News Archives: June, 2011

The Investment Company Institute's latest monthly "Trends in Mutual Fund Investing: May 2011" shows total assets of bond mutual funds rising to $2.749 trillion while money fund assets remained flat at $2.727 trillion in May, making this, we believe, the first time that total bond fund assets have ever surpassed money fund assets. ICI's monthly report says, "The combined assets of the nation's mutual funds decreased by $70.7 billion, or 0.6 percent, to $12.403 trillion in May, according to the Investment Company Institute's official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI." Bond funds now represent 22.2% of assets vs. money funds' 22.0%.

ICI's monthly statistics explain, "Bond funds had an inflow of $19.56 billion in May, compared with an inflow of $13.15 billion in April. Taxable bond funds had an inflow of $19.59 billion in May, vs. an inflow of $16.87 billion in April. Municipal bond funds had an outflow of $30 million in May, compared with an outflow of $3.72 billion in April. Money market funds had an outflow of $2.74 billion in May, compared with an outflow of $3.20 billion in April. Funds offered primarily to institutions had an outflow of $6.05 billion. Funds offered primarily to individuals had an inflow of $3.30 billion." Year-to-date, bond funds have increased by $140.7 billion, or 5.4%, while money fund assets have decreased by $76.9 billion (through 5/31/11), or -2.7%.

ICI's weekly money fund statistics will likely show modest outflows again this week, which would mark the third week in a row of declines. Crane Data's Money Fund Intelligence Daily shows money fund assets declining by $16.3 billion in the week through Wednesday with Prime Institutional funds falling by a noticeable $36.7 billion. While outflows due to likely overblown concerns about European bank exposure were undoubtedly at work, quarter-end seasonal declines were also no doubt a factor. The outflows from Prime Institutional funds have persisted for three weeks, according to ICI's data.

Crane's Daily series shows a slighth increase in assets (up $2.0 billion) yesterday, following three straight days of outflows. It's worth noting though that these decreases remain quite small and manageable, and that the outflows from Prime Institutional funds have decreased every day since Friday, their biggest daily decline. (Prime Institutional assets lost a mere $1.6 billion yesterday, following daily declines of $6.6 billion, $9.9 billion, and $13.9 billion the prior three days.) Finally, Wednesday's news of the Federal Reserve extending its dollar swap arrangements with the European Central Bank (see "Link of the Day") and the Greek vote for austerity should help allay concerns about the possibility of significant outflows developing.

ICI also reported its privately-distributed "Month-End Portfolio Holdings of Taxable Money Market Funds," which shows that Repurchase Agreements showed the only sizeable increase among money fund composition segments in May. Repo holdings rose by $53.1 billion to $490.7 billion (up to 20.3% from 18.1%), while Certificates of Deposit, including Eurodollar CDs fell by $11.6 billion to $598.2 billion (24.7%). CDs remained the largest segment, however, while Commercial Paper remained the third largest sector with $392.6 billion, or 16.2% of assets. U.S. Government Agency Securities accounted for $345.6 billion, or 14.3%, and U.S. Treasury Bills and Securities accounted for $337.9 billion, or 14.0%.

Note that Crane Data's monthly Money Fund Intelligence XLS, which also tracks Portfolio Composition, will be out on July 8 with data as of June 30, and our Money Fund Portfolio Holdings with June 30 data will be out on July 15. Many will be watching these numbers closely to see whether money market funds dramatically reduced their holdings of French banks following recent headline scares over Greece and Europe. We would expect money funds to have reduced their exposures, but not to have abandoned the largest of the French banks.

Corporate treasury group the Association for Financial Professionals, or AFP, just released the results of its "2011 AFP Liquidity Survey," which includes information on short-term investing, cash management trends and investment policies, and usage of money fund trading portals among large companies. The release says, "In its 6th year, the AFP Liquidity Survey provides CFOs, treasurers and other financial professionals data to benchmark their companies' short-term investment strategies against their peers.... The 2011 report reflects a survey of AFP members conducted in May 2011. The survey found that financial executives continue to use an extremely conservative approach to cash investment."

The "2011 AFP Liquidity Survey's" "Key Findings" comment, "Even if financial professionals have a slightly more upbeat outlook, companies continue to hold nearly four-fifths of their cash and short-term investment holdings in three historically ultra-safe investment vehicles: bank deposits, money market mutual funds and Treasury securities. Recent regulatory changes are not currently anticipated to cause any greater shift to bank deposits. For example, survey respondents indicate that their organizations are not planning to alter their investment in bank deposits as a result of the repeal of Reg Q (which will allow for interest payments on corporate bank deposits)."

They continue, "Outside of the U.S., a vast majority of cash and short-term investment holdings are maintained in bank deposits. Fifty-three percent of survey respondents indicate that their organizations have cash holdings outside of the U.S.... These organizations hold, on average, 57 percent of their total cash holdings in the U.S. Another 14 percent of these cash holdings are held in either Canada or Mexico while 17 percent of the cash holdings are in EMEA (Europe, the Middle East and Africa)."

AFP explains, "Whether or not they have a written cash investment policy, most organizations have a list of permissible investment vehicles they can hold in their short-term investment portfolio. Virtually all organizations permit the use of bank deposits as a vehicle for short-term investments. In addition, 82 percent of organizations permit the use of Treasury bills, while more than half of organizations allow the use of 'pure' Treasury money market mutual funds (67 percent), commercial paper (59 percent) and diversified money market mutual funds (54 percent)."

They continue, "Organizations allocate an average of 78 percent of their short-term investment balances in three safe and liquid investment vehicles: bank deposits, money market mutual funds and Treasury securities. Not only does this result represent a four percentage point increase from the results reported in the 2010 AFP Liquidity Survey, it matches the result cited in the 2009 survey, is above the 73 percent reported in the 2008 survey, and is significantly higher than the 67 percent reported in 2007. Forty-two percent of short-term investment balances are maintained in bank deposits, an increase of less than a percentage point from 2010. Organizations also returned funds back into money market mutual funds -- with holdings in their portfolios growing by more than three percentage points for diversified money market mutual funds (to 19.1%) and by a percentage point back into 'pure' treasury money market mutual funds (to 10.4%)."

The Survey also says, "In the U.S., changes stemming from the Wall Street Reform and Consumer Protection Act ('Dodd-Frank') resulted in the repeal of Regulation Q, which will allow financial institutions to pay interest on demand deposit accounts. The same legislation also extended unlimited insurance from the FDIC for non-interest-bearing transaction accounts (often tied to an Earnings Credit Rate) through December 31, 2012.... Half of survey respondents indicate that their organizations do not plan to increase the balances that they hold at U.S.-based relationship banks as a result of the changes in Reg Q and FDIC insurance availability."

Look for more excerpts from the "2011 AFP Liquidity Survey." The survey contains a number of statistics on "multi-family trading portals" (or money fund portals), which we'll cover in coming days.

Yesterday's Wall Street Journal editorial page took another shot at money market mutual funds in its Review & Outlook piece, "Money-Market Mayhem," which was quickly followed by outrage in the investment management community and a response from the Investment Company Institute's Paul Stevens. The Journal writes, "Amid the Greek mini-panic this month, did you notice the really shocking news? To wit, U.S. regulators are worried about the "systemic risk" posed by the exposure of American money-market funds to European bank debt."

The WSJ Editorial explains, "That's right, nearly three years after the panic of 2008, our all-seeing regulators have somehow not fixed what was arguably the single biggest justification for government intervention at the time. In 2008, the feds felt obliged to guarantee all money-fund assets after they let the Reserve Primary fund pile into bad Lehman Brothers paper, Reserve broke the $1 net-asset value, and in the following days some $400 billion fled prime money funds. We'd have thought our regulatory wise men would have fixed this systemic risk before all others."

It adds, "Yet now we learn that since 2008 U.S. money funds have been allowed to pile into European bank debt even as everyone knew those banks had stocked up on bad European sovereign paper. The Treasury is even saying privately that the U.S. needs to support the European bailout of Greece lest European banks fail, U.S. funds take big losses, and we get another flight from money funds. Can this possibly be happening? Yes, and this time it's an entire industry as opposed to a particular fund. Half the assets in U.S. prime money market funds were invested in European banks as of the end of May, according to Fitch Ratings."

Finally, the Journal piece says, "As for the mutual fund industry, so long as funds can enjoy an implicit taxpayer guarantee while hunting for higher yields in Europe or elsewhere, don't expect them to willingly accept reform. The industry has been working to come up with a self-regulatory safety net that would stop a run against all funds if one or more failed, but its fail safe includes access to the Federal Reserve's discount window. In short, a government lifeline. Congress isn't helping, as a House Financial Services hearing on Friday that mostly took the industry line showed."

ICI President & CEO Paul Stevens responded late Monday with a piece entitled, "Wall Street Journal Editorial Gets It Wrong Again on Money Market Funds, written by Mike McNamee. It says, "The Wall Street Journal posted another misleading editorial on money market funds. ICI President and CEO Paul Schott Stevens has submitted a letter to the editor in print and online to respond. Here is the text of his submission."

He writes, "Once again, a Journal editorial has misstated the facts and twisted the analysis of important issues surrounding money market funds ("Money-Market Mayhem," Review & Outlook, June 27). Your editorial vastly overstates the risks to U.S. money market funds in the Greek debt crisis. For more than a year, U.S. prime money market funds have had no direct holdings of Greek debt, sovereign or private. Yes, these funds hold the debt of European banks. But these are dollar-denominated, short-term liabilities of highly rated global banks that borrow in the U.S. money markets to help finance their U.S. and other dollar-based operations. Of the banks in prime money market funds' portfolios, in every case the bank's direct exposure to Greek government debt is less than 1 percent of the bank's total assets -- and for most of the banks, it's much less."

Stevens continues, "Your editorial also promotes the myth that the money market fund industry and regulators have failed to address the risks revealed by the financial crisis. This is false. Six months after the Reserve Primary Fund broke the dollar, the fund industry voluntarily adopted higher credit standards, shorter portfolio maturities, greater portfolio transparency, and explicit liquidity requirements for fund portfolios. In January 2010 -- six months before the Dodd-Frank Act passed -- the Securities and Exchange Commission adopted regulations based largely on those standards. These measures have made money market funds considerably more resilient: prime funds, for example, today hold $660 billion in assets that are liquid within one week, far more than the $370 billion outflow experienced in the week of Lehman Brothers' failure. The fact is, regulators did address money market fund risks "before all others.""

He explains, "What I find most puzzling is the Journal's choice of money market funds as the whipping boy for systemic risk. Money market funds represent a clear case where market discipline reinforces strong regulatory standards. The risks of money market funds are clearly disclosed, as are their portfolio holdings and mark-to-market share values. We tell our investors, in virtually every communication, that money market funds are not insured or guaranteed. Our industry did not ask for a federal guarantee; insisted that the guarantee program be limited; applauded the end of the guarantee program; and has worked hard to ensure that no government guarantee, explicit or implicit, is ever needed again."

Finally, Stevens writes, "'Mayhem' comes in many forms. I would suggest that misstating the facts and twisting the analysis regarding a vital segment of our economy, in a time of global uncertainty, is creating mayhem where none exists."

On Friday afternoon, CNBC's "Street Signs" ran a segments entitled, "Is Your Money Market Fund Safe?" which discussed money funds' exposure to European banks and which featured Crane Data President Peter Crane. The introduction to the story, by Kate Kelly, said, "Now to a financial fear that could bring the Greek crisis right back to Main Street USA. Money market accounts [funds] here in the states are worth nearly $3 trillion and managers have been investing in European banks and they say they're going to keep on doing it.... Kate, do the money market funds really know what they're getting into here?" (See also, CNBC's "Is Your Money Market Fund Safe?.)

Kelly says, "They would of course say yes, Mandy. Something like 50% of the big funds are invested in Europe. About 7 out of the 10 of their major asset plays are European names. They would say they're focused on the core, whether it's France, Germany or UK, have never been in Greece, have not been in those peripheries for quite some time now. They would even say we've done our own credit research based on the stress test of last summer and we feel comfortable with the French bank's exposures to Greece, for example. Having said that, there are a couple of questions here. Certainly they're looking for yield, and there may be higher yield available in Europe than there is say in the U.S. There's more supply as well of European paper than there is of Asian paper. However, do they really want to be involved in these names?"

CNBC's Mandy Drury says, "Let's bring in money market analyst Peter Crane, president of Crane Data. What's your take on all this, Peter? How much should we be worried with regard to the money market funds and their exposure to the European banks?" Crane answers, "Money funds are clearly watching the situation closely. They've never invested in Greece so they don't have any direct Greek exposure, and they do have heavy holdings of French banks. There's no doubt about that. But they're only investors in the largest, the systematically most important. These banks have $1 trillion of reserves on their balance sheets, so the odds of them defaulting or losing liquidity any time soon are slim to none."

The piece continues, "Peter, how confident are you in what the money market funds are investing in?" Crane responds, "They've gotten smarter, they've gotten more liquid. Banks are gotten more liquid as well. You're not going to see the leverage of a Lehman Brothers. Comparing this to Lehman Brothers is a long stretch. The landscape was littered with bombs and defaults.... They've been invested in Europe for many years now and may be tip-toeing back, but they're not exactly stampeding away."

Kelly also asks, "With all due respect to the money market funds and research they've done already, do we even know enough, are there enough facts out there about this European financial paper in order to make qualified judgments?" Crane comments, "The bulk of these [assets] are now straightforward, plain vanilla CDs. So the esoteric securities that had been growing in the markets in the '90s, I mean pieces of those are gone entirely. So things are a lot more transparent and a lot more straightforward.... The money funds that I've talked to over the last couple of days -- certainly they may be shortening maturities and letting some of the maturing paper roll off -- but they're still comfortable with the large, systematically important European credits."

Drury asks, "Are you at all fearful we could see nervous investors selling out of money market funds? Quite often this just has to do with confidence as opposed to the facts." Crane responds, "That's the key. Our data shows money funds have seen tiny inflows the last three days. There is a very modest shift out of Prime money funds and into Treasury money funds in the last few days. But investors have heard this story three or four times before and they haven't blinked, so there is no reason to think they'll blink this time."

See also, WSJ's (Blog) "Smart Money Lightening up on Money Funds Exposed to Europe?". Also, look for our latest asset totals in today's Money Fund Intelligence Daily and look for coverage of last week's Crane's Money Fund Symposium later this week and in the upcoming issue of Money Fund Intelligence.

Testimony has been posted for this morning's House Committee on Financial Services Hearing on "Oversight of the Mutual Fund Industry: Ensuring Market Stability and Investor Confidence". The statements contain little information regarding recent concerns of a possible Greek default indirectly impacting money market funds (and instead rehash the recent regulatory debate), but today's discussion is expected to involve this issue. The hearing starts at 9:30am in 2128 Rayburn HOB on Capital Markets and Government Sponsored Enterprises. Check the "Live Webcasts" link on http://financialservices.house.gov/.

Among the testimony posted, Mercer Bullard, President and Founder of Fund Democracy, says, "My testimony focuses on correcting some of the misconceptions about the nature of MMFs and their regulation that threaten to undermine reasonable efforts to improve MMF regulation. In particular, the misguided proposal to prohibit MMFs from using a stable net asset value would unnecessarily eliminate an investment vehicle that has been chosen for decades by tens of millions of Americans as a safe place for their cash holdings. As is so often the case, retail investors' interests will have been virtually ignored, as pointedly illustrated by the participant list and discussion at the SEC's recent MMF roundtable."

He adds, "The current MMF debate has been replete with misleading characterizations of the actual performance of MMFs during their thirty-year history. For example, statements that MMFs are 'prone' or 'susceptible' to runs are patently false. There have been dozens of instances of market stress during the last three decades that have affected MMFs, but only two MMFs have failed. One failure was extremely small (and did not trigger a run).... The recent claims that MMFs are at risk because of their holdings of short term European banks are similarly misleading. There is no empirical basis for the assertion that these holdings pose a threat to MMFs' NAVs. The data on which these claims have been made are stale and inadequate to reach a reasonably informed judgment about the safety of MMFs individually or as a group."

Andrew 'Buddy' Donahue, Partner, Morgan Lewis & Bockius LLP, comments, "The next step in money market reform is extraordinarily important as the wrong choice might have considerable unforeseen consequences for the money market funds, the investors and the capital markets. Yet not doing anything might leave money market funds vulnerable to runs and the increased potential for 'breaking the buck'. I believe that commentators have provided the SEC with a wide range of choices from which an optimum solution might be crafted. One possibility is for there to be a required 'buffer' provided by the manager assuring that there are assets dedicated to maintaining the stable nav. That 'buffer' could be in the form of a special share class funded by the adviser that must be maintained at a certain prescribed level and which is designed to absorb any realized or unrealized losses or gains to enable the other share class to maintain a stable nav. This approach could be augmented with requirements for greater transparency from omnibus accounts and a limit on the maximum fund ownership by any one investor or group of investors (such as 5%). This approach might make explicit the implicit guarantee that investors and the industry seem to operate under and the increased transparency and ownership limits would enable money market funds to better assess and manage their vulnerability to runs."

Scott Goebel of Fidelity writes, "Fidelity has worked with others in the industry to develop the concept of a NAV buffer, whereby each money market fund would be required to retain a portion of the fund's income in order to build a buffer within the fund to absorb potential realized or unrealized future losses. When combined with the recent amendments to Rule 2a-7, which better position money market funds to withstand heavy redemptions, this mandatory buffer (which would grow over time) would strengthen the ability of money market funds to maintain the stable $1.00 NAV. The transparency and protection afforded by the NAV buffer also would increase investor confidence and reduce the likelihood of runs -- or large unexpected redemptions -- by investors on money market funds in the event of market volatility."

Paul Stevens, President & CEO of the Investment Company Institute, says, "Since fall 2008, the ICI and its members have dedicated enormous effort, in collaboration with regulators, to preserving the benefits that money market funds provide to the economy and to investors, while making them more resilient in the face of severe market stress such as that which followed the collapse of Lehman Brothers. During this period, both the SEC and the money market fund industry have made a great deal of progress toward this objective. Importantly, all money market funds now manage interest rate, credit and liquidity risks under stricter new SEC standards.... Notwithstanding the importance of these and other reforms to date, however, both regulators and the industry have continued to weigh additional measures to make money market funds even better prepared to weather the worst conditions, including ways to the enhance liquidity available to prime money market funds investing in the commercial paper market and to minimize the risks of a fund being unable to maintain a stable NAV."

Stevens adds, "We remain committed to working with regulators on these and other policy options. We submit that this process should be guided by two principles. First, we should preserve those features of money market funds (including the stable $1.00 per share NAV) that have proven so valuable and attractive to investors. Second, we should avoid imposing costs of a nature that will undercut the willingness or ability of large numbers of investment advisers to continue to sponsor these funds. Otherwise, we will put at risk the enormous benefits that money market funds provide to the economy."

Two heavyweights came to the defense of money market mutual funds yesterday, attempting to counter the overly sensationalistic stories regarding the risk of Greek problems impacting U.S. investors. The Christian Science Monitor, in its article, "Federal Reserve chief tells US financial markets not to worry about Greece", says, "Memo to the financial markets: the Federal Reserve says the Greek financial problems should not be a problem for the US financial system even if the protest-torn country defaults. At his press conference on Wednesday, Fed Chairman Ben Bernanke described how the nation's central bank has pored over the assets of US banks and decided everything is OK -- at the moment." (Europe was also of course a topic at our Crane's Money Fund Symposium conference, which kicked off in Philadelphia yesterday. Look for coverage in the next Money Fund Intelligence.)

The article continues, "Mr. Bernanke says the Fed asked the banks to 'essentially do stress tests' -- computer simulations -- to see what would happen to their capital if Greece defaulted on its loans." It quotes Bernanke, "And the answer is the effects are very small." The Monitor explains, "Bernanke says the Fed is also monitoring the impact of the European debt problems on US money market mutual funds."

It quotes him, "The situation is similar in some sense, in that, with very few exceptions, the money market mutual funds don't have much direct exposure to the three peripheral countries [Greece, Portugal and Ireland] which are currently dealing with debt problems." The piece adds, "However, he says, the money market funds do own a substantial amount of debt issued by banks in core countries such as Germany and France. That is the reason, he said, 'why the Federal Reserve and other regulators are continuing to look at ways to strengthen money market mutual funds.'"

In another show of support, Dow Jones writes "FDIC's Bair: Not Worried About Money-Market Funds In 'Near Term'". It says, "The chairman of the U.S. Federal Deposit Insurance Corp. said Wednesday that she isn't immediately worried that the European sovereign-debt crisis will cause losses at U.S. money-market mutual funds."

The article explains, "The potential threat to those funds is "something we've been aware of for some time," FDIC Chairman Sheila Bair told reporters after a House hearing. It quotes her, "In the near term, I'm not worried about it, but I think it just underscores why we need to fix this problem."

Dow Jones adds, "Bair said investors should understand that when they put their money into money-market funds, it isn't always held in U.S. government-backed securities and may be channeled to other kinds of investments. If investors don't want to take that risk, she said, they should put their money solely into funds that invest in U.S. Treasury securities."

As a flurry of news articles (see today's "Link of the Day") raise concerns about money funds' heavy exposure to European debt, the ICI's Sean Collins and Chris Plantier attempt to downplay any worries. The Investment Company Institute's new "Money Market Funds and European Debt: Setting the Record Straight" says, "Recent events in Greece have drawn the media's attention to indirect exposure that U.S. money market funds may have to European sovereign debt through their holdings of securities issued by European banks. Unfortunately, some of those stories have landed far from the mark and require correction. Here are some of the facts that the media is missing."

First, they explain, "A recent Moody's Investor Service announcement regarding certain French banks reaffirms the highest rating for those securities that money market funds hold. While Moody's recently announced it is reviewing the long-term ratings for three French banking groups, the same announcement reaffirmed Moody's highest rating on those banks' short-term paper. Thus, any exposure that U.S. money market funds have to these French banks is deemed of the highest short-term credit quality. Under U.S. Securities and Exchange Commission regulations money market funds are required to hold the vast majority of their assets in short-term securities that have received the highest short-term rating."

Next, Collins and Plantier comment, "Comparisons between Lehman Brothers in 2008 and French banks in 2011 are misleading and inappropriate. French banks have much higher required capital ratios than Lehman Brothers did in 2008. These are large, profitable banks, and their direct exposure to Greek government debt is a small fraction of their capital. Also, French banks have access to liquidity facilities from the European Central Bank."

They also say, "U.S. money market funds have no direct exposure to Greek sovereign debt, and they have managed and continue to manage any indirect exposure. The Eurozone has been experiencing debt and financial concerns for more than a year now. Throughout this period, prime money market funds and other investors have reacted to changing developments. As fiduciaries to their shareholders, money market funds are constantly examining the quality of their portfolio and the creditworthiness of investments -- going above and beyond any credit rating agency ratings. Over time, this analysis has led prime money market funds to reduce their exposure to certain European sectors and names."

They add, "Money market funds are more resilient today than they were in 2008. In 2010, the SEC amended regulations that raised these funds' standards for credit quality, shortened portfolio maturities, improved disclosure, and imposed for the first time explicit liquidity requirements for fund portfolios."

Finally, the ICI "Viewpoint" says, "The safety of money market funds derives from their holdings of low-risk, liquid assets, not from a government guarantee. Some media reports have compounded their errors on the Eurozone crisis by incorrectly reporting that money market funds carry some sort of government guarantee. Let's be clear: Money market funds have never been backed by the Federal Deposit Insurance Corporation, and they are not now backed by any governmental agency, explicitly or implicitly. In 2008, the U.S. Treasury put into a place a temporary guarantee program for money market funds, to help calm the markets. That program expired in 2009 after collecting $1.2 billion in fees without paying a single claim. Money market funds make clear in prospectuses, advertisements, and on their websites that they are not guaranteed and there is risk of loss of principal. Money market funds are a low-risk investment, but not a no-risk investment."

Mutual fund trade association the Investment Company Institute recently argued that a "proposed [accounting] change eliminating 'cash equivalents' from financial reporting would misrepresent a company's liquidity position." The May 31 "ICI Letter on Proposal Eliminating "Cash Equivalents" from Financial Reporting," written by Director of Fund Accounting Gregory Smith to the Financial Accounting Standards Board's Nicholas Cappiello and the IFRS Foundation's Denise Gomez Soto, says, "The Investment Company Institute is writing to provide input regarding the July 2010 staff draft of an exposure draft of the International Accounting Standards Board and the Financial Accounting Standards Board for the Boards' joint project to develop a standard on financial statement presentation. A significant proposal in the Staff Draft is the elimination of the concept of "cash equivalents," which would result in the classification of shares of US registered money market funds as short-term investments."

ICI explains, "The Institute strongly objects to this result and believes that classifying shares of money market funds as short-term investments in a company's financial statements would misrepresent the purpose and use of this asset in a company's business. Further, we believe it is highly problematic to combine money market fund holdings with other instruments that may be included in short-term investments, i.e., any debt security maturing in 12 months or less, regardless of credit quality, as such instruments may present significantly greater risks than money market funds."

It continues, "The Institute believes that money market funds are, and will continue to be, an asset held by companies for the purposes of preserving principal and maintaining liquidity. Unlike a short-term investment, money market funds are well-suited to meeting a customer's cash management objectives of minimizing exposure to credit, liquidity, counterparty and market risks, and can be quickly converted to cash at a predictable value. We therefore urge the Boards to preserve the concept of cash equivalents and recommend that any final standard require that cash equivalents be presented as a separate line item on the balance sheet. A separate category for cash equivalents would address the Boards' concerns regarding the aggregation of cash and cash equivalents while avoiding the problems that we believe would result if cash equivalents are eliminated and aggregated with short-term investments."

ICI's comment continues, "In the United States, a money market fund is a type of mutual fund that has as its objective the generation of income and preservation of capital and liquidity through investments in short-term high quality securities. These funds also typically seek to maintain $1.00 net asset value per share. Money market funds, like all US mutual funds, are subject to a comprehensive regulatory scheme under the US federal securities laws that has worked extremely well for over 70 years. Their operations are subject to all four of the major US securities laws administered by the US Securities and Exchange Commission, including the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, and the Investment Company Act of 1940. We refer to these very specific US money market funds as 'money market funds.'

It adds, "In addition to the substantive requirements of the Investment Company Act, money market funds are subject to the strict requirements of Rule 2a-7 under the Investment Company Act. Rule 2a-7 includes several risk-limiting conditions intended to help a fund stabilize its share price at $1.00. These conditions limit risk in a money market fund's portfolio by governing the credit quality, liquidity, maturity, and diversification of a money market fund's investments. Early last year, Rule 2a-7 was amended to further strengthen investor protections through provisions such as explicit liquidity standards, stress testing, "know your investor" procedures, shorter portfolio maturities, improved credit quality, and more detailed and more frequent disclosure. The amendments have made money market funds even more consistent with the objectives of preserving principal and maintaining liquidity."

ICI continues, "The SEC has increased the transparency of money market funds by requiring them to provide updated portfolio information on their websites as of the end of each month. In addition, each month money market funds must file with the SEC new Form N-MFP, which contains detailed information about the fund and its portfolio, including the market value of each security held. The information provided in Form N-MFP becomes publicly available 60 days after the end of the month covered by the report. We also note that both industry and policymakers in the United States are continuing to consider money market funds and ways to bolster their resilience to severe market stress so as to assure their continued ability to serve investor and market interests.

The letter adds, "We believe that the proposal to eliminate the concept of cash equivalents, with the result that money market funds will instead be included in short-term investments, raises serious concerns regarding the presentation of a company's assets in its statement of financial position. As described above, retail and institutional investors alike rely on money market funds as a low-cost, efficient cash management tool that provides a high degree of liquidity, stability in principal value, and a market based yield. The reforms to date have only served to improve and strengthen the liquidity and stability of money market funds."

It also says, "In the Staff Draft, the Boards' propose to eliminate the concept of cash equivalents on the rationale that 'cash equivalents do not possess the same characteristics as cash and have different risks from cash.' The Boards believe that "presenting cash equivalents separate from cash avoids grouping dissimilar assets in the same line item ... [and that such a] presentation better reflects liquidity in the statement of financial position." We believe the proposal, however, appears to result in the same problem that the Boards are seeking to prevent, i.e., grouping dissimilar assets. If cash equivalents are eliminated, assets in money market funds will be grouped with a range of assets in short-term investments, including investments with markedly different risks, characteristics and regulatory requirements from a money market fund. We do not believe the proposal in the Exposure Draft solves the Boards' stated problem; rather, it only puts the perceived problem in a different place. We also do not believe grouping cash equivalents with short-term investments "better reflects liquidity." In fact, we believe this would obscure liquidity."

ICI's Smith explains, "The Boards have also acknowledged the difficulties and tensions posed by the elimination of the concept of cash equivalents. For example in a 2008 discussion paper, it was recognized that the elimination of "cash equivalents" would significantly increase the volume of cash receipts and payments presented in most entities' statements of cash flows. To address the issue and consequently to prevent purchases and sales of cash equivalents from giving rise to cash payments and receipts within the cash flow statement, the paper included a recommendation to continue to allow the net presentation of cash and cash equivalent flows for receipts and payments for items under circumstances in which the turnover is quick, the amounts are large, and the maturities are short. While we appreciate the rationale for this approach, it results in a differing treatment of "cash equivalents" between the balance sheet and the cash flow statement, with the former presenting money market funds as short-term assets held for investment purposes and the latter as cash-like instruments. Again, we do not think this is an optimal result, nor does it improve financial statement presentation."

It adds, "Lastly, given the long-standing view of cash and cash equivalents as closely related assets, we urge the Boards to weigh the possible unintended consequences of eliminating the concept of cash equivalents. We believe that having the accounting standards abandon cash equivalents will place financial statement standards out of step with the market and the users of financial statements. Aligning cash equivalents and short-term investments in the balance sheet (but not in the statement of cash flows) could result in confusion as it will depart from the market and operational realities of how cash equivalents are used and viewed by a variety of market participants. For example, many entities have guidelines for their corporate treasurers relating to holdings of cash and cash equivalents (and in some cases, only certain cash equivalents, such as AAA rated money market funds or government-only money market funds)."

Finally, ICI concludes, "For the reasons described above, we therefore recommend that the standards recognize a separate category of "cash equivalents" on the balance sheet, rather than wholly eliminating it. We believe that such instruments are quite different from short-term investments and that cash equivalents should not be aggregated into the category of short-term investments. As a result, we strongly urge the Boards to have a category for cash equivalents. We believe that having a cash equivalents category, rather than eliminating the concept, will more accurately present a firm's assets as well as its liquidity."

In a recent "Market Memo" entitled, "Don't sweat the debt-ceiling showdown," Federated Investors' Senior Portfolio Manager Susan Hill writes, "It is likely that the game of chicken between Congress and the Obama administration over raising the debt ceiling will continue over the next several weeks, leading to market uncertainty and speculation about the prospects of a technical default by the Treasury. That's because raising the debt ceiling has become intertwined with the desire to make significant strides toward credible fiscal reform. But let's be clear. Federated considers the probability of a technical default by the Treasury to be virtually nonexistent."

She says, "We are confident that the debt ceiling will be raised by August 2nd, the date upon which the U.S. Department of the Treasury will have, according to Treasury Secretary Timothy Geithner, exhausted the extraordinary measures that it has at its disposal to meet the financial obligations of the federal government. Nevertheless, because there has been some market speculation as to what a technical default might mean to money market funds that hold Treasury securities, we wanted to address some of the basic questions surrounding this issue."

Hill explains, "First, the Securities and Exchange Commission Rule 2a-7 that governs money market funds does not require that a fund dispose of a security that is in default. Rather, it would permit the fund to continue to hold such a security, provided that the board of directors of the fund has determined that disposal of the security would not be in the best interests of the fund. Rule 2a-7 indicates that such determination may take into account, among other factors, market conditions that could affect the orderly disposition of the security. Given the expectation that any potential technical default on Treasury securities would be very short-lived, it is possible that a fund's board could make the determination to continue to hold the security."

She continues, "Second, although all short-term securities might exhibit some degree of volatility during this time, we would expect the market reaction to remain substantially below the threshold which might exert significant downward pressure on the net asset values (NAVs) of money market funds. All things being equal, it would take an instantaneous increase in rates on short-term securities of approximately 300 basis points before the NAV of a money market fund with a 60-day average maturity would be in jeopardy of breaking a buck. Such an extreme market overreaction is hard to imagine."

Hill says, "Finally, the Federated money market funds are absolutely committed to maintaining liquidity to meet the needs of their shareholders in the event that a fiscal reform package and subsequent increase in the debt ceiling is delayed. Rule 2a-7 already requires money market funds to maintain stringent minimum liquidity buffers for daily and weekly liquidity needs. Federated would expect to continuously evaluate the potential liquidity needs of its money market funds and augment their existing liquidity position with greater daily or weekly positions, cash balances or alternate liquidity sources should it appear necessary if the conflict continues."

Finally, Federated writes, "In other words, while we believe that political brinkmanship will give way to the hard realities that a failure to raise the debt ceiling would pose to the United States -- no one wins when systemic risk in the global financial markets is unleashed -- we are diligently working to prevent this showdown from undermining our primary goal: Providing clients with a stable source of cash management. When it comes to your money, we don't play games."

ICI's latest weekly "Money Market Mutual Fund Assets says, "Total money market mutual fund assets decreased by $34.37 billion to $2.708 trillion for the week ended Wednesday, June 15, the Investment Company Institute reported today. Taxable government funds decreased by $1.34 billion, taxable non-government funds decreased by $31.75 billion, and tax-exempt funds decreased by $1.27 billion." Year-to-date, money market fund assets have declined by $103 billion, or 3.7%, while over the past 52 weeks assets have declined by just $98 billion, or 3.0%.

ICI Chief Economist Brian Reid comments on the flows, "It's important to note that large estimated tax payments by companies and individuals historically cause outflows from money market funds in mid-June. The decline of $34.4 billion in the week ended June 15 is in line with declines for the similar week in the previous three years, which ranged from $34.2 billion to $72.6 billion."

The weekly report explains, "Assets of retail money market funds increased by $3.04 billion to $916.31 billion. Taxable government money market fund assets in the retail category increased by $340 million to $169.70 billion, taxable non-government money market fund assets increased by $2.87 billion to $548.95 billion, and tax-exempt fund assets decreased by $160 million to $197.67 billion."

It adds, "Assets of institutional money market funds decreased by $37.41 billion to $1.791 trillion. Among institutional funds, taxable government money market fund assets decreased by $1.67 billion to $596.27 billion, taxable non-government money market fund assets decreased by $34.63 billion to $1.086 trillion, and tax-exempt fund assets decreased by $1.11 billion to $109.33 billion."

Watch for an update later this morning on asset flows yesterday (from our Money Fund Intelligence Daily, the first day that European concerns hit the front pages.... We're also watching for comments on European exposure in money funds from fund companies, but have yet to see any. Finally, we're looking forward to seeing many of you next week in Philadelphia for the 3rd annual Money Fund Symposium!

Sunday's New York Times contained an article entitled, "Too Big to Fail, or Too Trifling for Oversight?". The piece says, "It is not very often that business people head to Washington to explain how unimportant they are. But over the last several months, executives from more than two dozen financial companies and their trade groups have paraded into the Treasury Department, the Federal Reserve and other government agencies to try to persuade top regulators that they are not large or risky enough to threaten the financial system if they should ever collapse. Big insurers like the Mass Mutual Financial Group and Zurich Financial Services; hedge funds like Citadel and Paulson & Company; and mutual-fund companies like BlackRock, Fidelity Investments and Pacific Investment Management Company have all been making the rounds, according to documents filed by the regulatory agencies."

The Times explains, "What they are all hoping to avoid is being designated 'systemically important' by a council of financial regulators. That would require them to face stricter federal oversight and keep more cash on hand, which they fear would erode profits.... Deciding which firms should be deemed 'systemically important' is at the heart of a package of new financial rules that aim to prevent a repeat of the recent financial crisis. But the lack of specific criteria from regulators so far has created uncertainty about who will get tagged."

The article continues, "More clarity may come later this summer when regulators are expected to put out a more detailed proposal. Criteria like size, how connected the firms are to each other, and overall risk levels will be more carefully defined. Then, after regulators analyze the data, the designated companies will be notified and given a chance to argue why they do not pose a major financial threat. This means final determinations will not be made until the middle of 2012, at the earliest. That, of course, is just fine with many of the companies involved."

It adds, "Other financial giants have made their own arguments to regulators. In their comment letters, big asset managers like BlackRock and Fidelity claim that since they manage money on behalf of individual investors, the firms pose little risk to the system. General Electric, a huge lender to businesses and consumers, told Treasury officials that it should not be put in the same category as Goldman Sachs since it does not engage in risky derivatives trading or make other speculative bets with its own money, according to a person close to the discussions."

Finally, the Times says, "Meanwhile, several large financial companies are finding sympathetic ears in Washington. Barney Frank, the ranking member of the House Financial Services Committee and one of the chief architects of the new rules, said he did not believe life insurers and mutual-fund companies were risky enough to require heightened supervision." They quote Frank, "If you look at it, they weren't the causes of the problems."

Certificates of Deposit remained the largest allocation among Taxable money market funds with $24.0% of assets, or $539.7 billion, as of May 31, according to Crane Data's latest Money Fund Portfolio Holdings collection. CDs accounted for 24.5% of holdings ($547.9 billion) in the period ended April 30, 2011, and they remain well above their totals of the first three months of the year, when they averaged 22.1%. European banks continue to dominate the list of the largest suppliers of CDs to money funds, representing 7 of the 10 largest issuers. (Note though that contrary to some recent press reports, money market funds do not have, and have never had, any exposure to Greek debt or banks.)

Among the 10 banks with over $20 billion in CDs outstanding held by money market funds (as of 5/31/11), BNP Paribas is by far the largest with $42.3 billion outstanding (7.9% of the total $539.7 billion). Rabobank Nederland ranks second with $33.9 billion (6.4% of the CD market) and Credit Agricole ranks third with $32.0 billion (6.0%). Three non-European issuers place fourth through sixth -- Bank of Nova Scotia $28.6 (5.4%), Bank of Tokyo Mitsubishi $24.8 (4.7%), and National Australia Bank $23.9 billion (4.5%). The top 10 CD issuers are rounded out by European names Deutsche Bank $23.3 (4.4%), ING Bank $21.5 (4.0%), UBS $20.4 (3.8%), and Royal Bank of Scotland $20.2 (3.8%).

Repurchase Agreements, or Repo, represented the second largest sector of taxable money fund holdings as of the latest reporting period (5/31/11) with $469.7 billion, or 21.0% of assets. Repo jumped by $66.4 billion, or 2.9%, in May. Government Agency Repurchase Agreements account for the biggest piece of repo held by money funds at $228.3 billion (10.2%), and this sector also was responsible for the majority of the May increase (up $62.6 billion). Other Repurchase Agreements in taxable money funds totalled $127.7 billion, or 5.7%, while Treasury Repurchase Agreements totalled $113.7 billion, or 5.1%. (Note: These "Category" breakouts were mandated by the SEC's 2010 "Money Market Fund Reforms". See page 201 for the full list of Categories.)

Commercial Paper, which is comprised of Asset Backed CP ($110.4 billion, or 4.9%), Financial Company CP ($218.4 billion, or 9.7%) and Other CP ($36.4 billion, or 1.6%), ranked third among money fund holdings with $365.2 billion, or 16.3% of assets. Treasury Debt ranked fourth with $352.9 billion (15.7%), Government Agency Debt ranked fifth with $315.3 billion (14.1%), Other Notes ranked sixth with $81.3 billion (3.6%), Variable Rate Demand Notes ranked seventh with $64.6 billion (2.9%), and Other (Time Deposits) ranked 8th with $24.7 billion (1.1%). Other Instruments, Other Municipal Debt, Investment Companies, and Insurance Company Funding Agreements all totalled less than 1.0%.

Crane Data began collecting and publishing Money Fund Portfolio Holdings in late 2010 following the SEC's mandate that funds publish monthly holdings on their website by the end of the fifth business day of the following month. We publish the Taxable fund holdings on the 10th business day of the new month, and our Tax-Exempt funds are published a week later. (We're also in the process of collecting "Offshore" money fund holdings.) The Holdings collections are distributed to subscribers of our Money Fund Wisdom database and product suite. To request our latest data set, e-mail Statistics Editor Kaio Barbosa or call 508-439-4426.

Two press releases related to the online money market mutual fund trading "portal" marketplace were sent out on Monday. The first, entitled, "SunGard's Short-Term Cash Management Portal Surpasses $100 Billion in Total Money Fund Assets says, "The SunGard Global Network (SGN) Short-Term Cash Management portal surpassed $100 billion in total money market fund assets. The SGN Short-Term Cash Management portal is a global compliance, trading and connectivity solution for institutional cash investors. The solution is a multi-fund trading platform that helps corporate treasurers increase efficiency in researching, analyzing and gathering other relevant information and provides the ability to optimize short-term investments."

SunGard's statement explains, "The use of online money fund trading portals continues to run counter to the current trend of institutional money market asset declines. The Investment Company Institute's 2011 Investment Company Fact Book reports that nonfinancial businesses held 25% of their cash in money market funds as of year-end 2010, although this is down from 30% at year-end 2009. According to the Association for Financial Professionals' 2010 Liquidity Survey, 21% of organizations use an electronic, multi-family trading portal to execute at least some of their short-term investment transactions, and organizations using trading portals execute an average of 73% of their money market mutual fund transactions through the trading portal."

Bob Ward, chief operating officer of SunGard's wealth management business, comments, "The increasing asset volumes traded on the SGN Short-Term Cash Management portal suggest it is meeting the growing demand for integrated, electronic trading platforms to help global treasury and investment professionals manage risk, improve operational efficiencies and satisfy auditor requests. Offering the transparency of a fully disclosed, direct model and an international network with multiple currencies, the portal helps meet these requirements in one centralized, automated source to buy and sell shares in institutional money market funds."

The other release says, "BNY Mellon, the global leader in investment management and investment services, today announced the launch of BNY Mellon Connect Mobile, a new application that gives clients access to BNY Mellon product and service offerings via an iPad. Available for download at the iTunes App Store, BNY Mellon Connect Mobile debuts with a link to foreign exchange research from BNY Mellon Global Markets and a link to Liquidity DIRECT Mobile, which makes available via an iPad many of the transactional, reporting and account management features of Liquidity DIRECT, BNY Mellon's cash investment tool for institutional investors."

It adds, "Liquidity DIRECT Mobile allows clients to take the power of Liquidity DIRECT with them wherever they go. Clients can easily monitor and manage their cash investments via their iPad without being tied to their desktop. Liquidity DIRECT enables institutional clients to access a wide range of money market funds, provide custody for margin balances in counterparty transactions, and invest directly in individual money market securities through BNY Mellon's full service broker-dealer. It also gives users access to a wealth of Liquidity DIRECT's account performance and investment information, such as money market fund yields, returns and credit ratings. Liquidity DIRECT Mobile allows clients to invest, redeem and transfer cash via an iPad-compatible version of Liquidity DIRECT."

Jonathan Spirgel, executive vice president and global head of Liquidity Services at BNY Mellon, comments, "`As the first institutional investment portal adapted specifically for an iPad, Liquidity DIRECT Mobile continues our tradition of introducing first-to-market, client-focused cash investment technologies. We're going to maintain our innovation momentum by introducing iPhone and Android adaptations of Liquidity DIRECT Mobile during the second half of the year."

We recently noticed another Comment Letter posted by the Investment Company Institute. This latest, written by President & CEO Paul Schott Stevens, is in a Response to a recent Financial Stability Board paper, "Shadow Banking: Scoping the Issues". Stevens writes, "The Investment Company Institute appreciates the opportunity to comment on the background note by the Financial Stability Board entitled 'Shadow Banking: Scoping the Issues'." (See also, "Financial Stability Board, Shadow Banking: Scoping the Issues.)

ICI says, "Since our inception in 1940, we have been active participants in the development of laws and regulations that have been instrumental in the growth of fund investing in the United States and worldwide. We have been deeply engaged in the development of laws and regulations responsive to the recent financial crisis, including mechanisms to counter systemic risk and to make money market funds more resilient in the face of the most adverse market conditions, such as those caused by widespread bank failures in 2008."

They continue, "The FSB's directive from its member institutions is to "develop recommendations to strengthen the oversight and regulation of the 'shadow banking system' by mid-2011." To that end, the FSB established a task force to consider the following: (1) a definition for 'shadow banking'; (2) potential approaches to monitoring the 'shadow banking' system; and (3) possible regulatory approaches to address systemic risk and regulatory arbitrage concerns posed by the 'shadow banking' system. The Note describes the current thinking of the FSB's task force, particularly on the definition of the “shadow banking system."

Stevens adds, "The Note states that the financial crisis has shown that "the shadow banking system can also become a source of systemic risk, both directly and through its interconnectedness with the regular banking system." The Note asserts that the shadow banking system can "create opportunities for arbitrage that might undermine stricter bank regulation and lead to a build-up of additional leverage and risks in the system." The Note concludes that "[e]nhancing supervision and regulation of the shadow banking system in areas where systemic risk and regulatory arbitrage concerns are inadequately addressed is therefore important."

Stevens explains, "Crucial to the FSB's project is a definition of the "shadow banking" system, which the Note very broadly identifies as "the system of credit intermediation that involves entities and activities outside the regular banking system." Acknowledging that the definition is broad, the FSB limits the Note's view of "credit intermediation" to activities and entities involved either in extending credit (directly or as part of a chain) or in facilitating its intermediation. In further describing "credit intermediation," the Note observes that credit intermediation encompasses not only on-balance sheet transactions but also derivatives and other off-balance sheet transactions that would be part of the credit intermediation chain. The proposed definition would exclude "pure equity trading" and foreign currency transactions by entities outside of the banking system, unless such activities are part of the credit intermediation chain. The Note explicitly identifies the trading of credit-related financial instruments, such as bonds and structured/hybrid financial products, as within the definition of credit intermediation."

He says, "Although the Note begins broadly, it concedes that any focus should only be on non-bank credit intermediation where important risks are most likely to emerge. Consequently, the Note states that regulatory attention should focus on those "shadow banking" activities that give rise to either or both of the following: (1) Systemic risk: primarily arising from activities that generate maturity and/or liquidity transformation, that involve flawed credit risk transfer, and that create or facilitate leverage; and (2) Regulatory arbitrage: arising from activities that circumvent or undermine banking regulations. The Note defines "maturity transformation" as the activity of issuing short-term liabilities (such as deposits) and transforming them into medium–long term assets (such as loans). "Liquidity transformation" refers to the issuance of liquid liabilities to finance illiquid assets. For this purpose, the Note states that an asset is illiquid when it cannot be easily converted into cash without a loss in nominal value. The Note does not include a definition of "flawed credit risk transfer"; there is only a general reference to flawed credit risk transfer through securitization."

The letter states, "As a preliminary matter, ICI strongly objects to the use of the terms "shadow banks" and "shadow banking" because they are inherently inaccurate and misleading. These terms are merely epithets, connoting that all the activities so labeled lack both transparency and any regular or official status. Such is not the case. As a recent Staff Report of the Federal Reserve Bank of New York observes, "the label 'shadow banking system' ... is an incorrect and perhaps pejorative name for such a large and important part of the financial system." We urge the FSB to use more precise and neutral terminology when discussing the various roles of non-bank financial Intermediaries. As we discuss in Appendix A, those entities play a variety of important roles in the financial system. These roles may share some similarities with the role that banks play -- but there are also critical differences and those differences should be respected."

ICI's response concludes, "The FSB wields an unusually powerful tool, in its ability to forge global recommendations regarding those activities perceived to pose systemic risk and to require international attention. We urge the FSB to carefully weigh any proposals relating to non-bank financial intermediaries against its standard that "the regulatory response to shadow banking should be carefully balanced and targeted." Such balance will only be achieved if the FSB's recommendations are closely informed by, and tailored to take account of, the unique features of existing regulatory regimes and the experiences of different financial markets."

The Federal Reserve published its comprehensive quarterly "Z.1 Flow of Funds Accounts of the United States" statistical release yesterday, which showed that the Household sector solidified its position as the largest owner of money market mutual funds shares in the first quarter of 2011. Households owned $1.188 trillion, or 44.3% of the $2.679 trillion in money funds in Q1, up $37 billion or 2.5% from Q4 2010. Funding corporations, which includes securities lenders, remained the second largest investor in money funds with $591 billion, or 22.0%, but their holdings declined by $99 billion, or 4.1% in the latest quarter.

Nonfinancial corporate businesses' holdings of money market funds drifted lower by $20 billion, or 0.2%, to rank third with $497 billion, or 18.6% of the total All other investor types remained relatively flat. Private pension funds held $96 billion, or 3.6% of assets, unchanged from the prior quarter; State and local governments held $91 billion, or 3.4% of assets (unchanged); the "Rest of the world" category held $85 billion, or 3.2% of assets (up $1 billion); Nonfarm noncorporate businesses held $66 billion, or 2.5% (unchanged); the Property-casualty insurance category held $28 billion, or 1.0% (up $2 billion); Life insurance companies held $24 billion, or 0.9%; and State and local government retirement held $15 billion, or 0.5%.

The Fed's Z.1. Survey also showed that Time and savings deposits accounted for the largest percentage of money fund portfolio holdings at 17.5%, or $470 billion. Security RPs (repo) ranked second among the Fed's L.121 table with $439 billion, or 16.4%, while Open market paper ranked third with $398 billion, or 14.9%. Agency and GSE backed securities accounted for $373 billion of holdings, or 13.9%; Treasury securities accounted for $338 billion, or 12.6%; and Municipal securities accounted for $321 billion, or 12.0% of the total. Corporate and foreign bonds totalled $154 billion (5.7%), Foreign deposits totalled $108 billion (4.0%), and Miscellaneous assets and Checkable deposits and currency together totalled $79 billion (2.9%). Repo and Agency declines accounted for almost all of the $76 billion asset decline in the first quarter, dropping $40 billion and $29 billion, respectively.

Chicago-based consulting firm Treasury Strategies commented on the "Flow of Funds" release, "The Federal Reserve today reported corporate cash balances climbed to $1.91 trillion -- a 36% increase since the first quarter of 2009 -- representing $510 billion. This significant increase indicates that businesses continue to generate cash from operations, while corporate treasurers remain concerned about the future economic outlook."

In other news, ICI said in its weekly "Money Market Mutual Funds" report, "Total money market mutual fund assets increased by $15.88 billion to $2.742 trillion for the week ended Wednesday, June 8, the Investment Company Institute reported today. Taxable government funds increased by $4.94 billion, taxable non-government funds increased by $10.09 billion, and tax-exempt funds increased by $850 million."

Ratings agency Standard & Poor's published its revised Principal Stability Fund Ratings Criteria yesterday afternoon. The announcement says, "Standard & Poor's Ratings Services has published updated principal stability fund ratings criteria, titled "Methodology: Principal Stability Fund Ratings," to enhance transparency and to help market participants better understand our approach to rating fixed-income funds that seek to maintain a stable or accumulating net asset value. The criteria changes are largely consistent with the proposals outlined in the articles "Request for Comment: Principal Stability Fund Rating Criteria," published Jan. 5, 2010, and "Request for Comment: Fund Ratings Criteria," published Sept. 17, 2010."

S&P Primary Credit Analyst Peter Rizzo tells Crane Data, "There are no surprises here." The release comments, "We received more than 20 responses from market participants on each request for comment (RFC). Based on this feedback, the final criteria reflect changes to stress test frequency, the definition of illiquid/limited liquidity, and diversification for investments in another rated fund. We adopted all other items outlined in the RFCs as proposed. The main criteria changes are summarized below and become effective Nov. 1, 2011."

The release says the changes include: "Elimination of the 'G' rating modifier that was applied when the portfolio consisted primarily of direct U.S. government securities; Establishment of explicit issuer or counterparty credit ratings (or the requirement to have a formal guaranty from a Standard & Poor's rated entity) for counterparty transactions such as repurchase agreements, reverse repurchase agreements, swaps, forward purchases, foreign-exchange contracts, and other hedging positions; Adoption of weighted average maturity (WAM) to final, or WAM(F), criteria for all PSFR categories (i.e., 'AAAm' maximum of 90-120 days); Establishment of a maximum final maturity of 397 days for all investments other than certain 'AA-' or higher-rated sovereign floating-rate securities or securities with an unconditional demand feature (i.e., put) providing for liquidity within 397 days; Expansion of guidelines for the underlying index for variable/floating-rate security resets to indices that are highly correlated (at least 95% over past five years) with three-month LIBOR in addition to the effective fed funds rate; and, Maintenance of the maturity of "nonmarketable" securities that count toward the limited liquidity/illiquid basket at greater than five business days (RFC proposed to reduce it to one business day); Introduction of monthly stress testing guidelines (RFC proposed weekly)."

They also include: "Establishment of cure periods for when a quantitative criteria metric/threshold is breached; Explanation of what we view as "higher-risk investments;" Enhancement of our qualitative review of management that includes measures to provide ratings differentiation based on management's resources, operational policies, risk management and credit analysis; Introduction of interest rate swap criteria; Revision of interfund lending criteria; Expansion on WAM adjustments attributed to investment experience of fund manager, concentration of shareholder base, and size of fund; Refinement of maximum exposure per issuer (i.e., investments in another rated fund now 10% from 25%. The RFC proposed 5%); Refinement of the treatment of municipal securities that we do not rate--specifically the use of long-term ratings from Moody's or Fitch; Implementation of more granular criteria for the 'AAm', 'Am', and 'BBBm' rating categories on the maximum exposures to muni securities only rated by Moody's or Fitch, unrated credit-enhanced variable-rated demand obligations, unrated prerefunded municipal escrow bonds, sovereign government-related entities and sovereign government-guaranteed securities, and other rated funds; and, Clarification of criteria pertaining to collateralized investments."

Finally, S&P's statement adds, "The finalized criteria also include a table summarizing all of the changes as well as a summary of responses to the two RFCs published in 2010. Standard & Poor's will host a teleconference on Tuesday, June 14, 2011, to discuss the criteria. The call will begin promptly at 11:00 a.m. Eastern Daylight time. The credit analysts participating on this call will include Peter Rizzo, Joel Friedman, and Andrew Paranthoiene. To participate in the call, please dial one of the following numbers: US/Canada Toll Free: 1-866-803-2143. Conference ID#: 5161988, Passcode: SANDP."

The June issue of Crane Data's Money Fund Intelligence publication and our Money Fund Intelligence XLS with May 31 month-end performance data and rankings were distributed to subscribers Tuesday. This month's feature articles include: "Money Funds Under Siege; SEC Roundtable, Fed Hit $1," which discusses the raging debate over the future of money fund regulations; "Reich & Tang Does Daily MMFs & FDIC Sweeps," which interviews RNT Chief Strategist Tom Nelson; and "Moody's Ratings Changes Shift AAA Landscape," which talks about the agency's mysterious retreat from rating money market funds. Crane Data also updated its Money Fund Wisdom database software, and issued a final reminder for this month's Crane's Money Fund Symposium conference in Philadelphia, June 22-24.

Our "Under Siege" article comments, "At the start of 2011, not a soul had come out in favor of a floating NAV or even radical change for money market funds, other than long-time nemesis Paul Volcker. Now, however, it seems like the world outside of the money fund industry is hell-bent on destroying the $2.7 trillion sector. In May, The Wall Street Journal editorial Page, Banking Regulators at the recent SEC Roundtable, and even some Federal Reserve members all came out in favor of radical surgery." The piece explains, under the subtitled, "Roughed Up by Roundtable," "The May 10 'Money Market Funds and Systemic Risk Roundtable' was held to address, "The potential for money market funds to pose a systemic risk to broader financial markets -- what makes money market funds vulnerable to runs.... [and] Possible options for further regulatory reform and their implications, including floating NAV, bank regulation, and options that reflect a hybrid of these regulatory approaches: a private liquidity bank; mandatory reserve or capital requirements; and liquidity fees."

This month's fund family profile "interviews Tom Nelson, Chief Strategist for the Reich & Tang, manager of the Daily Income Funds, the new RNT Natixis Liquid Prime Portfolio, and Reich & Tang Insured Deposits, an FDIC-insured sweep program." It asks, "How long has Reich & Tang been involved in running money funds? Nelson says, "Reich & Tang has been managing money funds since 1974. It is one of the largest firms in the nation focused solely on liquidity and cash management services. From the beginning we have focused within the retail channel and were at the forefront of the brokerage sweep business, which continues to grow nicely today. (Look for more profile excerpts on www.cranedata.com later this month.)

The June issue also discusses recent changes in money fund AAA ratings. We write, "In mid-May, Moody's became the latest ratings agency to alter its money market fund rating scale. Though the change didn't cause as much disruption as the NRSRO's original proposal undoubtedly would have, the move still caused waves, especially among smaller advisors. The change was accompanied by a flurry of press releases announcing a number of withdrawn ratings. Mutual fund news service ignites wrote that "Dozens of Money Funds Drop Moody's Ratings," saying, "Moody's now rates 291 money funds; in September it rated 338."

Every month, Crane Data publishes its 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 produce its "complement," Money Fund Intelligence XLS, which has additional data and rankings; Crane Index, a subset with cash 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 next Money Fund Portfolio Holdings collection is scheduled for distribution on June 14.

Stradley Ronon Counsel Joan Ohlbaum Swirsky writes on "SEC Roundtable Discussion Highlights Different Views of Money Market Fund Reform" in the law firm's latest "Fund Alert" for June 2011. She says, "The roundtable (Roundtable) discussion of money market funds that the Securities and Exchange Commission hosted on May 10, 2011 showcased the gulf between some regulators and industry stakeholders regarding proposals for the reform of money market funds. Some participants in the Roundtable noted the importance of money market funds to investors and issuers and their track record of stability. But these views appeared to strike some others as irrelevant to a basic contention: that money market funds may experience a run that could threaten the broader financial system." (Note: Subscribers should watch for Crane Data's June Money Fund Intelligence publication and May 31 month-end data rankings and Crane Indexes later this morning.)

Swirsky explains, "Some Roundtable participants appeared to divide along opposite sides of a key issue: either money market funds are an investment (though a very safe one) and shareholders understand the risk that they can lose money or, alternatively, investors in money market funds perceive those funds as guaranteed and the salient issue is who will (and how to) ensure the implicit protection. It was further suggested that if only a central bank can provide the protection, it is not unreasonable to allow that bank to regulate money market funds. The discussion also highlighted the differing views of various money market fund sponsors and academics regarding the alternatives for reform of money market funds -– but also highlighted the strongly held belief within the industry that money market funds are a regulatory success story that must not be destroyed by unnecessary fundamental regulatory transformation."

She continues, "The SEC and its staff did not support any particular reform option at the Roundtable, but Paul Stevens, President and CEO of the Investment Company Institute, said at the ICI's Money Market Summit on Jan. 16, the week following the Roundtable, that he was 'taken aback' by the reaction of the SEC representatives to the ICI's discussion of its proposed liquidity facility to support money market funds. He characterized the reaction as questioning why the ICI had proposed the idea at all. The Roundtable participants focused more discussion on the capital buffer proposals described below than on the proposed liquidity facility."

The Stradley publication comments, "The SEC convened the Roundtable to discuss, among other things, 'the potential for money market funds to pose a systemic risk to broader financial markets -- what makes money market funds vulnerable to runs' and possible options for further regulatory reform of money market funds, including: floating the net asset value, imposing bank regulation, creating a private liquidity facility, and mandating reserve or capital requirements. The Roundtable grew out of the Report dated Oct. 21, 2010, of the President's Working Group on Financial Markets (PWG; the PWG Report) on proposals for reform of money market funds. The SEC sought public comment on the PWG Report and said the SEC would meet with various stakeholders, interested persons, experts and regulators to discuss the options in the Report."

Swirsky says, "The Roundtable included, among others, six of the 10 voting members (or their representatives) of the Financial Stability Oversight Council. The FSOC is a council of regulators established to oversee systemic risk by the Dodd-Frank Act, which was signed into law by President Obama on July 21, 2010. The Dodd-Frank Act grants the FSOC authority to influence the regulatory regime for money market funds and other significant financial institutions in various ways." To read the full article, visit http://www.stradley.com.

On Friday, Eric Rosengren, President & Chief Executive Officer, of the Federal Reserve Bank of Boston gave a speech entitled, "Defining Financial Stability, and Some Policy Implications of Applying the Definition, which contained a section on money market mutual funds. Rosengren reviews the crisis, discusses current options and risks, including heavy European holdings of money funds, and urges action to address future threats. (See also, Bloomberg's "Fed's Rosengren Says Money Funds May Be Vulnerable to Europe".)

In the section "Examples of financial instability (and possible causes)," Rosengren says, "I have been arguing here that there are examples of serious financial problems and dislocations that I would not consider examples of financial instability, as I define it. But there are, unfortunately, examples of financial instability that occurred recently, during the financial crisis and recession. As I mentioned in my introduction, the Dodd-Frank legislation seems primarily focused on addressing the failure of large financial institutions and payments systems -- which certainly warrants attention. But a large interconnected failure is only one of several ways that a systemic problem can emerge. The first example I would offer involves the experience of money market mutual funds (MMMFs) during the financial crisis, and it demonstrates that even a small financial intermediary can create financial instability."

He explains, "As of August 2008 MMMFs had $3.5 trillion of assets, and funds had been flowing into MMMFs, as a result of problems at a variety of banks and other factors. But Figure 6 shows the daily change in money market fund assets in prime funds in the latter portion of 2008, and notes some of the key events of that era. In the wake of the failure of Lehman Brothers, a relatively small MMMF called the Reserve Primary Fund experienced very substantial outflows due to investor concerns about its credit exposure to Lehman. While money market funds are highly regulated by the SEC and are supposed to hold high-quality liquid assets, investors were concerned that losses from Lehman would cause the Reserve Fund to 'break the buck' (that is, redeem shares for less than one dollar)."

The Boston Fed President continues, "The problems at the Reserve Fund not only caused funds to flow out of that fund, but also triggered large withdrawals from other money market mutual funds as well.... Over the course of the week, over $300 billion was withdrawn from prime MMMFs, forcing the funds to try to quickly sell assets to meet redemption requests. Note that there are three major types of money market funds ... funds that invest in tax-exempt securities, funds that invest in government securities, and prime money market funds that purchase a wide variety of debt instruments. It was the prime money market funds that posed the most severe problem during the crisis -- and which still pose a problem today (as I will discuss in a moment). While some of the assets in the prime funds, such as Treasury securities, could be readily sold, others such as asset-backed commercial paper (ABCP) were not easily sold given the prevailing harsh market conditions."

He adds, "The rapid withdrawal of funds from prime money market funds not only represented a crisis of confidence, but also began seriously disrupting credit markets where MMMFs were the major buyers. Interest spreads on asset-backed commercial paper ... rose dramatically. The bottom panel shows that asset-backed commercial paper could only be issued in very short maturities. The percent of issued paper maturing in one to four days leapt from roughly half to over 90 percent. In response to these short-term credit disruptions, the U.S. Treasury announced a plan to insure MMMF shares, and the Federal Reserve System announced an asset-backed commercial paper MMMF liquidity facility. The facility, operated for the System by the Boston Fed, allowed money market funds to sell asset-backed commercial paper to banks -- the MMMFs could use the sale proceeds to meet redemption requests -- and the asset-backed commercial paper was pledged by the banks to the Fed as part of a loan from the Fed, which was ultimately paid back with interest. In addition, over time other facilities were created to address disruptions in short-term credit markets."

Rosengren says, "The money market problems that disrupted short-term credit markets highlighted that financial instability could be created by even a small money market fund if its problems created doubts about other funds' ability to redeem investors' funds at stable net asset value. In a situation like this, we should note, the weakest link in the financial stability chain might be small, rather than large, financial intermediaries. This problem with promising stable asset values despite some credit risk was what in this example impaired financial intermediaries (the MMMFs), seriously disrupted short-term credit markets, and had a large impact on the ability of firms to acquire short-term debt financing."

He continues, "The Securities and Exchange Commission has tightened requirements on money market funds. While this represents an important step forward, I will digress for a moment on this issue as it relates to our topic today, financial stability. Despite the regulatory changes that have occurred, MMMFs still remain vulnerable to an unexpected credit shock that could cause investors to doubt the ability to redeem at a stable net asset value. I am certainly not predicting such an outcome, but I believe we all do well to recognize and address this vulnerability."

Rosengren also says, "I do think it would be particularly prudent to address this issue now, as money market mutual funds have the potential to be impacted should there be unexpected international financial problems emanating from Europe. Consider that many (but not all) MMMF's have sizeable exposures to European banks, by virtue of holding the banks' short-term debt. This means some MMMFs are potentially sensitive to a disruption in the European banking system, should one arise from the fiscal and sovereign-debt problems we are seeing in some European countries. Conversely, I would note that European banks are reliant on the MMMFs -- which are a major source of their dollar-funding needs. This latter point is worth noting as we carefully and responsibly examine this set of issues -- because it means, for instance, that a regulatory change that reduced the debt holdings of European banks by prime money market funds could (as an unintended consequence) necessitate corresponding changes in European dollar-funding strategies."

Finally, he adds, "While there have been various proposals to address this issue -- for instance allowing the asset values of the funds to float, or requiring capital be set aside in the event of a credit shock, or requiring a source of strength from a parent company or an insurance contract -- no one solution has been settled on that would cure the type of problem that occurred with the Reserve Primary Fund in the last financial crisis. So in my view, any solution needs to address the potential impact of unexpected credit losses, the risk that investors might rapidly withdraw their funds to avoid any loss, and the operational convenience that MMMFs provide as a transactions account vehicle. Despite these challenges, the set of issues surrounding MMMFs is in sum a vulnerability that needs to be addressed. Forums like this one serve an important role in allowing us to underline issues like this that need focused and constructive attention."

Guggenheim Funds, which recently hired a veteran money market fund management team (see our "People" News below), is the latest entrant into the "enhanced cash" or ultra-short bond ETF space. A press release posted yesterday says, "Guggenheim Funds Distributors, Inc. announced the launch of two new actively managed exchange-traded funds (ETFs), the Guggenheim Enhanced Core Bond ETF (GIY) and the Guggenheim Ultra-Short Bond ETF (GSY). The two funds seek to offer the benefits of active management and a cost-effective way to access today's fixed income marketplace." (See also our April 26, 2011, Crane Data News "Oppenheimer Short Duration Fund Launches; Dreyfus Closes Enhanced".)

It says, "Guggenheim Enhanced Core Bond ETF is an actively managed ETF that seeks total return comprised of income and capital appreciation. The Fund will normally invest at least 80% of its net assets in fixed income securities and attempts to outperform the Barclays Capital U.S. Aggregate Bond index. The Investment Adviser utilizes a quantitative strategy which attempts to identify relative mispricing among the instruments of a given asset class and estimate future returns which may arise from the eventual correction of the relative mispricing. Guggenheim Enhanced Ultra-Short Bond ETF is an actively managed ETF that seeks maximum income, consistent with preservation of capital and daily liquidity. The Fund will normally invest at least 80% of its net assets in fixed income securities. The Fund uses a low duration strategy to seek to outperform the 1-3 Month Treasury Bill Index in addition to providing returns in excess of those available in U.S. Treasury bills, government repurchase agreements, and money market funds. The Fund is not a money market fund and thus does not seek to maintain a stable net asset value of $1.00 per share."

The new fund's website explains, "The Guggenheim Enhanced Ultra-Short Bond ETF (GSY), seeks maximum current income, consistent with preservation of capital and daily liquidity. The Fund will normally invest at least 80% of its net assets in fixed-income securities. The Fund uses a low duration strategy to seek to outperform the 1-3 month Treasury Bill Index in addition to providing returns in excess of those available in U.S. Treasury bills, government repurchase agreements, and money market funds, while seeking to provide preservation of capital and daily liquidity. The Fund is not a money market fund and thus does not seek to maintain a stable net asset value of $1.00 per share. The Fund expects, under normal circumstances, to hold a diversified portfolio of fixed-income instruments of varying maturities, but that have an average duration of less than 1 year."

See our April 2011 Money Fund Intelligence story, "Comeback or Flashback? Enhanced Cash Returns," which says, "Last year, Dreyfus, with its Institutional Income Advantage Fund (DLASX), and JPMorgan, with its JPMorgan Managed Income Fund (JMGSX) launched the first of the latest generation of products in the space just beyond money market funds. This past month, Fidelity launched its Conservative Income Bond Fund (FCNVX), and Oppenheimer has filed for a new Short Duration Fund. There remain, though, just a handful of large funds in the sector -- and they're pikers compared to the money fund arena. PIMCO's Enhanced Short Maturity Strategy Fund (MINT), which was launched in November 2009, is the only new fund that has seen real growth -- it recently broke above the $1 billion mark. But its yield indicates that it's beyond the realm of 'enhanced cash'. (MINT is yielding around 0.8% vs. 0.25% to 0.5% for most of the new breed of enhanced funds.)"

Today, we excerpt the second half of our article, "U.S. Bancorp Sticks With First American Funds," which interviews Joe Ulrey and Jim Palmer. MFI: What are the funds buying? Palmer: Certainly repo is a large component of our Treasury Obligations and Government Obligations funds. It's difficult to get away from that, especially when you consider how low yields are in 90-day T-Bills or in 90-day Discount Notes. In that high-quality liquid space, it is much harder to find attractive alternatives to repo. We are seeking longer dated floaters and concentrating more on U.S. Treasury securities.

We have invested more of our Prime and Government fund assets in U.S. Treasury notes as Treasuries have become a more valuable asset class for funds for a variety of reasons. First, we can include Treasuries in our daily and weekly liquidity asset calculations.... Second, with rates so low and the spreads on corporate, bank and especially in agency securities being so thin, the relative value of Treasuries has gone up from a yield perspective as well. As a result, we have the ability to improve the risk profile of our funds without greatly sacrificing yield.

MFI: Are there any other supply developments? Palmer: We're definitely participating more in the municipal market through daily and weekly VRDNs. VRDNs can offer incremental return over Repo, CDs, and CP, with daily and weekly liquidity. Money market funds and other investors will perhaps find more ways to move more cash out of repos and into other investments which may help correct the demand/supply imbalance. Also, some of the collateral issues may resolve themselves over time.

MFI: How long can we stay low? Palmer: We can stay low as long as the Fed feels we need to stay here and U.S. economic growth remains anemic. Our forecast is for the Fed to remain on hold through 2011. The recent public comments from several Fed presidents have suggested a growing disagreement within the Fed about the risk of completing QE2 as well as keeping the Fed Funds rate targeted in the 0-25 basis point range. But we believe the key decision makers remain firmly in the camp of keeping policy steady, given their view that the economy is still relatively weak and inflation is still well contained. Ultimately, we feel these key decision makers will win the day and policy will remain accommodative.

MFI: What are your customers concerned about these days? Palmer: I'd say with so much transparency in the industry, it's really rare for any customer to express concern about the current investments in the First American Funds. What we have now is a much more informed investor base. They are asking broader questions -- what's happening in Europe, how do the terrible events in Japan affect the money markets, and primarily, when do we think the Fed will raise interest rates? This is where we like to have our credit analysts or portfolio management team step in and provide additional commentary, and that comes through either our website or conference calls with clients. But I would say that for the last year, the most common questions have revolved around the low yield environment and 'when can we expect to see higher yields on our cash?'

MFI: How are fee waivers impacting the business? Ulrey: Fee waivers are quite painful to us as a business line, and we're feeling the same pain as all money funds out there in this waiver environment. However, U.S. Bank is well-positioned to handle a downturn in one of its divisions. Fortunately, the asset management business overall does remain profitable to the bank and represents a core product to the client base. U.S. Bank remains committed to this product. This investment space represents a solid anchor product for our clients. I can't stress that enough.

MFI: What are your thoughts on the future of money funds? Ulrey: We did not comment [on the PWG report] since we were going through a lot of the changes with Nuveen at the time, but we do have a perspective on the future of this business. We believe the money market business is here to stay and will remain a $1 NAV product. There is $2.7 trillion sitting out in money fund investments patiently waiting for yields to increase one of these days, so the clients do like the product as it's structured today. It's an investment that provides principal preservation, daily liquidity and high-quality assets.

Speaking to the PWG and the regulatory front, we believe the SEC has done a great job with the WAL, WAM and overnight liquidity changes. Also implementing additional and more appropriate disclosure requirements was a positive change. These alone have gone a long way to button up any potential vulnerabilities in money market funds. PWG can, hopefully, further improve on this foundation. However, we believe that floating NAV would not have stopped the run on assets, and that it is not a viable alternative. Some of the other options out there, such as liquidity facilities or capital reserve requirements, could be possible options. We'll continue to stay tuned, provide input, analyze the ideas and see where the industry goes.

MFI: Can you talk about the profile of the investor base? Ulrey: The vast majority of the clients in our funds are core clients of U.S. Bank. They come to invest in First American Funds through services the bank provides. Whether they're buying corporate trust services or institutional trust and custody services, money market funds are secondary. I think that's a huge advantage for us. You've got investment liquidity, but you also have your investor base liquidity. And we have a very diversified investor base. We have direct relationships with these clients through U.S. Bank, which is huge. We can pick up the phone and talk to them directly about what's going on in our funds.

In the May issue of our monthly Money Fund Intelligence, we feature the story, "U.S. Bancorp Sticks With First American Funds," which profiles the First American Funds and interviews President Joe Ulrey, who is also the CEO of the fund's advisor, U.S. Bancorp Asset Management, and Jim Palmer, the Head of Investments for U.S. Bancorp Asset Management. The Minneapolis-based company was one of the early entrants into the money market space and has now managed money funds for 30 years. We discuss the firm's history, recent changes and the challenges in the money fund space today. Excerpts from our Q&A follow.

MFI: How long have you been in the short term investment business? Ulrey: Jim and I have been working together on the money market funds for the last 20 years, so we have a long history. We both have earned our gray hair legitimately managing through a lot in the money fund space. I started out in cash as head of the short term money market business and Jim worked with me as lead PM. I went on to serve as Treasurer and CFO, as well as holding a variety of other leadership roles within our predecessor firm, FAF Advisors, Inc. Jim has continued to grow and add more responsibilities, ultimately heading the fixed income investment side of our business.

MFI: Tell us about your recent rebranding. What's changed? Ulrey: As you are aware, at the end of 2010, U.S. Bancorp entered into a strategic transaction with Nuveen Investments, where the long fund portion of the business of FAF Advisors was contributed in exchange for an ownership interest in Windy City, the parent company of Nuveen Investments. The important thing to understand is that the money market and short term fixed income business was not part of the transaction and was never considered to be part of the transaction; it has always been viewed as a foundation product offering for U.S. Bancorp.

MFI: How much cash do you manage? Ulrey: Of the $54 billion we are managing today, about $41 billion is in our five registered money market funds. The remainder is in separately managed custom cash portfolios and securities lending collateral programs. We also retained the First American closed end funds and are advisor and administrator for these funds. These closed end funds are just under $1 billion and they are sub-advised. They also weren't part of the Nuveen transaction.

MFI: What is the biggest challenge in managing the funds? Palmer: Money market investing is dynamic, interesting and competitive. I think the primary frustration today is certainly the low rate environment, which has been exacerbated by the significant decline in repo and money market yields on the front end of the yield curve. Low repo rates have dragged down money market rates across the entire front-end maturity spectrum.

In addition, the very thoughtful and appropriate regulatory changes that we've seen in both the money market and banking industries have created an interesting dynamic where money market funds are being required to carry more liquidity while banks are being encouraged to issue longer dated debt. As fund managers, we have to navigate through those changes, and get on top of new products that are coming to the short term market. The First American Fund complex was already fully rated so we were well positioned to integrate the more conservative regulatory policies.

MFI: Can you survive these low yields? Palmer: With repo rates in the low single digits, it makes everything more difficult. [But] this was not a panic-induced reduction in yields, it was more of a reaction to technical factors. We believe a lot of those factors will be alleviated over time. One of the factors that got a lot of headlines was the change to the FDIC insurance fund assessments. That certainly had an impact on repo rates. Over the next several weeks, repo rates will probably end up lower than they were in the first quarter, but should move higher than they are today. (Look for Part II of our interview in coming days, or see the May issue of MFI.)