News Archives: April, 2011

Money fund holdings of Repurchase Agreements plunged in March according to the Investment Company Institute's latest "Month-End Portfolio Holdings of Taxable Money Market Funds". ICI's monthly statistics showed jumps in Other Treasury Securities, U.S. Government Agency Securities and Cash Reserves, as well as increases CDs and Eurodollar CDs. ICI also released monthly asset figures for March, which showed a modest decline, weekly asset figures, which showed a jump in MMF assets in the latest week, and quarterly statistics on worldwide mutual funds which showed declines.

Repos held in taxable money funds declined by $51.3 billion, or 10.3%, in March to $448.1 billion, which represents 18.6% of funds' holdings. Certificates of Deposit remained the largest holding in money funds with $574.7 billion, or 23.8%. (This total includes $109.7 billion in Eurodollar CDs.) CD holdings grew by $11.2 billion in March. Commercial Paper remained the third largest segment (after Repo) in taxable money funds, accounting for $406.2 billion, or 16.8% of the $2.411 trillion total.

ICI's report shows that Government Agency holdings, the fourth largest sector in money funds, rose by $13.1 billion, or 3.6%, in March to $381.0 billion, or 15.8% of assets. U.S. Treasury Bills and Other Treasury Securities accounted for $344.6 billion, or 14.3% of assets. Treasury holdings increased by $12.1 billion, or 3.6%. Corporate Notes and Bank Notes in money funds added up to $156.8 billion, or 6.5%, and Other holdings totaled $85.2 billion, or 3.5%. (See Crane Data's latest Money Fund Portfolio Holdings series for information on individual securities held in money funds and look for next week's May Money Fund Intelligence XLS for April data on fund Portfolio Composition.)

ICI's March "Trends in Mutual Fund Investing" says, "The combined assets of the nation's mutual funds increased by $49.4 billion, or 0.4 percent, to $12.171 trillion in March.... Money market funds had an outflow of $14.62 billion in March, compared with an inflow of $11.92 billion in February. Funds offered primarily to institutions had an outflow of $7.13 billion. Funds offered primarily to individuals had an outflow of $7.48 billion." ICI continues to show "Liquid Assets of Stock Mutual Funds" near record low levels at 3.4%.

The Investment Company Institute's latest weekly "Money Market Mutual Fund Assets" report says, "Total money market mutual fund assets increased by $16.81 billion to $2.727 trillion for the week ended Wednesday, April 27.... Taxable government funds increased by $870 million, taxable non-government funds increased by $20.81 billion, and tax-exempt funds decreased by $4.88 billion."

Also, ICI's quarterly "Worldwide Mutual Fund Assets And Flows" shows total worldwide money fund assets at $4.531 trillion as of Q4 2010 and says, "Mutual fund assets worldwide increased 4.2 percent to $24.70 trillion at the end of the fourth quarter of 2010.... Outflows from money market funds were $56 billion in the fourth quarter, about on par with the $44 billion of outflows in the third quarter, but below the quarterly pace of $327 billion of outflows set in the first half of the year. For the full year, net outflows from money market funds in 2010 were $753 billion." The ICI's full worldwide totals may be seen here.

Finally, look for more statistics and news from the Investment Company Institute, which is the mutual fund industry's trade group, next week. ICI is expected to release its annual "Mutual Fund Fact Book" next week to coincide with the opening of the Institute's General Membership Meeting, the largest gathering of mutual fund professionals of the year. (We'll be covering in next week's Money Fund Intelligence.)

The Federal Reserve's Open Market Committee issued its latest statement yesterday, saying, "Information received since the Federal Open Market Committee met in March indicates that the economic recovery is proceeding at a moderate pace and overall conditions in the labor market are improving gradually. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Commodity prices have risen significantly since last summer, and concerns about global supplies of crude oil have contributed to a further increase in oil prices since the Committee met in March. Inflation has picked up in recent months, but longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued."

The Fed continues, "Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Increases in the prices of energy and other commodities have pushed up inflation in recent months. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations. The Committee continues to anticipate a gradual return to higher levels of resource utilization in a context of price stability."

It adds, "To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and will complete purchases of $600 billion of longer-term Treasury securities by the end of the current quarter. The Committee will regularly review the size and composition of its securities holdings in light of incoming information and is prepared to adjust those holdings as needed to best foster maximum employment and price stability."

Finally, the FOMC statement comments, "`The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate."

The Investment Company Institute and money fund giants Vanguard, Charles Schwab, Dreyfus, Federated Investors, BlackRock, Invesco, and Wells Fargo Advantage Funds were among 22 organizations posting comment letters to the SEC's "References to Credit Ratings in Certain Investment Company Act Rules and Forms (File No. S7-07-11)" proposal to remove ratings agencies from Rule 2a-7 of the Investment Company Act of 1940, the rules governing money market funds. (Comments were due by April 25. See the full proposed rule here.)

The ICI's letter says, "The Investment Company Institute appreciates the opportunity to offer its views on the Securities and Exchange Commission's proposal to remove references to credit ratings of nationally recognized statistical rating organizations (NRSROs) from certain rules and forms under the Investment Company Act of 1940. The proposed amendments give effect to provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) that call for the amendment of SEC regulations that contain any references to or requirements regarding credit ratings that require the use of an assessment of the credit-worthiness of a security or money market instrument."

It continues, "Although the Release states that the amendments 'are designed to offer protections comparable to those provided by the NRSRO ratings,' ICI is concerned that the proposed alternative standards of credit-worthiness in Investment Company Act Rules 2a-7 and 5b-3 may have the unintended consequence of raising some credit standards and lowering others. While the elimination of standards based on credit ratings must necessarily alter these regulations to some degree, we suggest below some different approaches that would keep these regulations more in line with their current standards. We also offer a recommendation that would permit funds to use NRSRO ratings to disclose credit quality information in shareholder reports in a manner that is consistent with their investment policies."

ICI General Counsel Karrie McMillan explains, "We recommend that Rule 2a-7 define an eligible security as 'a security with a remaining maturity of 397 days or less that the fund's board of directors determines presents minimal credit risks and the issuer of which the fund's board of directors determines has a strong capacity to meet its short-term obligations.' The proposed standard would eliminate the 'first tier' and 'second tier' categories from the rule and effectively limit money market fund purchases to those securities that meet one uniform, but very high, standard (e.g., securities generally comparable to securities rated in the highest short-term rating category, which would be first tier securities under the current rule)."

The letter adds, "We recommend that the requirement to reassess minimal credit risk under paragraph (c)(7)(i) be eliminated and that paragraph (c)(10)(i) be redrafted to include a general, ongoing obligation to monitor the credit risks of portfolio securities. An express requirement for funds to review their credit assessments under Rule 2a-7 on an ongoing basis would obviate the need for a separate requirement to identify specific triggers for reassessment. We do not believe that Section 939A of the Dodd-Frank Act precludes the SEC from promulgating regulations that simply refer to existing credit ratings without requiring an assessment of a security's credit-worthiness, such as in the stress testing paragraph of Rule 2a-7. Accordingly, we recommend that the SEC retain the stress testing provision in its current form."

Finally, ICI's letter says, "We recommend that at the time a fund enters into a repurchase agreement, the fund's board (or delegate) be required to determine that the issuer of any underlying nongovernment securities have an 'exceptionally strong capacity' to repay financial obligations, which would be consistent with the definitions used by many rating agencies to define their highest long-term rating category. We would not object to the additional proposed requirement that the underlying securities qualify as liquid securities.... Although the references to credit ratings in Form N-MFP are to existing credit ratings and are merely a collection of data points so regulators and investors will better understand funds' portfolios, we would not object to the removal of this information from Form N-MFP, provided that it is clear that funds may choose to include ratings from one or more NRSROs in the monthly website portfolio disclosure required by Rule 2a-7."

As we discussed in our latest Money Fund Intelligence (see the article "Comeback or Flashback? Enhanced Cash Returns"), there have recently been a handful of new entrants in the space just beyond money market mutual funds. While we mentioned the registration filing of one of these, the press release sent out yesterday entitled, "OppenheimerFunds, Inc. Launches Short Duration Fund" makes this latest launch official.

The release says, "OppenheimerFunds, Inc. (OFI), a leading asset manager, today announced the launch of Oppenheimer Short Duration Fund, an actively-managed fund that seeks to offer investors attractive short duration returns with relatively low interest rate risk. Oppenheimer Short Duration Fund seeks to provide investors with a competitive yield over money market funds and relative stability of principal. In an attempt to achieve this objective, the Fund will seek to maintain a portfolio duration of one year or less and invest in a variety of investment grade short-term debt and money market instruments."

Carol Wolf, Co-Portfolio Manager of the new Oppenheimer Short Duration Fund, says, "The credit and liquidity environment over the last few years has created an imbalance in the market. Short duration products may be able to exploit these inefficiencies by taking advantage of the steep yield curve. The fund presents a diversification option for investors and seeks the combination of current income, while endeavoring to preserve capital."

The Oppenheimer release continues, "This new fund will be managed by Wolf, who is head of the Denver-based Oppenheimer Cash Strategies Team, and Chris Proctor, Vice President and Portfolio Manager. The Cash Strategies Team has been running funds for more than 30 years since the inception of the Daily Cash Accumulation Fund and the Centennial Funds in the '70's."

It adds, "The Oppenheimer Short Duration Fund can invest in a variety of U.S. dollar-denominated, investment-grade fixed income obligations, including corporate notes, floating and variable rate instruments, asset backed securities, and U.S. Government and Agency debt. The Short Duration Fund will be managed with the same investment and credit process as the other funds the team oversees. The Cash Strategies Team manages more than $10 billion in assets (as of 3/31/11), including all of OppenheimerFunds' money market funds. Further information about the fund can be accessed at Currently, Class Y Shares of the Fund are being offered to institutional investors with a minimum initial investment of $250,000."

Finally, the release says, "Oppenheimer Short Duration Fund is not a money market fund. Shares of the fund have a variable net asset value. Fixed-income investing entails credit risks and interest rate risks. When interest rates rise, bond prices generally fall and a fund's share price can fall. The Fund is also subject to liquidity risk. Investments in foreign securities entail special risks (such as economic and political uncertainties) and may have higher expenses and volatility. The Fund may invest more than 25% of its assets in securities of issuers in the banking and financial services industries which may be more susceptible to particular economic and regulatory events and increased volatility. Derivative instruments, investments whose values depend on the performance of an underlying security, asset, interest rate, index or currency entail potentially higher volatility and risk of loss compared to traditional stock or bond investments. Diversification does not guarantee profit or protect against loss."

In other "Enhanced Cash" News, Dreyfus recently closed its `Dreyfus Institutional Income Advantage Fund. The SEC filing says, "The Board of Trustees of The Dreyfus/Laurel Funds Trust has approved the liquidation of Dreyfus Institutional Income Advantage Fund. Effective on or about February 17, 2011, no new or subsequent investments in the Fund will be permitted, except through dividend reinvestment." No word on what caused Dreyfus to retreat from this sector.

BlackRock, the 5th largest money fund manager in the U.S. with $162 billion and the 2nd largest manager of "offshore" money market funds with $84 billion (according to our most recent Money Fund Intelligence XLS and MFI International), reported its latest quarterly earnings yesterday and hosted a conference call to discuss the results. The company's Q1 2011 release says of its money markets, "Cash management products continued to face challenging overall market conditions. Cash management experienced net withdrawals of $24.4 billion largely reflecting institutional reaction to the continued low rate environment with particular pressure related to concerns around European sovereigns and their respective banks. Modest inflows in Asia were more than offset by net outflows of $23.1 billion in the Americas and $1.3 billion in EMEA. We anticipate continued pressure as rates are expected to remain low for the next several quarters."

The statement adds, "Investment advisory, administration fees and securities lending revenue of $1,984 million in first quarter 2011 increased $231 million, or 13%, compared to $1,753 million in first quarter 2010, primarily related to growth in long-term AUM, which reflected the benefit of both net new business and market appreciation on long-term AUM during the prior twelve months, partially offset by a decline in fees from cash management products due to lower average AUM."

Laurence Fink, Chairman and CEO of BlackRock, says on the call, "Long-term flows, as Ann Marie stated, grew by close to $35 billion. This has been offset by an outflow of $24 billion in our Cash Management business. Our flows are representative of the industry. With the shortage of short-term treasuries, we see rates below five basis points. This is a business that will continue to flounder during these low rate environments. We are constructive about it. We, actually, in the first quarter though saw positive flows in the institutional side, and we saw very large negative flows more on the retail side."

He continues, "So we are building our market share in terms of institutional, and it's not representative with our gross $24 billion in our outflows in cash. But we are building market share institutionally and we are certainly seeing some substantial wind-downs in the retail side. And much of this is because in many cases, the retail platforms are migrating from money market funds to bank deposits. Bank deposits are higher in yield than money market funds, even at a time when banks are having a little success in terms of C&I loans. They may be using the deposit for buying short-term Treasuries or mortgage securities, but they're willing to pay more than money markets can afford. So that trend is not going to change anytime soon."

Fink adds, "And so this is going to be an area that will have a drag on our flows, albeit this is low-fee business. What I'm trying to stress is the revenue from the very, very high-fee businesses that we are demonstrating." Note that there were no questions on money market funds during the Q&A session.

Economists at the Federal Reserve Bank of New York recently wrote on their new "Liberty Street Economics blog, "Everything You Wanted to Know about the Tri-Party Repo Market, but Didn't Know to Ask." It says, "The tri-party repo market is a large and important market where securities dealers find short-term funding for a substantial portion of their own and their clients' assets. The Task Force on Tri-Party Repo Infrastructure (Task Force) noted in its report that 'at several points during the financial crisis of 2007-2009, the tri-party repo market took on particular importance in relation to the failures and near-failures of Countrywide Securities, Bear Stearns, and Lehman Brothers.' In this post, we provide an overview of this market and discuss several reforms currently under way designed to improve functioning of the market. A recent New York Fed staff report provides an in-depth description of the market."

The post asks, "What Is the Tri-Party Repo Market? It answers, "The tri-party repo market is one where securities dealers fund their portfolio of securities through repurchase agreements, or repos. A repo is a financial transaction in which one party sells an asset to another party with a promise to repurchase the asset at a pre-specified later date. A repo resembles a collateralized loan but its treatment under bankruptcy laws is more beneficial to cash investors: in the event of bankruptcy, repo investors can typically sell their collateral, rather than be subject to an automatic stay, as would be the case for a collateralized loan. In the tri-party repo market, a third party called a clearing bank acts as an intermediary and alleviates the administrative burden between two parties engaging in a repo."

The piece also asks, "Why Should We Care about the Tri-Party Repo Market? It answers, "The importance of this market was highlighted by the recent financial crisis. As noted above, the tri-party repo market took on particular importance in relation to the failures and near-failures of Countrywide Securities, Bear Stearns, and Lehman Brothers. 'The potential for the tri-party repo market to cease functioning, with impacts to securities firms, money market mutual funds, major banks involved in payment and settlements globally, and even to the liquidity of the U.S. Treasury and Agency securities, has been cited by policy makers as a key concern behind aggressive interventions to contain the financial crisis,' according to the Task Force Report."

The economist explain, "The tri-party repo market is very large. At its peak in 2008, about $2.8 trillion of securities were funded by tri-party repos. Volumes shrank to $1.6 trillion in the second half of the financial crisis, and have been steady around that level since. The size of individual portfolios being financed in this market is also very large. At the peak, some dealers were financing portfolios of $450 billion in the tri-party repo market, mostly overnight."

They also say, "The tri-party repo market is made up of three types of participants: securities dealers, cash investors, and clearing banks that function as intermediaries between dealers and investors. The dealers sell securities with a promise to repurchase these securities at a later date.... The largest dealers in the tri-party repo market are primary dealers.... The cash investors buy securities that they will sell back at a later date.... Money market mutual funds and securities lenders are the two largest groups of cash investors, each representing about a quarter of the cash invested in that market.... The two tri-party repo clearing banks in the United States are JPMorgan Chase and Bank of New York Mellon."

The post also asks, "How Are Reforms Improving the Market? It says, "The financial crisis highlighted some problems with the tri-party repo market. A white paper prepared by the New York Fed describes how this market may contribute to systemic risk. The white paper mentions three key areas of concern: 1) the tri-party repo market's dependence on intraday credit provided by the clearing banks, 2) risk management practices that may increase stress in bad times, and 3) the lack of effective 'and transparent plans to support orderly liquidation of a defaulted dealers collateral."

Finally, the blog says, "In the next few months, the tri-party repo market will change in important ways as the recommendations of the Task Force are implemented. It will be interesting to see how the market adapts to new ways of doing things and what reforms are enacted to increase the stability of the tri-party repo market regarding dealer defaults. While the Task Force has accomplished quite a bit, more needs to be done to address the risk associated with the default of a large dealer."

Today, we continue excerpting from our April Money Fund Intelligence article, "Goldman Sachs Marks 30 Years In Money Funds," which interviews Goldman Sachs Asset Management's Dave Fishman and James McCarthy. Our Q&A continues: Q: What's your outlook for the Fed and rates? Fishman comments, "Our base case is that interest rates remain on hold in the US this year. Despite improvements in key indicators, the Federal Reserve's accommodative bias remains underpinned by unemployment around 9% and low inflation, and risks to global growth have clearly risen."

He continues, "But we are firm believers that it takes more than a Fed outlook to keep ahead of market developments these days. Even if the Fed stays on hold, we're well aware that policies across major markets globally have profound implications for investors."

McCarthy responds, "Inflation has clearly become more of an issue in developed economies beyond the US. The Fed's stance contrasts with the Eurozone's hawks, where the European Central Bank has signaled an imminent hike to head off the second round effects of strengthening demand in core Europe, and rising commodities prices. We believe that markets may be overpricing the extent of tightening that is likely to come this year, though, as the peripheries' economic problems are far from resolved. Similarly, we think markets may have overstepped in pricing rate hikes by the Bank of England (BoE) this year. Inflation is more than double the official target of 2% and support for a hike is growing, but we believe the BoE should resist removing stimulus while growth remains weak, and tough fiscal corrections are underway."

He adds, "Even stronger inflationary pressures are arising in the world's largest growth economies, and in China we see further hikes in policy rates and reserve requirements. We're closely monitoring the implications for global rates across all major economies."

Q: What's the biggest challenge in managing a money fund today? Fishman says, "The lessons of the global financial crisis and, more recently, the sovereign debt crisis in peripheral Eurozone are clear. Managers cannot be complacent about credit risks, which arise in the corporate, financial and even government sectors of today's markets. The events of 2007-2010 demonstrated clearly how interconnected capital markets around the world have become, and how swiftly shocks can be transmitted across major financial centers."

Q: How do you manage these credit risks? McCarthy answers, "It's a measure of how seriously we have always taken credit risk, that we have checks and balances in place to make sure our fundamental analysis of short-term credit issuers is thorough. In addition to the research capabilities of our GSAM portfolio managers, we also leverage the independent resources of the Goldman Sachs Credit Risk Management and Advisory department. The CRM&A maintains a list of more than 1,200 approved credits, which are signed off by at least two senior analysts. So effectively we're deploying two different levels of quality control in our approach to credit risk management." (Note: GSAM leverages the resources of Goldman Sachs & Co. subject to Chinese Wall restrictions as of March 31, 2011.)

Q: How does GSAM's size help? How does it hurt? Fishman tells us, "We believe our size is among the key benefits of investing with GSAM. We are large enough to attract the attention of top broker dealers. As a result, our clients can benefit from our broad access to dealer inventories, new issuance, and the highest standards of best execution. At the same time, though, we're small enough to be nimble. We don't need to buy massive quantities of an asset for it to have an impact on the fund. From a risk standpoint, that's a great advantage, when it comes to managing volatility."

Q: How have recent regulatory changes affected the industry and how have you adapted? McCarthy responds, "The most significant recent regulatory changes were the tighter liquidity guidelines in the SEC's revised 2a-7 rules, and similar provisions from the European Securities and Markets Authority. Interestingly, though, these changes have mainly reinforced our perennial conservative approach to our investment strategy. These reforms are in line with how we have managed the cash business for the past 30 years, and we welcome changes that we feel have helped raise the standard of risk management industry wide."

Q: What are your thoughts on the future of money funds and the PWG report? Do you think changes like a floating NAV, liquidity facility or capital reserves are likely or desirable? Fishman concludes, "Liquidity management strategies are now more relevant than ever, and we don't see this situation changing anytime soon. Corporate America currently holds near-record levels of cash, and new risks are arising across global markets. It's impossible to predict how the industry will evolve and regulations will pan out, but we believe there should always be a need for liquidity management."

He adds, "As for the President's Working Group, we recognize that there are no easy solutions to the issues that regulators and the industry are currently facing. We appreciate the discussion and debate these efforts are encouraging across the industry, and we welcome the progress made by regulators so far."

Below, we excerpt from the article, "Goldman Sachs Marks 30 Years In Money Funds," which is featured in the April issue of Crane Data's Money Fund Intelligence. The current issue of MFI writes: This month, we interview Goldman Sachs Asset Management's Dave Fishman and James McCarthy, Co-Heads of GSAM's Global Liquidity Management Team. Below, our Q&A discusses the advisor's philosophies and strategies, as well as changes in the current market environment.

Q: How long has GSAM been involved in running money funds? How long have you been involved? Fishman says, "Goldman Sachs has been in the money management business for 30 years: in fact, our global liquidity team celebrates the anniversary in May. Goldman Sachs was in the money market fund business even before it established its asset management business, so liquidity management is at the core of GSAM's enterprise, and remains one of its largest components. Assets under our liquidity team's management have risen from just $2 billion in 1981 to $244 billion this year, approximately a third of GSAM's total AUM [as of March 31, 2011]."

McCarthy adds, "Our portfolio management team has an average of 15 years of investment experience, encompassing both strong bull markets and deep bear markets. In fact, this year also marks the 15th anniversary of a pivotal point in our growth, when we launched our offshore business, taking a major step in the long-term project to expand our global footprint."

Q: Over the years, where have you seen the biggest changes in GSAM's business? Fishman responds, "We think of this global expansion as the biggest change, though it's more of a long-term evolution. It fits with Goldman Sachs' firm-wide commitment to following growth around the world. At GSAM, we believe a global approach enhances our portfolio management capabilities, in terms of flexibility and risk management, as well as our ability to deliver services to more clients."

"Our global reach is reflected in the comprehensive range of onshore and offshore fund strategies we offer -- from government, commercial paper and tax exempt funds, to our separately managed account capabilities. Increasingly, we are partnering with firms around the world to serve clients beyond our largest and most mature market in the US, and we have expanded the range of currencies in which we can provide liquidity," he says.

Fishman adds, "In addition, Kathleen Hughes joined recently as our head of global liquidity sales and distribution, based in London, and we have grown our European team. We've also made significant progress in the Asia Pacific region, with ventures in China and Australia. We expect this global expansion to continue rapidly over the next three to five years."

Q: What have been the main constants? McCarthy tells MFI, "Over the years we have identified core principles that have seen us through periods of recession and extraordinary market upheaval, and obviously most recently the global financial crisis. First, we view cash as its own asset class. We believe investors should approach cash management just as they would any other investment strategy: by creating a diversified portfolio that balances the investor's specific goals and risk tolerance. Liquidity maintenance and preservation of principal are the foundations of our investment approach. The financial crisis highlighted that liquidity was not properly priced, and now we believe the market should reflect the appropriate premium."

Q: What are your investors concerned about these days? Fishman answers, "In our view, the risks currently facing investors are as great as they've been in the 40 or so years of the money market funds industry. Over the past couple of years, and even in the past couple of months, the global marketplace has been driven by unpredictable and in some cases cataclysmic events: the credit crisis, the Eurozone's sovereign debt crisis, political upheaval across the Middle East and North Africa and the largest earthquake on record in Japan. Our clients are understandably worried about what they're going to see in the newspaper tomorrow. So the short answer is, investor concerns are twofold: they're worried about everything, and they're worried about whether they're adequately protected."

He adds, "Against this backdrop, investors want to give the responsibility of actively managing these risks to industry professionals with the capacity to analyze risks as they arise, and the flexibility to respond swiftly. Our clients value our global reach, which enables us to take a far nimbler approach to investing internationally."

Q: How do you help investors to address these concerns? McCarthy says, "One of our key objectives in creating funds over the years has been to give investors the opportunity to make informed decisions about their exposures in overseas markets. To that end, GSAM created two distinct US commercial paper funds, with one offering exposure to foreign commercial paper and/or foreign bank obligations, and the other focusing on US domestic issues. The aim was to provide investors products that cater to their risk tolerance and comfort level, which has become particularly relevant against the backdrop of sovereign risk and fragile European markets."

Los Angeles Times columnist Tom Petruno writes an excellent piece on how low rates are forcing investors to do things they don't want to do. The article, "Cash misery fuels rush to risk", says, "Near-zero yields from cash accounts are tempting more investors to chase higher returns in stocks, bonds and other riskier assets."

It explains, "With short-term interest rates still near rock-bottom, traditional cash hideouts such as bank savings accounts and money market mutual funds earn so little interest that it almost seems unfair you should have to report it on a tax return. The average money market fund's annualized yield is an infinitesimal 0.02%, according to iMoneyNet Inc. At that rate, $10,000 earns all of $2 a year. And that's before Uncle Sam and the state take their share (interest earnings, remember, are fully taxable)."

Petruno continues, "With the tax-season reminder of the virtually nonexistent returns on cash accounts, more investors may find themselves compelled to move money into riskier alternatives in search of higher earnings power. That's exactly one of the Federal Reserve's goals in keeping short-term rates near zero. The Fed wants idle cash flowing into stocks, bonds, real estate and other assets as a way to stimulate the economy."

He warns, "It's a dangerous game because of the potential for desperate people to reach beyond their true tolerance for risk-taking. Yet there are plenty of signs this year that a growing number of investors have reached the point of severe misery with cash and are heading elsewhere, for better or worse." The piece quotes Morningstar Inc.'s Kevin McDevitt, "People feel they have no choice but to go 'risk on' because of the Fed."

The Times also writes, "One of the year's biggest surprises so far has been small investors' willingness to buy domestic stocks again. U.S. stock mutual funds were bleeding cash for much of last year as people sold out, a trend that continued even as the market surged in the fourth quarter. But by mid-January, the funds began to see net inflows again, meaning new purchases exceeded redemptions. U.S. stock funds took in a net total of almost $21 billion in the first two months of this year, industry data from the Investment Company Institute show. That's a small sum compared with domestic funds' total assets of $4.4 trillion, but the change of heart is what's significant. Nearly $86 billion had flowed out of the funds last year."

But, Petruno tells us, "[T]hings have become much more complicated for investors who are looking to put cash to work in the bond market. Small investors began to pour into bonds two years ago, after stocks crashed. It was a smart move. Market interest rates mostly declined from early 2009 through late last year, which meant that older bonds issued at higher fixed rates rose in value. Now, however, ... [the] tax-free municipal bond market suffered a vicious sell-off from November through mid-January, pushing bond fund share prices down as much as 10% and driving market yields to two-year highs. Investors were spooked by fears that state and local governments' budget woes would lead to widespread bond defaults. Muni bond mutual fund investors have pulled $40 billion from the funds over the last five months ... [and] money still is coming out of muni funds."

He explains, "That raises a critical question: Do many of the investors who have joined the rush into bonds since 2008 fail to understand the basic risks? If market interest rates rise, the value of older bonds declines, and your investment can slide into the red. Americans now have $2.6 trillion in bond mutual funds, up from $1.7 trillion three years ago. That's a lot of money that could be shocked if interest rates should jump across the board and depress bond prices."

Finally, Petruno says, "So the Federal Reserve is getting what it wanted -- people are putting more of their cash to work. What we're still waiting to find out is how well many newbie bond investors understand that there really is no free lunch. Higher yields come with higher risk. Cash has never looked less attractive as an asset than it does now, especially with inflation rising. But as some muni bond investors learned the hard way, for money that you absolutely cannot afford to lose in the short run, cash is a form of misery worth enduring."

Money fund assets posted their third straight week of gains in the week ended April 13, but the increases, likely driven by the plunge in repo yields, will no doubt disappear as the April 15 (or 18) tax date looms. ICI's latest weekly "Money Market Mutual Fund Assets" report says, "Total money market mutual fund assets increased by $2.32 billion to $2.746 trillion for the week ended Wednesday, April 13, the Investment Company Institute reported today. Taxable government funds increased by $3.71 billion, taxable non-government funds increased by $2.26 billion, and tax-exempt funds decreased by $3.65 billion."

In other news, ICI announced details on its "2011 Money Market Funds Summit", which will be held May 16, 2011 in Washington, DC. A press release sent out yesterday says, "The Investment Company Institute (ICI) will host a one-day summit on Monday, May 16, bringing together top analysts and industry leaders to discuss the current state of the money markets, progress to date in strengthening money market funds since the financial crisis, and the future of money market fund regulation."

It continues, "The summit will feature the following topics and speakers: Keynote: F. William McNabb III, Chairman and CEO of The Vanguard Group, will deliver the opening address. Luncheon speaker: Doug Holtz-Eakin, President of American Action Forum, will speak at the luncheon.... Lou Crandall, Chief Economist at Wrightson, ICAP, LLC, and Paula Tkac, Vice President and Senior Economist at Federal Reserve Bank of Atlanta, will speak on a panel along with other industry experts about money markets today, as they are moving past the financial crisis.... Along with other industry leaders, Anthony Carfang, Partner and Director at Treasury Strategies, Inc., will discuss the global money market fund industry."

The agenda adds, "A panel moderated by Karrie McMillan, General Counsel of ICI, Travis Barker, Chairman of the Institutional Money Market Funds Association in London, and others will discuss the topic of money market fund regulatory changes since the 2008 financial crisis.... Paul Schott Stevens, President & CEO of ICI will moderate a panel about the future of money market fund regulation.... Andrew J. 'Buddy' Donohue, Partner, Morgan, Lewis, & Bockius LLP and former Director of SEC's Division of Investment Management, and Erik R. Sirri, Professor of Finance, Babson College, will provide their insights in this forward-looking discussion. The complete program is posted on ICI's events page. Event location and attendance details: The St. Regis Hotel, 923 16th Street & K Street, NW, Washington, DC 20006.

As we mentioned in our Crane Data April 10 News "SEC to Host Roundtable on Money Funds and Systematic Risk May 10", "The Securities and Exchange Commission announced today that it will host a roundtable discussion in May on money market funds and systemic risk on May 10." Finally, note also that Crane Data will host its 3rd annual Money Fund Symposium on June 22-24, 2011, at The Philadelphia Marriott, so there will plenty of discussions on the future of money fund regulations in the coming months.

William Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, spoke again Tuesday in Asia on Regulatory Reform of the Global Financial System. Dudley explains, "The financial crisis exposed significant vulnerabilities in the financial system. Without revisiting all the causes and consequences of the credit boom and bust that led to a boom and bust in the U.S. housing market, the bottom line is that our regulatory system failed in two important dimensions. First, a significant number of large, internationally active financial firms reached the brink of failure. Second, the financial system was not very resilient when these firms got into difficulty. Instead, the threat of failure propagated further shocks that reverberated throughout the global financial system."

He says, "These two shortcomings reflect many factors including inadequate capital and liquidity buffers, poor incentives to correctly measure, price and manage risks ex ante, the opacity of firm balance sheet and counterparty exposures, and the manner in which large financial firms were interconnected within the financial system. In the end, there was too much leverage in which large amounts of highly illiquid, long-term assets were financed by short-term liabilities. The fact that a large amount of the wholesale funding used to finance these assets was provided by leveraged financial intermediaries to other financial intermediaries increased the system's vulnerability to adverse shocks. As it turned out, the amount and quality of capital was grossly inadequate relative to the quality of the assets and off-balance-sheet exposures of many of the major global banking institutions. Moreover, many institutions had inadequate liquidity buffers. The lack of liquidity forced the fire sale of assets, which depressed prices and increased the pressure on capital."

Dudley continues, "The interconnectedness of the financial system also caused shocks to spread quickly. For example, the failure of Lehman Brothers led to losses at the Reserve Fund, which precipitated a widespread money market mutual fund panic. It also led to actions by U.K. bankruptcy authorities that had the effect of freezing the assets owned by hedge fund and other clients of the firm and this encouraged such investors to pull assets from other institutions perceived to be weak. These and other propagation channels in turn, led to virtual stoppage of lending and borrowing activity in the money markets and, ultimately, a credit crunch that reverberated throughout the global financial system. For example, the crisis led to a sharp constraint on the availability of trade credit in the fall of 2008 that had a devastating impact on economic activity in emerging markets in Asia and Latin America, as well as Japan. This region felt the full economic consequences of the crisis even though banks in the region were generally healthy and far from the U.S. housing boom and bust and the subprime mortgage debacle that could be viewed as the initial spark that ignited the crisis."

He comments, "The crisis also underscored another area for further cross-border work: Our international approach to liquidity provision and lender-of-last-resort services to globally active institutions. Cooperation among liquidity providers, for example, through some central bank dollar swap arrangements, played an important role in stabilizing global money markets. However, the division of lender-of-last-resort responsibilities between home and host countries remained ambiguous through the crisis. This needs further attention."

Dudley asks, "So what steps have been taken to address some of these sources of vulnerability? There are literally dozens of initiatives underway nationally and globally, not only in traditional bodies for such cooperation such as the Basel Committee on Bank Supervision, but also among newer international groups such as the Financial Stability Board. Most of these initiatives can be grouped into three major categories: Actions to significantly reduce the probability of failure of large systemically important financial institutions. Measures to broaden the oversight of the financial system to include activities that occur outside of the core banking system. The shadow banking system, which is composed of the wide range of financial intermediation activities that occur outside of the traditional purview of bank regulators, needs greater attention."

He continues, "In particular, shadow banking activities that involve maturity transformation are vulnerable to shocks because such activities do not have the support of bank deposit guarantees or access to central bank liquidity and, thus, are vulnerable to funding runs. Steps to strengthen the resolution regime and the core financial market infrastructure to ensure that when a large complex financial firm fails, the failure doesn't threaten to bring down the entire financial system."

Dudley then says, "The second important strand of reform is to ensure that regulatory oversight is sufficiently broad to include the activities of the so-called shadow banking system. This aspect of reform and oversight is still in its early days. But work is underway. For example, the Financial Stability Board is undertaking work to identify potential sources of vulnerability caused by the activities in the shadow banking system and how such vulnerabilities could be addressed. Also, in the United States, the Financial Stability Oversight Council (FSOC) views its mandate broadly with respect to identifying systemic risks and proposing remedies. For example, on an ongoing basis, the FSOC will monitor and assess which non-bank financial intermediaries in the United States are systemically important and, thus, require greater regulatory oversight."

Finally, he adds, "But the focus will not just be on large financial firms. Activities and practices that occur outside of the core institutions are also important. For example, the activities of money market mutual funds is one area receiving close scrutiny. As you know, a run on the money market funds developed in the fall of 2008 when the Reserve Fund broke the buck when Lehman Brothers failed. This underscored a critical structural weakness of money market mutual funds created by the convention that the net stable asset value could be fixed at par. When a money market mutual fund incurs losses that cause it to 'break the buck,' this encourages investors to rush to withdraw their funds from other funds before they break the buck. The result can be a run on money market mutual fund assets. In the United States, the Securities Exchange Commission has already tightened the rules with respect to liquidity, quality and the average maturity of so-called 2a-7 fund assets, but there is still more to be done to address the remaining vulnerabilities."

Comment letters on the President's Working Group Report on Money Market Funds are still being posted to the the SEC's website under "Other Commission Orders, Notices, and Information". The most recent is one from John McGonigle, Vice Chairman of Federated Investors, which takes issue with some of the points made by three late comment letters from Rene Stulz of the Squam Lake Group, Paul Volcker, and the Shadow Financial Regulatory Committee. McGonigle says, "We are writing to address certain proposals made in three comment letters regarding the President's Working Group on Financial Markets' study of possible money market fund reforms."

He explains, "Although Federated Investors, Inc. has already commented on the proposals made in the PWG Report and by the Squam Lake Group, we consider it important to point out some critical errors made in their analysis of money market funds and problems with the Squam Lake Group's proposal in particular. We realize that while these letters were prepared by distinguished public servants and academics, the authors are not familiar with the management and operation of money market funds. Their lack of familiarity with these matters has led them astray, both in terms of their assessment of the potential for systemic risk and in their proposals for reform."

McGonigle continues, "We will try not to reiterate points made in our previous letters. Our first letter explains, among other matters, why the proposal to eliminate money markets (by forcing them to 'float' their share price) would be unwarranted and detrimental to investors, the capital markets and the U.S. economy as a whole. Our second letter explains the adverse implications of encouraging shareholder dependence on managers providing financial support to their funds, as proposed by the Squam Lake Group. This letter will identify some of the errors made by the commenters in the arguments supporting their proposed reforms."

He says, "One of the commenters characterized money market funds as 'unsupervised.' There is no basis for this assertion. As the Commission knows, it carefully supervises money market fund and other investment companies. Moreover, the Commission has substantially increased its supervision of money market funds by requiring monthly reports of detailed portfolio information on Form N-MFP. As noted in our previous comment letter, the Commission has shown demonstrably more success in its supervision of money market funds than any other regulator has shown in its supervision of banks.... The recent amendments to Rule 2a-7 have further strengthened board supervision by requiring that funds conduct regular stress tests and report the results to their directors. Perhaps the commenter meant 'little or no ... supervision' by the Board of Governors of the Federal Reserve. There is no reason to assume, however, that such additional supervision is warranted, and the commenter does not offer any justification for Fed supervision."

McGonigle adds, "All three commenters express concern that the Treasury's Temporary Money Market Fund Guarantee Program has created a moral hazard.... The possibility of another Temporary Guarantee Program will not encourage money market fund managers to take such risks or investors to accept them. First, the temporary guarantee was extended only to those funds that had not already been forced to drop their share price below $1.00 (also known as 'breaking a dollar'). It did not protect shareholders in the Reserve Primary Fund.... Second, the Temporary Guarantee Program required the liquidation of a fund before guarantee payments would be made to its shareholders.... Being put out of the business of managing money market funds should be an adequate deterrent to any theoretical moral hazard that the prospect of federal protection might otherwise generate."

He explains, "All three commenters state or imply that shareholders will 'run' from a money market fund in an attempt to recover their investment before the fund breaks a dollar. They claim that this creates a systemic risk to the financial system, insofar as the threat of breaking a dollar could trigger massive redemptions from money market funds, which would in turn force funds to engage in a 'fire sale' of their holdings and to stop providing short-term financing to the government, financial institutions and corporations. As evidence of this risk, they cite the large-scale redemptions from prime money market funds that occurred in the wake of the Reserve Primary Fund breaking a dollar. This 'run on the funds' scenario presumes that there is some time between an event triggering the redemptions and the fund breaking a dollar. However, ... [of] the sixteen events identified in the report as prompting manager support, twelve were isolated credit events. Such credit events are, by their nature, unanticipated (otherwise the funds would not be holding the securities when they defaulted). As a result, these events produce sudden decreases in the funds' shadow prices that require an immediate response from the funds' manager. In other words, in the absence of manager support, an adverse credit event should cause a money market fund to break a dollar immediately, without providing its shareholders with an opportunity to redeem in advance of the event. 'Running' will not protect money market fund shareholders from the consequences of an isolated credit event, so it is not surprising that none of these events triggered wide-scale redemptions. We must therefore look to other events for evidence of shareholders propensity to run from troubled money market funds."

McGonigle mentions, "The events in September 2008 unfolded too rapidly for anyone to attempt education or outreach efforts, and it is unlikely that such efforts would have succeeded. The Lehman Brothers bankruptcy was preceded by the government takeover of Fannie Mae and Freddie Mac, and coincided with the government rescue of AIG and the acquisition of Merrill Lynch by Bank of America. At the time, there were serious questions regarding the viability of Citicorp, Goldman Sachs, Morgan Stanley and many other major U.S. financial institutions. This uncertainty caused the credit markets to 'freeze up,' as few were willing to provide liquidity for any instruments other than U.S. government obligations."

"Under these extreme conditions, it should not be surprising that some money market fund shareholders were concerned about further defaults in their fund's portfolio and the possibility that such defaults would eventually overwhelm the manager's capacity to support a stable price.... If our analysis of September 2008 is correct, then there is no reason to believe that the Reserve Primary Fund breaking a dollar would have led to wide-scale redemptions by itself. The historical evidence strongly indicates that shareholders would have responded to the failure by determining what other funds were exposed to Lehman Brothers and whether their managers had provided support. Shareholders would not have reflexively redeemed from funds without any exposure or that had received manager support, so there would not have been large-scale redemptions from these funds. Put differently, the evidence indicates that the 'run' in September 2008 was a consequence of systemic risks already present in the financial system, namely the belief that the same forces that caused Lehman Brothers to fail and required AIG and Merrill Lynch to be rescued also might lead to the failure of other major financial institutions. Money market funds were not, however, an independent source of systemic risk," he writes.

McGonigle writes, "Our analysis also has important implications for the reforms being considered by the Commission. If runs are a response to other systemic risks in the system, then floating the share price will not stop runs. Shareholders will want to get their money out before 'something else happens,' and these redemptions will eventually force funds to sell their securities into a distressed market. The Squam Lake Group's buffer also will not help the situation, because it is only available to cover losses, not to provide liquidity to the funds."

His conclusion says, "As we have shown, the recommendations made in these comments letters are based on a superficial analysis of money market funds and their shareholders. They criticize the fact that funds are not supervised in the same manner as banks, without recognizing the historical effectiveness of the Commission's and directors' supervision of the funds. They raise the specter of moral hazard without considering the actual terms of the Temporary Guarantee Program. They speculate on shareholders motivations for redeeming from the funds in September 2008 without regard for numerous events during the preceding three decades that did not lead to widespread redemptions. Finally, the Squam Lake Group failed to consider the necessary consequences of its proposed buffer (more frequent and arbitrary fund liquidations) or estimate the enormous cost of a buffer relative to the fees earned for managing money market funds. Once these points are analyzed in greater depth, it becomes clear that the commenters have not provided a convincing case for their proposed reforms. We continue to believe that the Commission would be better advised to focus on the reforms supported by an overwhelming majority of the comment letters -- namely the creation of an emergency liquidity facility."

The Financial Times writes "Repo fee hits money market funds", which says, "Hundreds of billions of dollars invested in money market funds face almost zero returns after sharp falls in short-term interest rates. The key interest rate for funding trades in US Treasuries fell to a tiny fraction of 1 per cent on Monday. Nearly a third of the $2,750bn that sits in US money market funds is invested in the repurchase or repo sector, trading in which has been hit by a new charge levied on banks at the start of the month by the Federal Deposit Insurance Corporation."

The article explains, "The plunge in short-term interest rates, to just 0.01 per cent, is also due to the temporary absence of some Treasury securities, after wrangling in Washington over the US debt ceiling, that would help soak up excess cash. Bearish positions in government bonds by dealers is another factor behind the squeeze in rates."

Author Michael Mackenzie writes, "The latest drop in rates compounds the already low level of returns money market funds have made since the Federal Reserve set overnight interest rates in a band of zero to 0.25 per cent in December 2008. Analysts are predicting further flows out of money market funds."

The piece quotes George Goncalves, head of interest rate strategy at Nomura Securities said there was 'a potential hastening of the shift from money market fund assets into bank deposits as money market outflows continue with low yields'."

It adds, "The drop in short-term interest rates, notably in the repo market, is a blow to the sector as money market funds exchange their excess cash for Treasury securities. With some banks reducing their presence in the repo market due to the FDIC charge, more cash is now available to invest, pulling short-term rates down. The general collateral rate used in the Treasury repo market traded at 1 basis point on Monday.... Other short-term rates for Treasury bills and commercial paper have dropped since the start of April with three-month bills at 4bp on Monday."

FT says, "Peter Crane, president of Crane Data, which tracks money market funds, said 27 per cent of the market was placed in the repo market. They quote Crane, "These kind of rate levels do not help and in the past two years we have experienced periods of low and even negative rates in the repo market. What matters is how long it lasts."

While they may in coming days, the yields on money market funds have not moved lower yet. Our Money Fund Intelligence Daily publication shows Crane Money Fund Indexes 7-Day Yields flat on Friday. Of course, given the proximity of all funds' net yields to zero (and the continued resistance to allowing any fund to "go negative" with its yield), any downward move in rates is likely absorbed by fee reductions instead of being passed through. Our Treasury Institutional and Government Institutional Crane Money Fund Indexes are already at rock bottom (0.01%), while the Crane Prime Inst MF Index has yet to be moved by the near-zero repo rates at 0.08%.

A press release sent out Friday afternoon says, "The Securities and Exchange Commission announced today that it will host a roundtable discussion in May on money market funds and systemic risk. The roundtable will include participants from the Financial Stability Oversight Council (FSOC). The roundtable will take place on May 10, 2011, and will provide a forum for various stakeholders in money market funds to exchange views on the potential effectiveness of certain options in mitigating systemic risks associated with money market funds. These will include, but are not limited to, options raised in the President's Working Group report on possible money market fund reforms that was issued in October 2010 (

The statement continues, "Roundtable panelists are expected to include sponsors of money market funds, short-term debt issuers, investors, and the academic community. A list of participants will be published closer to the date of the roundtable. The roundtable discussion will begin at 2:00 p.m. The roundtable will be webcast on the Commission's website at and will be archived for later viewing. Seating for the public will not be available."

It adds, "Members of the public who wish to provide their views on the matters to be considered at the roundtable discussion may submit comments to the comment file for the President's Working Group Report on Money Market Fund Reform, as noted below. Comments to the Commission may be submitted by any of the following methods: Electronic Comments - Use the Commission's Internet comment form (; or, Send an e-mail to (Please include File Number 4-619 on the subject line); or, Use the Federal eRulemaking portal ( Follow the instructions for submitting comments.... Send paper comments in triplicate to Elizabeth Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, D.C. 20549-1090."

The release notes, "All submissions should refer to File Number 4-619. This file number should be included on the subject line if e-mail is used. To help process and review your submissions more efficiently, please use only one method. The Commission will post all comments on the Commission's website at Please note that all comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly."

With this announcement, May and June are shaping up to be a busy time for money fund professionals and regulators following several months of calm. Among the other events scheduled: on May 11 (afternoon), Crane Data's Peter Crane and Federated Investors' Debbie Cunningham will speak on money funds at a Greater Washington Association of Financial Professionals' meeting; on May 16, ICI will host a "Money Market Funds Summit" at the St. Regis Hotel in Washington (details pending); and, on June 22-24, Crane Data will host its 3rd annual Money Fund Symposium, the largest gathering of money market fund professionals of the year, at the Philadelphia Marriott (Downtown).

Earlier this week, The Federal Reserve Board "requested comment on a proposed rule to repeal the Board's Regulation Q, which prohibits the payment of interest on demand deposits by institutions that are member banks of the Federal Reserve System." A press release explains, "The proposed rule would implement Section 627 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which repeals Section 19(i) of the Federal Reserve Act in its entirety effective July 21, 2011. The repeal of that section of the Federal Reserve Act on that date eliminates the statutory authority under which the Board established Regulation Q."

The release explains, "The proposed rule would also repeal the Board's published interpretation of Regulation Q and would remove references to Regulation Q found in the Board's other regulations, interpretations, and commentary. The Board is seeking comment on whether the repeal of Regulation Q is expected to have implications for balance sheets and income of depository institutions, short-term funding markets such as overnight federal funds market, the demand for interest-bearing demand deposits, and competitive burden on smaller depository institutions. Comments on the proposal must be submitted within 30 days from the date of publication in the Federal Register, which is expected shortly."

The full "Prohibition Against Payment of Interest on Demand Deposits - Notice of proposed rulemaking; request for public comment's Summary" explains, "The Board is requesting public comment on proposed amendments that would repeal Regulation Q, Prohibition Against Payment of Interest on Demand Deposits, effective July 21, 2011. Regulation Q implements the statutory prohibition against payment of interest on demand deposits by institutions that are member banks of the Federal Reserve System set forth in Section 19(i) of the Federal Reserve Act. Section 627 of the Dodd-Frank Wall Street Reform and Consumer Protection Act repeals Section 19(i) of the Federal Reserve Act effective July 21, 2011. The proposed amendments implement the Dodd-Frank Act's repeal of Section 19(i). The proposed amendments would also repeal the Board's published interpretation of Regulation Q. The proposed amendments also remove references to Regulation Q found in the Board's other regulations, interpretations, and commentary, including Section 204.10 of Regulation D (Reserve Requirements of Depository Institutions) and paragraph (n) of Supplement I to Regulation DD (Truth in Savings)."

The proposed rule continues, "The Board promulgated Regulation Q on August 29, 1933 to implement Section 19(i) of the Act. In the past, Regulation Q also contained provisions implementing then-current statutory provisions regulating the rates of interest payable on various types of interest-bearing deposits. The Depository Institutions Deregulation Act of 1982 phased out these statutory interest rate limitations effective in March 1986. After that time, Regulation Q consisted primarily or exclusively of provisions related to implementing Section 19(i)'s prohibition of the payment of interest on demand deposits by member banks."

It says, "Section 627 of the Dodd-Frank Act repeals Section 19(i) of the Act in its entirety, effective one year from the date of enactment. Accordingly, the Board will no longer have statutory authority to promulgate Regulation Q effective July 21, 2011. The Board therefore proposes to repeal Regulation Q, effective July 21, 2011. For the same reason, the Board proposes to repeal its published interpretation of Regulation Q currently set forth at 12 CFR 217.101 (Premiums on deposits)."

The rule adds, "The Dodd-Frank Act did not repeal the Board's authority under Section 19(a) of the Act to 'determine what shall be deemed to be a payment of interest.' The Board believes, however, that the primary reason for this authority was to enforce Section 19(i)'s prohibition of the payment of interest on demand deposits. Accordingly, the Board believes that there will be no reason to retain the definition of 'interest' in Regulation Q following the repeal of Section 19(i). The Board recognizes that there may be other laws or regulations that currently refer to regulation Q or that incorporate the definition of 'interest' currently set forth in Section 217.2(d) of Regulation Q. The Board believes, however, that such other laws and regulations can substantively incorporate the Regulation Q definition of 'interest' at any time if necessary, or can delete references to Regulation Q that will be obsolete after July 21, 2011. Accordingly, the Board does not propose retaining the definition of 'interest' currently set forth in Regulation Q."

The Fed concludes, "The Board seeks comments on all aspects of the proposal. In addition, the Board specifically seeks comments on the following: 1. Does the repeal of Regulation Q have significant implications for the balance sheets and income of depository institutions? What are the anticipated effects on bank profits, on the allocation of deposit liabilities among product offerings, and on the rates offered and fees assessed on demand deposits, sweep accounts, and compensating balance arrangements? 2. Does the repeal of Regulation Q have any implications for short-term funding markets such as the overnight federal funds market and Eurodollar markets, or for institutions such as institution-only money market mutual funds that are active investors in short-term funding markets? 3. Is the repeal of Regulation Q likely to result in strong demand for interest-bearing demand deposits? 4. Does the repeal of Regulation Q have any implications for competitive burden on smaller depository institutions?"

Comments should be "identified by Docket No. R-1413 and RIN No. 7100-AD60 and sent via e-mail to Finally, note that Crane's Money Fund Symposium will host a session on "Corporate Sweeps, Reg Q & Banking Regs on Friday, June 24 in Philadelphia featuring Jeff Avers, Group V.P. of SunTrust and Tony Carfang, Principal of Treasury Strategies.

The April issue of Crane Data's flagship Money Fund Intelligence publication e-mailed this morning along with March 31, 2011, performance data. This month's edition features the articles, "Waivers Costing Billions; Expenses Under 0.25%," which discusses the impact of low yields on fund revenues; "Goldman Sachs Marks 30 Years In Money Funds," which interviews industry veterans Dave Fishman and James McCarthy; and, "Comeback or Flashback? Enhanced Cash Returns," which reviews the recent fund launches and filings in the space between money funds and ultra-short bond funds. Crane Data will also be releasing the final agenda and an updated sponsor list for its upcoming Money Fund Symposium conference in Philadelphia, June 22-24.

MFI's expense article says, "Charged expenses for money market mutual funds continue to come under pressure. During the quarter ended March 31, 2010, our Crane 100 Index and broader Crane Money Fund Average both dropped below one-quarter of a percent. The average taxable money fund is now charging 0.23% (according to both indexes), which on the current $2.6 trillion in assets tracked by Crane Data amounts to under $6 billion in annualized revenue. While the drop in fees and assets has been brutal, this brings the revenue stream for money funds only back down to levels seen in early 2006."

Our monthly fund family profile asks, "Q: How long has GSAM been involved in running money funds?" Goldman Sachs Asset Management's Fishman tells us, "Goldman Sachs has been in the money management business for 30 years: in fact, our global liquidity team celebrates the anniversary in May. Goldman Sachs was in the money market fund business even before it established its asset management business, so liquidity management is at the core of GSAM's enterprise, and remains one of its largest components." (Look for more article excerpts on in coming weeks.)

Finally, the April issue discusses "enhanced cash." We write, "While momentum has been slow building, especially given the ultra-low yield environment, a couple new entrants into the market for 'enhanced cash' or ultra-, ultra-short bond funds, may bring some interest to the sector." We briefly look at existing offerings from Fidelity, Dreyfus and JPMorgan, and a new filing from Oppenheimer Funds.

Each month, Crane Data publishes the 30-page Money Fund Intelligence newsletter, which contains articles, news, indexes, rankings and performance statistics on money market mutual funds and "cash" investments. We also publish the "complement" Money Fund Intelligence XLS, which has additional data and rankings; Crane Index, a subset with indexes and averages; and we update Money Fund Wisdom, our online database query system, with all of our monthly data and products. Note that our Money Fund Portfolio Holdings collection is published on the 10th business day, so look for this next Friday.

Deutsche Bank appears poised to acquire a second "offshore" money market mutual fund complex with Standard Life's proposal to merge its funds into DB Advisors'. The marks the second acquisition by Deutsche of money funds assets from a British advisor, and may indicate that U.K.-based institutions are having second thoughts about the money fund business. DB became subadvisor of Henderson Global Investors' 3.3 billion Pound Henderson Liquid Assets Fund late last year. (See our October 6, 2010, Crane Data News "Deutsche Bank to Manage Henderson Liquid Assets Offshore MM Fund.")

A press release entitled, "DB Advisors Welcomes Opportunity to Expand Money Market Funds," says, "DB Advisors, Deutsche Bank's global institutional asset management business, said today that it would welcome an opportunity to amalgamate some of Standard Life Investments (Global Liquidity Funds) p.l.c.'s money market funds into the DB Advisors fund range. Standard Life Investments (Global Liquidity Funds) p.l.c has proposed to shareholders in its Sterling, Euro, and U.S. Dollar Liquidity Funds that these sub-funds are merged with DB Advisors' Deutsche Global Liquidity Series (DGLS) money market funds. The funds are constant net asset value (NAV), AAA-rated, money market funds. A shareholder vote is expected in April."

The release continues, "Standard Life Investments currently manage assets of L5.6 billion, E2.0 billion and $172 million for the (Global Liquidity Funds) plc. If shareholders vote in favour of amalgamation, it is expected that a significant proportion of these assets will transfer to DB Advisors. Figures are subject to change. The announcement of this proposed amalgamation follows the successful conclusion of a similar initiative between DB Advisors and Henderson Global Investors. In March 2011, DB Advisors completed the merger of the Henderson Liquid Assets Fund into its Sterling-denominated DGLS fund. Approximately L2.5 billion of assets were transferred to DB Advisors."

Mark Bolton, CEO of DB Advisors UK, said, "DB Advisors is committed to serving the needs of money market fund investors worldwide. We would be delighted to welcome investors in these funds to our global platform, which has deep resources, a robust credit process and a strong commitment to transparency." The release adds, "With over E94 billion in money market assets under management (as at December 31, 2010), DB Advisors is a leading provider of cash and short duration investment strategies for investors worldwide."

According to Crane Data's Money Fund Intelligence International, which tracks "offshore" or "IMMFA" money market funds, domiciled primarily in Dublin and Luxembourg, Standard Life is the 12th largest manager of money funds outside the U.S. out of 21. DB is the 7th largest offshore money fund manager in this $614 billion market. The largest managers in this space are JPMorgan, BlackRock, Goldman and HSBC, which was recently mentioned in the FT denying any plans to exit the business.

See our March 28 Link of the Day "The Financial Times writes 'Amundi money market move bucks trend'", which quoted the FT, "Last week, it was reported that HSBC Global Asset Management had considered leaving the sector altogether because of regulatory risks in the US. It came only a few months after Henderson Global Investors shifted most of its money market business to DB Advisors, Deutsche Bank's global institutional asset management business, citing regulatory pressure as the main reason.... [But] HSBC says it has 'no plans to exit the money market industry', which represents around 20 percent of its assets."

A press release sent out yesterday morning says, "Fitch Ratings has updated its global rating criteria for money market funds (MMF). The criteria update, which is part of Fitch's periodic review of all rating criteria, provides added transparency in light of the globally evolving regulatory landscape for MMFs. The report clarifies and updates certain elements of Fitch's MMF rating criteria. However, the core analytical framework, as outlined by Fitch in October 2009, remains unchanged. As such, no rating actions are expected as a result of the updated criteria. The criteria primarily focus on 'prime' MMFs, although it is also applicable to MMFs investing in sovereign, agency, and tax-exempt obligations."

The release continues, "Key changes to the criteria include: Expanded rating criteria to encompass the portfolio and operating parameters of MMFs rated 'AAmmf' and 'Ammf', which may be particularly relevant in light of the pan-European definition of MMFs; Updated diversification criteria for direct, indirect and collateralised exposures in MMFs, including exposures to the fund's sponsor or parent; An update of those assets recognised for daily and/or weekly liquidity and explicit recognition of committed liquidity facilities, when available; and, Clarified treatment of counterparty risk in repurchase agreements."

Fitch's statement adds, "Key elements of Fitch's ratings criteria are largely consistent with regulatory changes and enhancements to the MMF industry that were announced and/or implemented in 2010. For example, the U.S. Securities and Exchange Commission adopted a number of important enhancements to the regulatory framework for US MMFs. The Institutional Money Market Funds Association, the trade association representing 'AAA' rated constant net asset value (CNAV) MMFs outside of the US, reviewed its Code of Practice outlining how these MMFs manage credit, liquidity, and market risk. The Committee of European Securities Regulators, which was recently replaced by the European Securities and Markets Authority, published guidelines for harmonised MMF definitions across Europe. These definitions are viewed as a major step towards greater market transparency and comparability of European MMFs and have already led to significant reshuffling of product ranges, notably in Continental Europe. 'AAmmf' and 'Ammf' criteria will predominantly serve European funds."

Fitch's updated "Global Money Market Fund Rating Criteria" explains, "A Fitch MMF rating is primarily based on a review of the fund's portfolio holdings with respect to: credit quality; diversification and maturity; market and interest rate risk; and available liquidity relative to the fund's shareholder base. In addition, consideration is given to the capabilities and resources of the fund's investment advisor and sponsor, including the sponsor's ability and willingness to financially support the fund, if needed, in times of extreme stress. Fitch recognizes there is no contractual obligation on a part of the sponsor to support a fund. Therefore, the concept of support is implicit rather than explicit. Historically, support has been forthcoming from strategically motivated sponsors that had sufficient financial resources."

It adds, "Fitch relies on information provided by the investment manager and the fund administrator, supplemented by other third-party sources of information to the extent available and judged to be reliable. When assigning ratings, Fitch does not perform due diligence but undertakes reasonable checks on the information provided by the fund management company. MMF ratings may not incorporate 'event risk'. Event risk is defined as an unforeseen event which, until the event is known, is not included in the existing ratings. Prominent event risks for funds include sudden, dramatic and unexpected changes in market conditions due to unforeseen circumstances, such as a natural disaster or adverse regulatory decisions, litigation, fraud or other unforeseeable breakdowns in control and governance, among others."

For more details, visit For a list of Fitch rated money market mutual funds (and other AAA rated funds), see our Money Fund Intelligence XLS or Money Fund Wisdom products.

Assets of money market mutual funds dropped by $15.4 billion, or 0.6%, in March according to Crane's Money Fund Intelligence Daily (through 3/31/11), while yields remained at record low levels. Analysis of Friday's MFI Daily shows that Tax-Exempt money funds drove the declines in March, falling $9.4 billion, or 3.0%. Assets had risen slightly in February (up $1.2 billion) after falling sharply in January by $67.2 billion, or 2.5%. Declines early in the year were driven by outflows from Government and Treasury Institutional funds.

The 7-day (net) annualized yield of our Crane 100 Money Fund Index, an average of the 100 largest taxable money funds, dipped to 0.06% as of March 31 from 0.07% in January and February. Our broader Crane Money Fund Average, a measure of all taxable money funds, remained at 0.03%, where it has been all year. The Crane Tax-Exempt Money Fund Index remained at 0.03% in March, after falling to 0.04% in February and 0.05% in January. Look for more information on yields and assets in March in our Money Fund Intelligence and monthly data products, which come out Thursday morning.

In other news, Professional Pensions reports "DB Advisors looks to absorb SLI money market assets", which says, "DB Advisors could win up to $12bn (L7.4bn) in money market fund assets from rival Standard Life Investments after SLI's withdrawal from the sector over regulatory concerns. Standard Life Investments became the latest manager to quit its money market funds on the grounds it does not offer banking products to its clients. Global regulators are considering ushering Treasury-style money market funds into the scope of banking regulations."

Also, Capital Advisors released a research piece entitled, "The Path for Housing GSEs and its Impact on Corporate Cash Investors." It says, "Recent events related to government sponsored enterprise (GSE) reform have prompted short-duration investors to question the level and nature of government support for their debt issuance after December 31, 2012. The housing GSEs play a critical role in the U.S. mortgage market, representing 99% of all new mortgage backed securities (MBS) issuance in recent years. Money market funds owned $402 billion in agency debt at the end of 2010, which accounts for approximately 15% of all fund assets, and direct holdings of agency debt doubled in corporate cash portfolios between 1Q 2009 and 4Q2010."

The piece continues, "Due to their current government debt classification, the sudden removal of U.S. Treasury support for GSE debt may pose systemic risk. Current and projected capital draws by their regulator indicate that Fannie Mae (FNM) and Freddie Mac (FRE) may not need additional Congressional capital appropriations after 2012. The government's proposal to Congress also indicates its strong commitment to maintaining support. In conclusion, an expected lengthy political process, the possibility of grandfathering existing debt, and the short duration nature of cash debt, should provide additional comfort to corporate cash investors."

Finally, Treasury Strategies issued a press release entitled, "Comptroller of the Currency Says Moody's Proposed Rating Methodology For Money Market Funds Must Not Rely on Sponsor Support." It says, "Criticism is mounting for a proposal from Moody's Investor Services that would rate money market funds based on a fund sponsor's ability and willingness to support a distressed fund. Acting Comptroller of the Currency John Walsh expressed the regulator's opposition in a letter to Congressman Gregory Meeks, stating, 'We are opposed to any policy that creates an expectation that a national bank will be relied upon to provide support to a sponsored fund.'"

Late yesterday, the DTCC, or Depository Trust & Clearing Corporation (DTCC) and SIFMA, or the Securities Industry and Financial Markets Association released "a task force report that proposes several short- and long-term solutions to mitigate systemic and credit risks in the processing of money market instruments (MMI)," according to a press release entitled, "SIFMA AND DTCC Release Task Force Report Identifying Opportunities to Mitigate Systemic and Credit Risks in Processing of Money Market Instruments. The full "Money Market Instruments Blue Sky Task Force Report" may be seen at

The release explains, "The report's short-term recommendations focus on addressing the credit risk exposure that Issuing and Paying Agent (IPA) banks face because of a lack of transparency around the amount an issuer must fund to cover its maturities. The proposal calls for: Requiring issuers to follow current industry guidelines to fund maturities by 1:00 p.m. if it has a net debit, and, Establishing new enforceable deadlines for the IPA (in its role as the issuing agent) to submit all new valued issuances to The Depository Trust Company (DTC) by 1:30 p.m. and for receivers of new valued issuances to accept delivery by 2:15 p.m. New valued issuances are transactions that are deliveries versus payment (DVP) at DTC."

DTCC and SIFMA say, "By implementing these cutoffs, the IPA (in its role as paying agent) would have sufficient time to calculate its exposure and, if a funding shortfall exists, work with the issuer to resolve the deficiency before 3:00 p.m., which is the deadline at DTC when the IPA must decide whether to fund the maturities or issue a Refusal to Pay (RTP). (A RTP reverses all MMI transactions for that day in the affected issuer’s paper.)"

Susan Cosgrove, DTCC managing director and general manager of Settlement and Asset Services, says, "While the current system operates safely and efficiently, the industry recognized the value of coming together to examine the MMI process with a fresh eye to see if there are opportunities to eliminate additional risk from the system. Over 91% of all MMI transactions already meet the new valued issuance deadline proposed by the task force, but IPAs still face a degree of uncertainty that leaves them with a difficult choice -- either accept an unknown degree of credit risk or cancel every transaction for that issuer that day."

Robert Toomey, managing director and associate general counsel at SIFMA, adds, "We look forward to engaging all the stakeholders on these proposals. We believe that both the short-term and long-term recommendations provide opportunities to mitigate risk."

The press release continues, "DTCC and SIFMA formed the MMI Blue Sky Task Force in October 2009 to review the functioning of the MMI settlement system following the financial crisis and to develop a series of options and recommendations for consideration that would reduce risk in the market. The Task Force is also comprised of representatives of IPAs, broker/dealers, custodian banks and issuers. MMI transactions are processed through DTC, the wholly owned depository subsidiary of DTCC and a registered clearing agency with the Securities Exchange Commission (SEC)."

It adds, "Under the current system, IPAs face an unknown degree of daily credit risk exposure because issuers and investors, respectively, can continue processing new valued issuance transactions until 3:20 p.m. and 3:30 p.m., creating the possibility that an IPA may issue an RTP even though an issuer has raised sufficient funding 20 minutes after the 3:00 p.m. RTP deadline.... The Task Force is actively soliciting industry feedback on the white paper and welcomes written comments from market participants. Comments can be submitted at

Finally, the release says, "The Task Force also offered several longer-term recommendations that would require major structural and system changes that could mitigate systemic risks in the MMI market and further intraday settlement finality.... Among these recommendations, the Task Force suggested the industry explore in more detail the benefits and cons of: Creating an MMI matching process that would match an issuer's new issuance credits to offset their own maturity obligations. Creating an 'MMI partial settlement' option that would permit an IPA to pay maturities to the extent that the IPA has received issuer funding via cash or valued new issuance. Separating MMI and non-MMI transactions for settlement purposes. Changing MMI settlement from net end-of-day settlement to a 'real time gross' process, whereby transactions are settled as soon as they are processed, on a one-to- one basis."

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