields being offered, is an indication that money markets funds are valued for all the features described above, including stability, convenience and predictable cash flows."

Finally, Hagerman concludes, "We strongly oppose any proposal to mandate a floating NAV for all of the reasons set forth above. We believe that any such proposal would dramatically change the dynamics of world money markets, and could have severe adverse repercussions, including many unintended consequences. We believe that Rule 2a-7, which provides the regulatory framework for money market funds, remains sound, and that reform efforts should not be focused on creating a regulatory regime that fundamentally changes this landscape. We strongly support regulatory efforts to improve transparency and reporting within the money market space, as well as regulatory efforts to mitigate risk and improve liquidity within the existing framework."

The U.S. Chamber of Commerce's Center for Capital Markets Competitiveness continues to step up its lobbying against the floating NAV option for money market mutual funds. The CCMC distributed a statement yesterday entitled, "New Regulations Impacting Corporate Treasury Activities: Money Market Fund Reform," which says, "Last month, SEC Chairman Mary Schapiro singled out money market fund reform at a conference in Washington, making it clear that regulatory changes to money market funds are coming. But just last week newly confirmed SEC Commissioner Dan Gallagher declared at a Chamber event that "We cannot know what risks money market funds pose unless ... we have a clearer understanding of the effects of the commission's 2010 money market reforms. Any rulemaking in this space could be premature and possibly unnecessary." His message reiterated a key point we made in a November 17 letter to the SEC that there first needs to be a study to understand what, if any, risks remain from last year's reforms."

The Chamber continues, "As Commissioner Gallagher is only one of five SEC commissioners, we strongly support his views and encourage his fellow commissioners and other financial regulators to take a step back and pinpoint what they are trying to solve -- based on empirical evidence. And before sealing the fate of money market funds, they should try to grasp the very important role money market funds play in meeting the business community's short-term investing and financing needs.... Many of us don't realize that money market funds provide a vital source of financing to businesses and state and local governments through the funds' purchase of corporate commercial paper (a popular short term debt instrument) and municipal bonds -- thus, redistributing much needed capital into the economy. That's why we put together a simple, easy to read brochure that explains how they help businesses manage cash flow."

The Chamber adds, "Additionally, we are hosting a conference call on Wednesday, December 21 to discuss money market fund reforms and other regulatory initiatives that could impact corporate treasurers' ability to raise capital. For example, regulators are looking to finalize money market fund reform and the Volcker Rule in the first quarter in 2012. Join our conference call to learn how you and your company can get involved in the debate. For more information, contact Kristin Angus ( or 202-463-5502)." (To access the call, entitled, "New Regulations Impacting Corporate Treasury Activities," dial 888-461-2011; Conference ID: 7524346.)

Fitch Ratings put out a press release entitled, "Global Money Funds Defensively Positioned Against Market and Sovereign Challenges in 2012," which says, "Fitch Ratings says in a new report that its outlook for Fitch-rated money market funds (MMFs) is stable for 2012, reflecting conservative portfolio management, which leaves MMFs reasonably well-positioned to manage ongoing credit, liquidity and interest rate challenges in 2012. The Stable Outlook for MMF ratings indicates a limited likelihood of significant ratings changes over the next 12 months. Nevertheless, Fitch considers the MMF industry is facing material challenges including volatile credit markets, eurozone uncertainties, historically low interest rates, the lack of asset supply and ongoing regulatory reforms."

The release continues, "Fitch's outlook incorporates its expectation that MMF managers will continue to defensively manage their portfolios and adjust eligible issuers as needed. However, Fitch notes that the outlook for MMFs remains dependent on the credit conditions of financial issuers globally, given the lack of issuance in the non-financial sector. In response to the eurozone crisis, US MMFs have reduced or eliminated their exposure to European financial institutions while also increasing available liquidity and holdings of US Treasuries. Fitch expects this defensive credit stance to continue in 2012."

Finally, they add, "Fitch expects European MMFs will maintain large short-term primary liquidity in their portfolios against recession and eurozone sovereign risks. To limit credit risks, European MMFs are likely to stay focused on the most highly-rated financial institutions, while seeking to increase high-quality nonfinancial assets and secured investments such as repurchase agreements or high-quality asset-backed commercial papers. With potential regulatory reforms likely in 2012, especially in the US, Fitch will consider the overall implications relative to its MMF ratings criteria and investor expectations."

Fitch Ratings recently posted a press releases on Reuters entitled, "Fitch Rates Harvest Prime Liquidity Money Market Fund", which announced a AAAmmf rating for a Chinese money market fund. U.K. website Money Marketing also writes "Fitch puts Matrix-owned funds on review due to firm's financial resources". The first release says, "Fitch Ratings has assigned Harvest Prime Liquidity Money Market Fund, a regulated Chinese money market fund managed by Harvest Fund Management Co., Ltd. (Harvest) a 'AAAmmf(chn)' rating. The fund was launched today through an IPO and has not yet achieved its expected size and diversification. The fund has therefore been rated based on the prospectus, and the investment guidelines and model portfolio set out by Harvest."

It explains, "The main drivers for the rating are, based upon investment guidelines: The portfolio's overall expected credit quality and diversification, Short maturity profile, Minimal exposure to interest rate and spread risks, Strong overnight and one-week liquidity profiles, and The capabilities and resources of Harvest as investment manager. The 'AAAmmf (chn)' National money market fund rating reflects the fund's expected strong capacity to achieve the investment objectives of preserving principal and providing shareholder liquidity through limiting credit, market and liquidity risk."

Fitch adds, "In line with Fitch's 'National Scale Money Market Fund Rating Criteria and expectations for a 'AAAmmf (chn)' rating, the fund seeks to maintain a high credit quality by investing exclusively in securities/counterparties with a minimum international rating of 'A-', or of comparable credit quality by other global credit rating agencies. Fitch expects the vast majority of investments will comprise sovereign bonds, policy bank bonds and exchange traded repos.... Should the sovereign's international long-term foreign currency rating be downgraded, it is likely that Harvest Prime Liquidity Fund's National Money Market Fund Rating would not be downgraded as it could continue to represent the lowest default risk available in China, in line with Fitch's national scale rating approach."

The ratings agency continues, "The fund will seek to limit its interest rate and spread risk by limiting its weighted average maturity to reset date (WAMr) to 75 days. The weighted average final maturity (WAMf), a measure of credit spread risk, is also targeted at 75 days, and therefore below the 120 days that is consistent with Fitch's 'AAAmmf(xxx)' national scale money market fund rating criteria. The objective of the Harvest Prime liquidity Money Market Fund is to provide capital stability, liquidity and income through investment in a portfolio of high credit quality money market instruments and short-term bonds."

Fitch adds, "Harvest is a Beijing-based sino-foreign fund management company offering a range of funds and services. As at 30 September 2011, Harvest had CNY214bn assets under management (USD33.5bn; EUR24.6bn) and is ranked second largest mutual fund manager in China. Harvest is owned by China Credit Trust Co., Ltd. (40 %), a state owned financial services company, by Lixin Investment Co., Ltd. (30%), a private non-listed investment company and its foreign shareholder Deutsche Asset Management (Asia) Limited (30%). Fitch views Harvest's investment management capabilities, operational controls, financial and resource commitments and compliance procedures as consistent with the 'AAAmmf(chn)' National MMF ratings."

An article citing Fitch's review of Prime Rate funds says, "Fitch has placed three institutional money market funds managed by Matrix-owned Prime Rate Capital Management on review due to its financial resources. The ratings agency has placed the prime rate euro liquidity fund, prime rate sterling liquidity fund and US dollar liquidity fund that are rated AAA, on negative rating watch. This means the investment is placed on a review that could result in a downgrade."

The Money Marketing piece quotes a statement from Fitch saying, "The sponsor's financial resources are no longer consistent with a 'AAAmmf' rating, even after taking into consideration the funds' conservative investment guidelines. The review does not reflect any negative development in the funds' investment portfolios, which continue to be conservatively managed and fully meet the 'AAAmmf' portfolio guidelines set forth in Fitch's rating criteria for money market funds."

Prime Rate is the 18th largest out of 19 managers tracked by Crane Data's Money Fund Intelligence International with $2.4 billion in US Dollar, Euro and Sterling money funds. The manager is also a memeber of the London-based Institutional Money Market Funds Association. The company's flagship Sterling fund, Prime Rate Sterling Liquidity Fund, has lost L553 to L1.235 billion in the week ended Dec. 15.

On Wednesday, new Securities and Exchange Commission Commissioner Daniel Gallagher gave a speech entitled, "SEC Reform After Dodd-Frank and the Financial Crisis" at the U.S. Chamber of Commerce, questioning the need for additional and immediate money fund regulation. He says, "A very high profile event in the crisis separate from the bailout of Bear Stearns and AIG, but intimately tied up with the problem of too-big-to-fail, was the breaking of the buck by the Reserve Primary Fund, representing only the second time in history that investors have lost money in a money market mutual fund. Despite the fact that the Dodd-Frank Act did not address money market funds, these funds have emerged as an issue in the past month or so. Indeed, in an early November speech, the Chairman explicitly stated her intent to "issue a proposal in very short order" Since then, I have spent a considerable amount of time during my first 26 business days as a Commissioner focused on this important issue. And, based on what I have learned to date, I have questions about many of the currently discussed reform options."

Gallagher explains, "Before I comment on some of the specific proposals currently on the table, I want to step back for a moment and express my more general concerns with the push towards rulemaking in this area. In particular, I want to make sure that we keep in mind two important and related questions as we proceed. First, for what specific problems or risks are we trying to solve? And second, do we have the necessary data that will allow us to regulate in a meaningful and effective way? Let me address the first question. As I said earlier, I do not believe that it should be -- nor can it be -- the goal of the Commission to ensure that securities products are risk-free. Of course we must strive to prevent fraudulent and manipulative practices. But when the risks of an entirely legal investment are adequately disclosed, it is not the Commission's job to forestall the possibility of loss. To put a finer point on it, in light of the extensive disclosures regarding the possibility of loss, money market funds should not be treated by investors or by regulators as providing the surety of federally insured demand deposits."

He continues, "So what is prompting this urgency to reform money market funds? What are the particular risks that money market funds, as currently constituted, pose to investors and to the capital markets? What problem are we solving here? I'll admit that I just posed a bit of a trick question. We cannot know what risks money market funds pose unless -- and this brings me to my second point -- we have a clearer understanding of the effects of the Commission's 2010 money market reforms. For some reason, much of the discussion surrounding the current need for money market reform sweeps aside the fact that the Commission has already responded to the 2008 crisis by making significant changes to Rule 2a-7. Notably, those amendments only became effective in May 2010. Without an adequate understanding of the current state of play, we are handicapped in our effort to define existing risks and measure their magnitude. Nor can we simply hand-wave and speak vaguely of addressing "systemic risk" or some other kind of protean problem. The risks and issues justifying a rulemaking must be specifically and thoughtfully defined in relation to the Commission's mission. As a reminder, the Commission’s mandate is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. We are not expected to regulate with other goals in mind."

Gallagher comments, "Given my belief that any rulemaking in this space could be premature, and possibly unnecessary, I thought I'd spend just a few minutes on the current proposals being bandied about. Although I am keeping an open mind about all options in this space, and am fully aware that the devil is in the details of many of these proposals, I do have some initial reactions. First, I am hesitant about any form of so-called "capital" requirement, whether it takes the form of a "buffer" or of an actual capital requirement similar to those imposed on banks. Although I am not opposed to a bank-like capital requirement in principle, it is my understanding that the level of capital that would be required to legitimately backstop the funds would effectively end the industry. And I have doubts that a smaller capital buffer that accrues over time would be sufficient to protect investors and funds in an actual crisis. I am concerned that it could simply create the illusion of protection, and further obscure the well-disclosed risk of investing in money market funds."

He continues, "I will note, however, that at least one industry participant has suggested the possibility of a stand-alone redemption fee. Although the details of the imposition of such a fee would need to be carefully considered, this suggestion avoids my worries about capital requirements. This minimal approach does not set up false expectations of capital protection, externalizes the costs of redemptions, and could be part of an orderly process to wind down funds when necessary. And, a meaningful redemption fee may cause a healthy process of self-selection among investors that could cull out those more likely to "run" in a time of stress. But despite my initial positive reaction to the notion of a redemption fee standing alone, grafting the fee onto a capital buffer regime will not assuage my concerns with such a capital requirement. Indeed, a combined approach retains all the problems of any capital solution, unless something significant is done to manage investor expectations regarding the level of protection provided."

Gallagher goes on, "Second, I acknowledge that a move to a floating NAV would work a profound change to the money market fund industry as we recognize it today. This proposal has its ardent supporters and its impassioned critics. I believe that it is an important option to keep on the table and to subject to further study and consideration. For example, it would be important to understand the effect of such a change on the commercial paper market and bank deposits."

He adds, "Finally, I should make explicit what I hope you have already gleaned from my statements thus far. If the Commission moves forward with a proposal, the option of doing nothing until we have seriously analyzed the impact of last year's reforms must be given serious consideration. By pre-judging the outcome of this rulemaking -- that something, anything must be done as soon as possible, never mind the consequences -- the Commission runs the danger of skewing its analysis of any proposed regulatory changes. Any analysis we undertake will necessarily be flawed if we lack a rigorous sense of the current baseline against which to measure the effects of any proposed changes. Moreover, we have a legal obligation to thoroughly consider all reasonable alternatives, and that includes the alternative of doing nothing beyond those significant changes the Commission has undertaken just last year."

Crane Data's latest Money Fund Portfolio Holdings with data as of Nov. 30, 2011, show a continued reduction in French-related securities and a jump in Treasury securities. France now represents less than 5% of taxable money fund holdings (4.3%) with no Issuers among the 20 largest, while Treasury securities now account for almost 20% of all holdings. Money funds also now hold over 40% of their assets in securities maturing in 7 days or less as of month-end November holdings data. Below, we discuss more excerpts from Crane's new "Reports & Pivot Tables" addition to its MF Portfolio Holdings dataset. We also quote from the Investment Company Institute's posting late yesterday, "Money Market Funds Continued to Reduce Eurozone Holdings in November."

According to our latest Issuer rankings, the US Treasury remains by far the largest holding in money funds with $457.8 billion, or 19.7% of assets, which is up by $31.2 billion from month-end October. Federal Home Loan Bank ranks second with $152.4 billion, or 6.5%; Barclays Bank ranks third with $107.9B, or 4.6%; `Deutsche Bank AG ranks fourth with $91.6B, or 3.9%; Federal Home Loan Mortgage Co ranks fifth with $84.4B, or 3.6%; and `Federal National Mortgage Association ranks sixth with $80.6B, or 3.5%. Rounding out the top 10 are: Bank of America ($63.5B, 2.7%), Credit Suisse ($63.4B, 2.7%), RBS ($55.5B, 2.4%), and Citi ($50.6B, 2.2%).

The 11th through 25th largest issuers, according to Crane's Money Fund Portfolio Holdings for November 30, 2011, are: RBC ($49.1 billion), Australia & New Zealand Banking Group Ltd ($47.5B), JP Morgan ($45.9B), HSBC ($45.6B), Bank of Nova Scotia ($45.3B), UBS AG ($40.6B), Rabobank ($39.5B), Bank of Tokyo-Mitsubishi UFJ Ltd ($38.8B), Sumitomo Mitsui Banking Co ($36.3B), Westpac Banking Co ($35.9B), BNP Paribas ($34.4B), Goldman Sachs ($33.5B), Svenska Handelsbanken ($32.2B), Societe Generale ($32.1B), and Toronto-Dominion Bank ($26.4B).

ICI published a study, "Money Market Funds Continued to Reduce Eurozone Holdings in November," which analyzes Crane Data's most recent MF Holdings. They write, "Over the last year, U.S. money market funds have significantly reduced their holdings of debt securities issued by banks and other businesses headquartered in the 17 countries that use the euro as their currency. That trend continued in November."

The update, written by Economists Sean Collins and Chris Plantier, explains, "For the first time, ICI is issuing estimates of money market funds' European holdings in dollar terms. We estimate the total exposure of money market funds (including prime and government and agency funds) to European-domiciled issuers to be less than $800 billion in November. However, as explained below, a sizable fraction of those assets represents repurchase agreements with the U.S. operations of European-headquartered banks, and another portion represents securities issued by entities in European countries outside the eurozone. Taking these factors into account, we estimate that U.S. prime money market funds' holdings of eurozone securities fell to $204 billion by the end of November."

ICI continues, "As we have discussed in previous posts, portfolio managers of U.S. money market funds have effectively zeroed out their direct holdings in the countries most affected by the eurozone government debt crisis. These funds have also gradually trimmed their holdings of issuers in other eurozone countries that might be negatively affected by the debt crisis. As a result of these portfolio adjustments, U.S. money market funds hold virtually no securities issued in Italy, Spain, or the other eurozone "periphery" countries."

They add, "Funds' exposure to French-domiciled banks continued to fall sharply in November. Prime money market funds reduced their holdings of French issuers to 4.1 percent of their assets under management in November, down from 7.3 percent in October and the peak level of 15.4 percent in May. As the chart shows, holdings of non-French eurozone issuers remained roughly steady at 10.1 percent in November. Altogether, securities of eurozone issuers accounted for 14.2 percent of total assets of U.S. prime money market funds at the end of November, down from 17.4 percent in October and 31.1 percent in May."

Finally, the ICI piece says, "An overall decline in prime money market fund assets since May accounts for some of the shift away from the eurozone. From May to November, prime fund assets declined by $214 billion. During that period, prime funds' holdings of French assets fell by an estimated $200 billion, while other eurozone assets declined by an estimated $109 billion. At the same time, money market funds have increased their holdings of European issuers outside the eurozone. In November, the top three European countries for U.S. prime money market funds' holdings were the UK, Sweden, and Switzerland, none of which use the euro as their currency."

Recently, Comerica Securities' online money market fund trading system, Maestro, began providing clients access to money fund news, fund statistics and portfolio holdings information from Crane Data LLC. Maestro users may now view issuer, country and concentrations of fund holdings, as well as "shadow" NAVs and performance statistics, via a direct link and seamless login to Crane Data's premium Money Fund Wisdom website. Over the past year, a number of online money market trading portals have been adding content, especially transparency and money fund portfolio holdings information and analysis. While Crane Data has been providing its monthly Money Fund Portfolio Holdings to a number of these, this deal with Comerica represents the first instance of a portal giving its users access to Crane Data's entire product suite. (Click here for Maestro and click here for Crane Data's Resources page with Portal listings.)

Crane Data President Peter Crane comments, "We're thrilled to partner with Comerica Securities and to offer their users access to our high-end money fund information product suite. Online money market trading portals have been steadily enhancing their content and offering users more transparency and analytics, including access to money fund portfolio holdings. This deal will allow Comerica's users to perform extensive due diligence and analysis on the available universe of money funds." (Note: Crane Data released its latest set of Money Fund Portfolio Holdings, with data as of Nov. 30, yesterday.) In other "portal" news, see the press release, "ICD Launched Middle East Operations.")

In other news, the Federal Reserve issued its latest FOMC statement yesterday, saying, "Information received since the Federal Open Market Committee met in November suggests that the economy has been expanding moderately, notwithstanding some apparent slowing in global growth. While indicators point to some improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but business fixed investment appears to be increasing less rapidly and the housing sector remains depressed. Inflation has moderated since earlier in the year, and longer-term inflation expectations have remained stable."

The Fed continues, "Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations."

They add, "To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate."

Finally, the Fed says, "The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability."

The Investment Company Institute's Chief Economist Brian Reid wrote a "Viewpoints" piece last week entitled, "Time to Stamp Out the Confusion Around 'Shadow Banking', which attempts to respond to some recent criticisms of money market funds and other allegedly unregulated sectors outside of banking. Reid writes, "In the United States, money market funds are governed by tight risk-limiting rules, rules that have become considerably tighter since 2008. The Securities and Exchange Commission (SEC) has indicated further changes are forthcoming. Yet some recent commentary and reporting on money market funds misses this fact, substituting instead the vague notion that these funds lurk in a seemingly unregulated world of "shadow banking," an epithet used to debase a large group of nonbank financial intermediaries and activities. A recent Wall Street Journal column, for example, characterized money market funds as "one of the riskiest participants in shadow banking." Last May, a Reuters story described shadow banking as "a network of loosely regulated private equity, hedge, and money funds that together are large enough to topple the global financial system."

Reid explains, "Money market funds can be characterized in many ways, but "loosely regulated" is not one of them. These funds are among the most strictly regulated financial products offered to American investors. In fact, one of the SEC's most significant actions in 2010 was a comprehensive set of changes to the rule governing money market funds, raising standards for credit quality and transparency, shortening the average maturities of their portfolios, and requiring significant minimum levels of liquidity."

He continues, "Such misperceptions can lead in turn to outright mistakes regarding money market funds and other nonbank financial institutions. The Wall Street Journal story cited above, for example, erroneously states that money market funds have "had outsize exposure to European sovereign debt." Yet because of the risk-limiting rules that money market funds follow, they do not invest in securities denominated in foreign currencies. Money market funds thus do not hold European sovereign debt."

Reid tells us, "So how are these misperceptions arising? A major source of confusion is a paper, "Shadow Banking: Scoping the Issues," issued by the Financial Stability Board (FSB), a global consultative body that brings together financial authorities from around the world. This paper defines shadow banking broadly as "the system of credit intermediation that involves entities and activities outside the regular banking system."

He adds, "While we salute the FSB's search for ways to strengthen the global financial system, its analysis and the reporting and commentary that flow out of it discuss the issues in broad generalizations. For example, the FSB's most recent paper provides no details on how they define or measure the "shadow banking system," precluding outside researchers from verifying its analysis. Indeed, the FSB's very use of the term "shadow bank" implies that investing and lending outside of the banking system is inherently destabilizing and should regulated more like banks. As ICI discussed in detailed comments to the FSB, here's why this thinking is wrong."

Reid explains, "Banking and capital markets are both highly regulated and have successfully coexisted for centuries. In the United States, both have played critical roles in gathering funds from savers and lending them to borrowers. Capital markets provide an important supply of credit to governments, businesses, and individuals. And direct lending from the capital markets has increased the availability and reduced the cost of credit for these borrowers. Robust capital markets add resiliency to the financial system, because the capital markets sometimes weather times of crisis better than banks. At a SEC roundtable in May, former Federal Reserve Chairman Paul A. Volcker unwittingly underscored this point when he suggested the 650 U.S. money market funds should be turned into banks. "This country could use 650 more banks," Mr. Volcker exclaimed. "We just lost about 1,000 during the crisis!"

The Viewpoint continues, "Moving more financial activity into the banking system will concentrate risks and make the financial system more vulnerable. As the record of the last four years has shown, and as argued forcefully in a recent commentary by Peter Wallison of the American Enterprise Institute, banks following a common set of regulations tend to end up with portfolios carrying a common set of risks -- mortgage-backed securities, for example, or European sovereign debt. When those borrowers are hit by an economic shock, banks' concentration in those assets puts the entire financial system at risk. Credit intermediation through the capital markets diversifies risks and reduces system-wide threats. Regulating more institutions like banks will only increase the amplitude of future crises when shocks occur."

Finally, Reid says, "Regulators who miss or ignore these realities risk sowing confusion that undermines public understanding of the vital roles that different institutions play in the financial markets. And that confusion can cause problems as it seeps into the public discourse. This confusion also detracts from financial reform efforts. Bodies like the FSB will always need to find ways to make markets and market participants better able to withstand shocks. That task is a tough one, and it demands the ability to focus precisely on key areas of concern. The term "shadow banking" falls short of this precision."

In just over a month, we will host our second annual Crane's Money Fund University at The Hyatt Regency Boston, Jan. 19-20, 2012. Money Fund University was designed to offer attendees an affordable and comprehensive two day, "basic training" course on money market mutual funds, educating attendees on the history of money funds, interest rates, Rule 2a-7, ratings, rankings, money market instruments such as commercial paper and repo, and portfolio construction and credit analysis. With our Boston, we will expand the focus on regulations, adding a second session on recent Money Market Fund Reforms. Please note that this Friday (12/16) is the last day that our discounted hotel rate is available.

Day One of the 2012 MFU agenda includes: Welcome to Money Fund University, History & Current State of Money Market Mutual Funds with Peter Crane, President & Publisher, Crane Data and Sean Collins, Sr. Economist, Investment Company Institute; Interest Rate Basics & Money Fund Math with Brian Smedley, U.S. Rates, Bank of America Merrill Lynch; The Federal Reserve & Money Markets with Joseph Abate, Director F-I Strategy, Barclays Capital and Michael Cloherty, Head of Rates Strategy, RBC Capital Markets; Money Fund Regulations: 2a-7 Basics & History with John Hunt, Partner, McLaughlin & Hunt LLP and Joan Swirsky, Of Counsel, Stradley Ronan; Regulations II: Interpretations & Recent Changes with Stephen Keen, Partner, Reed Smith and Joan Swirsky; and, Operations: Fund Admin & The Board's Role with Brian Curran, Vice President, BNY Mellon and Susan Wyderko, Exec. Director, Mutual Fund Directors Forum.

Day Two's agenda includes: Instruments of the Money Markets Intro with Alex Roever, Managing Director, J.P. Morgan Securities; Instruments: Repurchase Agreements with Ellie Boldenow, Executive Director, J.P. Morgan Securities; Instruments: Treasuries & Govt Agencies with Sue Hill, Senior Portfolio Manager, Federated Investors and Sal Ursida, Partner, G.X. Clarke & Co.; Instruments: Commercial Paper & ABCP with Rob Crowe and Jean-Luc Sinniger of Citi Global Markets; Instruments: CDs, TDs & Bank Debt with Garret Sloan, F-I Strategist, Wells Fargo Securities and Dave Lummis, President, J.M. Lummis & Co.; Instruments of the Money Markets: Tax-Exempt Securities, VRDNs, TOBs & Muni Bonds with James Randazzo, Senior PM, Wells Capital Management and Ben Schuler, Structured Muni Analyst, Fidelity Investments; Portfolio Management Strategies & Basics with Jeff St. Peters, Portfolio Manager, SSgA and Michael Markowitz, MD & Head STFI, Guggenheim Partners; Credit Analysis & Approved Lists with Bob Piepenburg, Director/Credit Analyst, BofA Global Capital and Jacob Weinstein, Sr. Portfolio Analyst, Fidelity; and, Ratings, Monitoring & Risk with Joel Friedman, Senior Director, Standard & Poor's Viktoria Baklanova, Senior Director, Fitch Ratings and Crane Data's Peter Crane.

New portfolio managers, analysts, investors, issuers, service providers, and anyone interested in expanding their knowledge of "cash" investing should benefit from our comprehensive program. Even experienced professionals should enjoy a refresher course and the opportunity to interact with peers in an informal setting. Attendee registration for Crane's Money Fund University is $500. Exhibit space is $2,000 and sponsorship opportunities are $3K, $4.5K, and $5K. A small block of rooms have been reserved at the Hyatt Regency Boston. The conference negotiated rate of $189 plus tax (14.45% currently) is available through December, 16th.

We'd like to thank our current sponsors -- Fitch Ratings, G.X. Clarke & Co., Fidelity Investments, Invesco, Investortools, and Standard & Poor's -- for their support, and we look forward to seeing you in Boston next month. E-mail Pete for the latest brochure or visit to register or for more details.

Crane Data has also published the preliminary agenda and is accepting registrations for its largest Money Fund Symposium conference, which will be held June 20-22, 2012, at the Westin in Pittsburgh, Pa.. (See for details.) Finally, we also plan on joining forces with German conference producer IQPC to support the launch of European Money Fund Summit, an event focusing on money fund regulations, trends and standards in Europe tentatively scheduled for Nov. 14-16, 2012, in Frankfurt, Germany. Watch for more details in coming months.

Money market mutual fund assets rose for the fifth straight week, increasing $55.3 billion, or 2.1% since the week ended Nov. 2. ICI's latest weekly release says, "Total money market mutual fund assets increased by $25.26 billion to $2.678 trillion for the week ended Wednesday, December 7, the Investment Company Institute reported today. Year-to-date, money fund assets have cut their losses to $133 billion, or -4.7%. While the lion's share of asset increases since the start of November have gone into Government funds (including Treasuries), which have jumped by $46.8 billion, Prime funds have also seen increased lately (up $6.5 billion).

ICI's report says, "Taxable government funds increased by $7.51 billion, taxable non-government funds increased by $11.61 billion, and tax-exempt funds increased by $6.13 billion. Assets of retail money market funds increased by $5.94 billion to $936.54 billion.... Assets of institutional money market funds increased by $19.31 billion to $1.741 trillion. Among institutional funds, taxable government [prime] money market fund assets increased by $6.53 billion to $743.86 billion, taxable non-government money market fund assets increased by $9.20 billion to $901.16 billion, and tax-exempt fund assets increased by $3.58 billion to $96.16 billion."

In other news, J.P. Morgan Securities LLC released an "Update on prime money fund holdings for November 2011 yesterday afternoon. Analysts Alex Roever, Teresa Ho and Chong Sin write, "In November, prime money market funds saw the first month of net inflows since April. Prime funds gained $4bn of assets in November after experiencing about $210bn in outflows between May and October. Exposures to global bank credit across CP/CD, ABCP, repo, and other notes increased by $28bn month-over-month to $1.05tn. CP/CD and ABCP exposures declined by a combined $26bn which was offset by an increase of $55bn across repo and other notes, the majority of which are time deposits but also include floating rate notes, medium-term notes, and other short-term notes."

They continue, "Despite increased exposure to global bank credit, prime funds continued to trim exposure to Eurozone banks to the tune of $35bn, $25bn of which came off in CP/CD. Practically all of the reduction came from reductions in French bank credits with CP/CD exposures declining by $30bn, ABCP by $6bn, and repo and other notes declining by $5bn. Total French bank credit exposures stood at $44bn at the end of November. Dutch banks also saw slight declines across CP/CD and ABCP by $4bn, which was offset by increases in repo and other notes." Crane Data will publish its cut of November 30 Money Fund Portfolio Holdings early next week. We expect our data to also show a continued gradual decline in European holdings too.

Bloomberg also reports that "U.S. Money Funds Cut French Bank Debt by 68%." They write, "The eight largest prime U.S. money-market mutual funds cut holdings in French banks by 68 percent in November, shifting investments to Swiss, Swedish, Canadian and Japanese banks. French bank holdings declined by $11.7 billion to $5.56 billion, according to an analysis of fund disclosures by the Bloomberg Risk newsletter. The eight funds have reduced French bank debt by $76.8 billion in the past 12 months."

Finally, we'd like to encourage anyone planning on attending our Crane's Money Fund University (, our "basic training" on money market mutual funds, to make hotel reservations soon. Money Fund University is being held January 19-20, 2012, at The Hyatt Regency Boston and will feature training on money fund basics, Rule 2a-7, money market securities, and more. The discounted conference rate of $189 plus tax (currently 14.45%) is available through December 16th. To make reservations by phone please call: 1-888-421-1442. (Please reference "Crane's Money Fund University" in order to receive the discounted conference rate.) To make reservations online please click on this link.

Moody's Investors Service published a Special Comment entitled, "Money Market Funds: ABCP Investments Decrease," which says, "Since 2007, the investment allocations of Moody's-rated money market funds (MMFs) to asset-backed commercial paper (ABCP) have been decreasing continuously. The reasons causing leading portfolio managers to avoid ABCP investment are: (i) investors are averse to structured finance securities after losses related to Structured Investment Vehicles (SIVs) during the financial crisis; (ii) ABCP is viewed by some managers as contrary to a fund's objectives, which is to maintain liquidity; (iii) the overall credit quality of financial institutions providing liquidity to ABCP conduits has deteriorated; and (iv) the lack of disclosure of ABCP and opacity in terms of conduit structure prevents investors from fully understanding the risks of ABCP."

Moody's explains, "Although steps have been taken to scale back the funds' risk profiles and ABCP investments -- prompted by the prevailing credit conditions and euro-area sovereign debt concerns -- exposure to financial institution debt remains high. A credit-negative factor is that by 2007, the average long-term bank deposit rating of the global universe had deteriorated to A1 from Aa2. However, most MMFs managed down European bank exposures, often redeploying funds away from stressed European banking systems and into stronger European banks and banks in non-European countries."

They write, "In this challenging operating environment, we expect that conservative portfolio strategies will persist and, as a consequence, ABCP investments will remain limited. Besides the lower demand for ABCP, the exposure of MMFs to this asset class has also declined due to a decrease in the number of available conduits that meet the quality criteria of MMFs. Larger conduits can issue ABCP with relative ease, whilst smaller conduits -- backed by lower credit-quality financial institutions -- have found ABCP issuance more challenging."

Moody's explains, "We base our analysis on the prime Moody's-rated US and European MMFs. This homogenous universe comprises 82 European and 77 US MMFs -- all but one rated Aaa-mf -- whose assets under management totalled US$1.2 trillion at the time of our analysis."

The report, written by Vanessa Robert and Yaron Ernst, says, "When ABCP investments peaked in 2007, they accounted for nearly 25% of prime fund assets globally. Since then, MMF exposure to this asset class has trended downwards to 8.3% on average at the end of August 2011.... Some MMF managers have entirely eliminated ABCP from their approved list, although most managers have only limited their ABCP investment allocations. Of the rated funds, 45% have no ABCP exposure, whilst 72% have an exposure of less than 10%.... Some market participants still view ABCPs as very complex structures, discouraging them from investing, as they do not necessarily have the resources to analyse the underlying risks."

It adds, "With respect to demand-driven reasons, there is also a reduction in the number of available conduits that meet the quality criteria of the MMFs' credit teams, because the ABCP market has experienced "tiering". In other words, larger conduits have found it relatively easy to issue paper, whilst smaller conduits sponsored by lower credit quality financial institutions have found it difficult to issue."

Moody's comments, "However, some asset-management firms remain positive on the ABCP sector (19% of Moody's-rated prime MMFs have an exposure above 20%), as they believe that ABCP helps funds to reduce their risk profile. This is because they anticipate that the loss-given default would be limited due to the access to collateral. Generally, the market participants that hold this view are large, global players with significant credit resources.... Of the funds we rate, the most popular ABCP programs globally are those that are either large and stable, typically offered by top tier banks, or those that benefit from a sovereign guarantee. MMFs favour investments in fully supported programs sponsored by highly rated financial institutions that either (i) have a strong track record; or (ii) benefit from government support, such as Kells Funding and Straight A Funding. Generally, investment is made in structures that investors believe will be supported by banks, as opposed to standalone enterprises. Consistent with the reduction in their maturity profiles, the bulk of the prime funds’ investments in ABCP are within one month, at 72% of the investments."

Finally, the report writes, "Overall, macroeconomic conditions remain challenging for MMFs. Their operating environment is difficult, characterised by (i) historically low interest-rate levels; (ii) declining assets under management; (iii) global credit uncertainties; and (iv) a negative outlook on most financial institution sectors and/or banking systems. In addition, regulatory uncertainties persist. Although the SEC in the US and the CESR in Europe have tightened MMF regulations, further reform will be needed to address the systemic risk that MMFs pose. The Financial Stability Board's report on the shadow banking system released at the end of October 2011 clearly states that the role of MMFs in the financial markets will be heavily scrutinised by the International Organization of Securities Commission, which is due to report on the issue by July 2012. In our view, the key issue is the direction in which regulators choose to move that could include: (i) requiring shifts to variable NAV vehicles; (ii) imposing capital and liquidity requirements on constant NAV MMFs; and/or (iii) whether other approaches should be taken. Therefore, in the near term, MMFs will continue to operate in a tentative market and regulatory environment and any resurgence in MMF investment in ABCP is unlikely in the short term."

Note that the December issue of our Money Fund Intelligence newsletter will be sent to subscribers this morning, along with Crane Data's November 30, 2011, performance data.... A statement from the manager of the $1.2 billion Pacific Capital Money Market Fund complex says, "We are writing to inform you that effective December 5, 2011, Cash Assets Trust, which has been in operation since 1984, will terminate the operations of each of its three series: Pacific Capital Cash Assets Trust, Pacific Capital Tax-Free Cash Assets Trust, and Pacific Capital U.S. Government Securities Cash Assets Trust. As you will note from the Supplement, dated October 5, 2011, to the Prospectus and Summary Prospectuses (on the reverse side), the management of the Funds has concluded that it is no longer practical for the Funds to continue operations and the Board of Trustees of the Trust has approved the liquidation of the Funds. The Funds, accordingly, will not accept any new investments on or after Monday, December 5th."

It explains, "For quite some time, both the Trust's Adviser (the Asset Management Group of Bank of Hawaii) and Administrator (Aquila Investment Management LLC) have subsidized the Funds by waiving their respective fees, and as necessary, reimbursing various operating expenses, in order to produce a non-negative yield for investors. With short-term interest rates at historical lows, it has become challenging for money market funds to retain assets and remain profitable. The U.S. Federal Reserve expects to keep interest rates at these low levels for at least another two years based on expectations for slow economic growth in the U.S. These uncertain prospects for a return to higher short-term rates make it difficult to justify continued operation of the Funds."

It adds, "Your account will be automatically redeemed and the proceeds, including accrued dividends and capital gains, if any, will be sent to your address of record on December 8, 2011 (the liquidation date). You may wish to consult with your financial advisor regarding the implications of this closure and disposition of your proceeds. Should you have any questions regarding the liquidation of the Funds, please do not hesitate to contact a fund representative at 800-437-1020. If you have a question regarding your account, please contact the Transfer and Shareholder Servicing Agent at 800-437-1000. We have very much valued you as a shareholder in Cash Assets Trust and appreciate the confidence you have shown in the Aquila Group of Funds which also includes seven tax-free municipal bond funds, a high yield corporate bond fund, and a growth-oriented equity fund, one or more of which may be appropriate for you to consider as part of your overall portfolio of investments."

A previous "Supplement to the Prospectus and the Summary Prospectuses, dated July 31, 2011, says, "After consultation with management of the Trust, the Board of Trustees has authorized the liquidation of each of Pacific Capital Cash Assets Trust, Pacific Capital Tax-Free Cash Assets Trust, and Pacific Capital U.S. Government Securities Cash Assets Trust. It is anticipated that each Fund will be liquidated on or about December 8, 2011. The Funds will not accept new investments on or after December 5, 2011. As the Liquidation Date approaches, the Funds' Investment Adviser is expected to increase the portion of each Fund's assets held in cash and similar investments and reduce maturities of non-cash investments, in seeking to maintain adequate liquidity and a stable net asset value of $1.00 per share until the Liquidation Date. Each Fund will cease to pursue its investment objective as the Liquidation Date approaches."

The Commodity Futures Trading Commission (CFTC), which regulates U.S. commodity futures and option markets, held an Open Meeting Monday where it issued a "Final Rule on Investment of Customer Funds and Funds Held in an Account for Foreign Futures and Options Transactions." The CFTC had initially proposed limiting commodities futures merchants (CFMs) to a 10% maximum collateral investment in money market funds. But the final rule allows up to 50% in money funds overall (or 100% in Treasury money funds), with a limit of 10% per fund and 25% per fund family.

The CFTC's "Q & A - Regulation 1.25" says, "What is the goal of the rulemaking? In finalizing amendments to the Commission's regulations regarding investment of customer and secured amount funds, the Commission seeks to simplify Regulation 1.25 and impose requirements that can better mitigate credit, liquidity and market risk and ensure the preservation of principal and maintenance of liquidity. The Commission has (1) narrowed the scope of investment choices, (2) raised certain standards imposed on permitted investments individually and on a portfolio basis, and (3) increased safety by promoting diversification. The Commission has endeavored to tailor its final rule to achieve these goals while retaining an appropriate degree of investment flexibility and opportunities for attaining capital efficiency for derivatives clearing organizations (DCOs) and futures commission merchants (FCMs) investing customer segregated funds and secured amount funds."

It continues, "Does the rulemaking limit the collateral that may be used by customers of an FCM? No. The rulemaking focuses solely on the investment of customer funds by FCMs and DCOs. The Commission's interest is in ensuring that customer funds are invested in instruments that satisfy the Commission's overall objective of preserving principal and maintaining liquidity."

The CFTC's Q&A also asks, "Does the rulemaking contain any amendments affecting investments money market mutual funds (MMMFs)? Yes. Investments in MMMFs would be subject to several limitations. First, FCMs and DCOs may invest up to 10% of their customer segregated funds in MMMFs with less than $1 billion in MMMF assets and/or a management company with less than $25 billion of MMMF assets under management. An FCM or DCO may invest all of its funds in MMMFs meeting both size requirements, subject to additional limitations. While there is no asset-based concentration limit for Treasury-only MMMFs, FCMs and DCOs may invest up to 50% of their segregated funds in non-Treasury-only MMMFs. Additionally, FCMs and DCOs investing in non-Treasury-only MMMFs may invest no more than 25% in one family of funds and no more than 10% in any individual MMMF."

The Q&A also states, "The rulemaking also contains two technical amendments. First, the rulemaking clarifies that acknowledgment letters for MMMFs are to be from a party that has substantial control over the fund's assets and has sufficient knowledge and authority to facilitate redemption. Second, the rulemaking updates and clarifies the next-day redemption requirement for MMMFs (as well as include an appendix with safe harbor language for MMMF prospectuses)."

It adds, "Does the rulemaking contain any amendments affecting investments in foreign sovereign debt? Yes. The rulemaking eliminates foreign sovereign debt as a permitted investment. Does the rulemaking contain any amendments affecting in-house transactions and repurchase agreements? Yes. The rulemaking eliminates in-house transactions and repurchase agreements with affiliates. Repurchase agreements with third-parties are still allowed, subject to a 25% counterparty concentration limit."

The "Opening Statement of [CFTC] Commissioner Scott D. O'Malia" comments on the final rule, "Preliminarily, I would like to note that this final rule is markedly more sophisticated than the proposal in the way that it (i) clarifies the scope of prohibitions (e.g., in-house transactions), (ii) evaluates the risks posed by certain instruments (e.g., securities from government-sponsored enterprises and money-market mutual funds), and (iii) adjusts the asset-based and issuer-based concentration limits accordingly. I am pleased that this rule permits greater utilization of money market mutual funds, which would enable intermediaries and DCOs to more easily diversify investments of customer funds."

Finally, Commissioner Jill Sommers' "Opening Statement Before the Sixth Open Meeting to Consider Final Rules Pursuant to the Dodd-Frank Act adds, "I would like to close with an observation on the dearth of information we have regarding how FCMs and DCOs are actually investing customer funds. The cost-benefit analysis states that FCMs currently hold over $170 billion in segregated customer funds and $40 billion in Rule 30.7 funds. Throughout the cost-benefit analysis we acknowledge that the new restrictions on investments may cause some forced sales or administrative costs to convert unacceptable investments into permitted investments, but we have no way of calculating these costs because we are not in a position to know the composition of customer fund portfolios. We should know."

See also our prior Crane Data News stories: "CFTC's on "Proposed Rule on Regulations 1.25 and 30.7 Regarding Investment of Customer Funds and Credit Ratings"" (11/2/10), "ICI Lobbies CFTC to Reconsider New Restrictions on Money Funds" (12/8/10), "CFTC Soliciting Public Comment on Changes to Permitted Investments" (6/2/09), and "Comments Strongly in Favor of Keeping Money Funds in CFTC Regs (6/28/09)."

Another comment letter was posted Friday to the SEC's "President's Working Group Report on Money Market Fund Reform" web page. The latest comment was written by Jill Fisch of the University of Pennsylvania Law School and Eric Roiter of the Boston University School of Law. The letter says, "We are writing in response to the Commission's solicitation of public comments on the President's Working Group Report on Money Market Fund Reform (Oct. 2010). Although the Commission set January 10, 2011 as the original deadline for comments, we note that the Commission has continued to receive and post in the public file throughout this year comment letters and staff memoranda memorializing visits between interested persons and Commissioners on the issues raised in the PWG Report. We note further that SEC Chairman Schapiro in her speech on November 7 at SIFMA's annual meeting suggested that the Commission will be considering whether additional steps, beyond the 2010 revisions to Rule 2a-7, should be taken to address the risk of runs on market market funds."

The pair write, "We have recently written an article addressing whether money market funds should be forced to abandon their stable NAVs or other measures put in place to stem the potential for runs. A copy of the article (forthcoming in the University of Illinois Law Review), "A Floating NAV for Money Market Funds: Fix or Fantasy," is attached hereto, and we request that it be included in the public file."

The letter explains, "Our article concludes that the debate on whether to compel a floating NAV is misplaced and rests on erroneous assumptions. The $1 NAV is not, and has never been, fixed or divorced from market value. As is true for share prices of all mutual funds, the price of money market fund shares is, of necessity, a rounded price. Stock and bond funds round their NAVs to the nearest cent; money market funds round their shares to a $1 NAV if, and only if, the market value of their portfolio equals or exceeds 99.5 cents per share. As we point out in our article, upon adopting Rule 2a-7, the SEC approved the use of amortized cost accounting precisely because it reflects fairly the market-based net asset value of money market fund shares so long as the risk-limiting requirements of the rule are met."

Fisch and Roiter continue, "We conclude that the run on money market funds unleashed in 2008 was animated by investors' (more particularly, institutional investors') fear over the loss of liquidity, not the loss of principal. Indeed, the liquidation of the Reserve Primary Fund -- which substantially delayed investors' access to their money despite the fact that their eventual losses were less than 1% -- bears this out. The measures we propose, accordingly, address liquidity concerns once a fund has broken the buck. A fund's board must promptly decide whether to operate the fund with a fluctuating NAV or liquidate the fund. If the former course is chosen, investors should be free to redeem their shares, just as investors in ultra-short bond funds would be able to do. If the latter course is chosen, a fund board does not need, and should not have, the unfettered right to suspend redemptions indefinitely. We propose that the SEC amend its rules to permit full suspension of redemptions for only two days following the breaking of the buck; for three days thereafter, suspension of redemptions should be limited to no more than 50% of a shareholder's shares. By this time, a fund board, having decided to liquidate the fund, should have also created a reserve account based on a reasonable estimate of the costs of liquidation and any losses in the disposition of fund assets. Thereafter, shareholders in the fund should be free to redeem up to 90% of their shares, based upon a floating NAV reflecting the creation of the reserve account."

They add, "Our proposal would ameliorate concerns about runs because investors would know that a fund that has broken the buck would remain liquid, either because it will revert to a floating NAV or redemptions could be totally suspended for a maximum of two business days. The proposal would also create an additional incentive for investors who do not need immediately liquidity to stay in the fund because the reserve, once released, provides them with the prospect of greater recovery than those who redeem early."

Finally, the two state, "As for a "capital buffer," the Commission, in our view, should permit but not require it. Money market fund shareholders, of course, hold equity, not debt, and a requirement for capital that is subordinated to common shares obscures, rather than clarifies, their status. In effect, a capital buffer would convert money market fund investors into holders of preferred shares, senior to a new subordinated equity class. If the marketplace wants that feature, the Commission could certainly revise its rules to permit such a capital structure. We doubt, however, the efficacy of a subordinated capital cushion that is likely to be only a modest one. Once a fund's portfolio, on a fair value basis, drops below 99.5 cents per share, investors are put on notice that the fund might not be able to sustain its $1 NAV. Knowing that the capital buffer is limited (somewhere between, perhaps, 0.5% to 3% of NAV), investors might have an extra incentive to redeem before the cushion is exhausted, thereby aggravating rather than reducing problems of collective action. In any event, their concern has to do with loss of liquidity, and it is this concern that our proposal addresses."

ICI's latest weekly "Money Market Mutual Fund Assets" report says, "Total money market mutual fund assets increased by $6.13 billion to $2.652 trillion for the week ended Wednesday, November 30, the Investment Company Institute reported today. Taxable government funds increased by $23.06 billion, taxable non-government funds decreased by $14.80 billion, and tax-exempt funds decreased by $2.12 billion." Money fund assets have risen by $30 billion over the past 4 weeks, reducing their year-to-date in 2011 to $158 billion, or 5.6%.

ICI writes, "Assets of retail money market funds decreased by $910 million to $930.60 billion. Taxable government money market fund assets in the retail category increased by $720 million to $197.02 billion, taxable non-government money market fund assets decreased by $760 million to $542.24 billion, and tax-exempt fund assets decreased by $870 million to $191.33 billion." Retail money fund assets have declined by $5 billion over the past 4 weeks, but this segment has only declined by $14 billion, or 1.4%, YTD.

In the latest week, the Institute says, "Assets of institutional money market funds increased by $7.04 billion to $1.722 trillion. Among institutional funds, taxable government money market fund assets increased by $22.34 billion to $737.32 billion, taxable non-government money market fund assets decreased by $14.04 billion to $891.95 billion, and tax-exempt fund assets decreased by $1.25 billion to $92.59 billion." Institutional funds, led by Government funds, have increased by $35 billion since the week ended Nov. 2, but Institutional money fund assets have declined by $143 billion, or 7.7%, YTD.

In November, Government Institutional fund assets (including Treasury funds) increased by $38.6 billion, while Non-Government ("Prime") Institutional assets declined by $1.4 billion. Year-to-date, Government fund assets (both Retail and Institutional) have increased by $80.8 billion (9.5%), while Prime fund assets have declined by $200 billion (-12.2%). Tax-Exempt money funds have also seen noticeable declines in 2011, dropping $45.6 billion, or 13.8%. Money funds' YTD asset decline of 5.6%, if it holds, will rank as the sixth largest percentage decline in MMFs' 40-year history. (The biggest percentage decline was 1983's -18.4%, followed by 2010's -14.7%, 2009's -14.0%, 2003's -9.7%, and 2004's -6.8%.)

Their latest weekly explains, "ICI reports money market fund assets to the Federal Reserve each week. Revisions are due to data adjustments, reclassifications, and changes in the number of funds reporting. Historical weekly money market data back to January 2008 are available on the ICI website." (Crane Data also has money fund assets series, but ICI's is the broadest collection available.)

In other news, we mentioned the downgrade of minor money fund holding Eksportfinans in our Nov. 25 "Link of the Day: 'Norway's Eksportfinans Cut to Junk by Moody's Amid Wind Down' writes Bloomberg". A couple more mentioned have surfaced -- Bloomberg's "Moody's Wrong to Reduce Eksportfinans to Junk, Norway Says" and First American's statement "Eksportfinans Holding in First American Prime Obligations Fund Sold".

Bloomberg's latest piece writes, "A decision by Moody's Investors Service to cut Norway's Eksportfinans ASA seven steps to junk betrays a lack of analysis and doesn't reflect the state-backed unit's ability to pay its debts, Trade Minister Trond Giske said." First American's latest update says, "`On November 28, 2011, First American Funds sold a $12.7 million holding in Eksportfinans that was originally scheduled to mature on December 15. As previously communicated, the remaining $50 million position will mature on December 6, 2011. We will continue to monitor the security and scheduled payment for any changes."

Yesterday, the Fed and a number of other central banks announced a "Coordinated central bank action to address pressures in global money markets," saying, "The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity."

The Fed's announcement explains, "These central banks have agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points. This pricing will be applied to all operations conducted from December 5, 2011. The authorization of these swap arrangements has been extended to February 1, 2013. In addition, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank will continue to offer three-month tenders until further notice."

It continues, "As a contingency measure, these central banks have also agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant. At present, there is no need to offer liquidity in non-domestic currencies other than the U.S. dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise. These swap lines are authorized through February 1, 2013."

The Fed adds, "The Federal Open Market Committee has authorized an extension of the existing temporary U.S. dollar liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank through February 1, 2013. The rate on these swap arrangements has been reduced from the U.S. dollar OIS rate plus 100 basis points to the OIS rate plus 50 basis points. In addition, as a contingency measure, the Federal Open Market Committee has agreed to establish similar temporary swap arrangements with these five central banks to provide liquidity in any of their currencies if necessary. Further details on the revised arrangements will be available shortly."

Finally, they write, "U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets. However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses." See also, the Fed's "Frequently Asked Questions: U.S. Dollar and Foreign Currency Liquidity Swaps".

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