News Archives: October, 2012

Most money market mutual funds announced plans to open and operate normally on Wednesday, following an extremely rare, unscheduled shutdown on Tuesday (some retail funds were closed all day Monday too). Even with the closing of the New York Stock Exchange and stock markets Monday, many institutional money funds opened early this week but closed early ahead of Hurricane Sandy. With the Big Board still closed Tuesday, and with SIFMA (formerly the Bond Market Association) recommending that bond markets close Tuesday, the money markets effectively shut down yesterday. While markets should be open, it could get spooky today with month-end following big outflows Monday and a huge spike in overnight repo (repurchase agreement) rates.

The Federal Reserve Bank of New York commented Monday, "The Federal Reserve Bank of New York is open. Cash operations are open and operational. Fedwire is open and operating with normal hours for Fedwire Funds and Fedwire Securities. Due to financial market closures, several changes have been made to System Open Market Account operations previously scheduled to take place on October 30. (See their Statement Regarding Changes to Open Market Operations Due to Hurricane Sandy.)

SIFMA's release late Tuesday says, "The Securities Industry and Financial Markets Association (SIFMA) recommends the market be open on Wednesday, October 31, for the trading of U.S. dollar-denominated fixed-income securities in the United States. This recommendation applies to trading of U.S. dollar-denominated government securities, mortgage- and asset-backed securities, over-the-counter investment-grade and high-yield corporate bonds, municipal bonds and secondary money market trading in bankers' acceptances, commercial paper and Yankee and Euro certificates of deposit. SIFMA's recommended early and full market closes are recommendations only; each member firm should decide for itself whether its fixed-income departments remain open for trading. All SIFMA recommendations are subject to change due to market conditions."

The majority of institutional money funds opened until noon Monday, while some (Dreyfus, as well as many retail money funds) closed completely. All money funds were closed Tuesday. According to our Money Fund Intelligence Daily, money fund assets declined by $20.7 billion on Monday. (MFI Daily subscribers can spot funds that are closed by looking for no change in the 1-day asset change column, Chg1D.) While money fund rates have yet to reflect them, overnight repo rates spiked on Monday, rising to over 0.5%. (See the DTCC's Repo Index.)

J.P. Morgan Securities Alex Roever wrote last night in a piece entitled, "Liquidity markets: the morning after," "US liquidity markets are expected to reopen on Wednesday morning after Hurricane Sandy forced an early close on Monday and a near total close on Tuesday. Of course, Wednesday is also October month-end, a day when calendar effects normally result in modest changes to market flows that influence short-term interest rates. The confluence of storm-related factors and calendar effects probably will make October month-end sloppy, but we don't expect any systemically threatening developments. Much of the expected short-term yield volatility will result from 2-3 days of pent-up funds trying to flow from cash into short-term instruments."

He added, "Because of the storm, most MMFs closed early on Monday, and virtually all were closed Tuesday.... Most likely, these redemptions were pre-emptive and attributable to companies and other institutional shareholders wanting more cash on hand ahead of the storm. Although funds were closed to share transactions Tuesday, there was limited portfolio activity. Most maturing overnight trades were rolled to Wednesday. Some fund managers were able to execute overnight repo, time deposit and CD trades for cash with a limited number of dealers on Tuesday. While the full slate of dealers will probably return on Wednesday, there will a high level of maturities and a constrained amount of supply. Monday's MMF outflows cloud our expectations for Wednesday, as normally we'd expect month-end redemptions, but now it's uncertain what may have already flowed out, or if there's actually additional pent-up redemptions from funds being closed Tuesday."

As we mentioned in yesterday's "Link of the Day," Sunday's FT wrote a piece called, "Future of money market funds questioned," which reflects the new bearish view on European-centered and denominated money funds. The FT said, "Money market fund managers are likely to question whether they want to continue their involvement in an activity that is becoming increasingly unprofitable, industry commentators say. In a very low interest rate environment, yields on money market funds are being squeezed to a minimum, forcing providers to waive fees and review the structure of their products. If this continues much longer, credit rating agencies believe asset managers would have to consider whether it makes business sense to continue selling money market funds."

The article quotes, Charlotte Quiniou of Fitch Ratings, "This is one of the predictable outcomes. If funds become less and less profitable, managers will ask themselves whether they want to continue or not." The FT added, "Several managers have already closed funds after the European Central Bank dropped its overnight deposit rate to zero in July. At the beginning of October, Legal & General Investment Management closed its Euro Liquidity fund, a E257m vehicle.... According to Moody's, the Western Asset Euro Government Fund, ... which had E35m of assets ... has also been recently liquidated. Meanwhile, it was also reported at the end of August that Bank of America would close its Global Liquidity Euro fund, a Dublin-domiciled Ucits product, and return money to investors."

The FT piece noted, "However, many fund managers are expected to decide to remain in the money market fund business, even if they take a loss on that particular business segment.... Recent merger and acquisition activity in the money market fund sector has included deals from Deutsche Bank, which last year bought funds from Henderson Global Investors and Standard Life Investments. Earlier this year, Federated Investors also completed the acquisition of Prime Rate Capital Management."

Finally, the FT wrote, "Analysts also say that, following the ECB's rate cut, the priority for asset managers is not so much to sell funds but to prepare them for negative yields. Ms Quiniou says that virtually "all" asset managers are preparing their CNAV funds to allow yields to turn negative.... No CNAV fund is believed to currently have negative yields, but Moody's says the industry has identified a number of alternatives that will allow money market funds to operate in a negative or very low interest rate environment."

In other news, yesterday, Wells Fargo Securities Strategist Garret Sloan explains a little understood seasonal factor on cash rates and money fund balances, mortgage pool interest payments in his latest commentary. He wrote, "Repo markets spiked higher on Thursday last week to correspond with the monthly Fannie Mae/Freddie Mac mortgage pool interest payments and pool pay downs. As cash accrues at mortgage servicing companies from mortgagors, the growing cash balance is generally put to work in the repo market until it is required for distribution to MBS investors on the 25th of the month. The growing cash balance places downward pressure on the repo rate (all else equal), and on the 25th of each month there is generally a spike in repo rates as cash (i.e. demand for collateral) leaves the repo market to be paid out to investors."

He explained, "The cycle is repeated each month and last week mortgage repo climbed from 20 basis points earlier in the week to as high as 32 basis points on the 25th, and back down to 26 basis points on Friday. Treasury and agency repo followed suit, though in a more muted way. Treasury repo climbed from 19 basis points to as high as 26 basis points and back down to 22 basis points. However, the mortgage pay down is likely to pale in comparison to the upward pressure on repo rates seen this morning. The weather is again playing into the rates being paid in the repo market, with general collateral surging higher. Dealers and banks in need of funding are paying up significantly to make sure that their balance sheets are financed before the early close today and the potential mandatory close tomorrow."

Friday morning, Federated Investors hosted its 3rd quarter earnings call, which, as usual, discussed a number of issues of interest to money market fund providers and investors. Federated's J. Christopher Donahue, President and CEO, commented, "The third quarter saw a flurry of activity on the regulatory front. On August 22nd, the SEC Chairman issued a statement on money fund reform, indicating that a majority of the SEC commissioners would not support a proposal to reform the structure of money funds. This was followed by a statement from Commissioner Aguilar on the 23rd and a joint statement from Commissioner Gallagher and Paredes on the 28th. [W]e expect that SEC will and should retain this responsibility for overseeing markets and protecting investors, including money market regulations, and it is important to note that this agency, the SEC, has an unparalleled multi-decade record of success in the regulation of money fund and is far better equipped for this mission than the (FSOC)." (Note in other news on Friday: The ICI issued a statement, saying, "The Investment Company Institute's Money Market Working Group, made up of industry leaders, today made the following statement: "ICI and the fund industry are engaging directly with the Securities and Exchange Commission in a united effort to constructively build on the success of the 2010 reforms.")

Federated's Donahue continued, "Furthermore, the Commissioners concluded all of their statements by inviting constructive dialogue, which is obviously continuing, while noting that money funds are 'squarely within the expertise and regulatory jurisdiction as the SEC', and further 'we do not intend to abdicate our responsibility to regulate money market funds which would be unjustified and at the expense of our mission to oversee the securities market.' There have obviously been other events that have gone on here recently. We are well aware of the report that Treasury Secretary Geithner has written, and this has stimulated other activities [and] constructive dialog continues. Our position is very simple, that we will continue to champion those things that enhance the resiliency of money market funds."

He continued, "Money market mutual fund assets stand at about $246 billion.... On the institutional side, we are proceeding with the transition to begin managing the $9.5 billion Massachusetts Municipal Depository Trust mandate that we won during the third quarter. We expect to begin managing these assets early in 2013. We have had early success from the acquisition of our London-based Prime Rate Capital Management during the second quarter. The assets have increased from $4.2 billion ... to over $5 billion this month. We continued to look for alliances and acquisitions to advance our business in Europe and Asia, as well as here in the U.S. We closed in the third quarter, the previously announced transactions with Fifth Third for $4.4 billion in money market assets and Trustmark for $933 million in money market, equity and fixed income assets, and we remain active, as I said, in looking for additional consolidation opportunities."

Federated CFO Thomas R. Donahue commented on the call, "Taking a look at first at the money fund fee waivers, the impact of pre-tax income in Q3 was $16.3 million, down from $17.2 million in the prior quarters. The improvement was due mainly to higher rates for treasury and mortgage related securities. Based on the current assets and yield levels, we think the waivers could impact Q4 by about the same amount. Looking forward and holding all other variables constant, we estimate that gaining 10 basis points in gross yields would likely reduce the impact of minimum yield waivers by about 40% and a 25 basis points increase would reduce the impact by about 70%. It's important to note that the variables impacting waivers can and do change frequently."

Deborah Cunningham added, "Just to give you an update from a rate perspective for the third quarter versus the second quarter, effectively we had an improvement in overnight rates, repo in particular, stayed very steady in the low to mid '20s for both treasury as well as agency and mortgage-backed repo. The rest of yield curve however declined and flattened. For instance, one month LIBOR ended the period around 21 basis points, down 3 basis points from where we stood in the second quarter, and further out the curve, three months, six months and 12 months LIBOR, all declined 14, 18 and then 18 basis points again respectively. Although, the front end of the curve on an overnight basis held very steady and actually improved the curve itself further out to the (12-month period) actually declined substantially in the double digit mode."

Later in the Q&A portion of the call, Donahue responded, "[Y]ou mentioned ... the paragraph in Secretary Geithner's letter which functions as an indication for alternative approaches [to money fund reform] and engaging stakeholders, and so that effort is going on apparently. And we think that sets the stage for allowing for other ideas to come into play, and you mentioned our favorite, which is the voluntary gating, ala the Putnam situation.... [T]his supplied us with the experience and the enthusiasm to recommend in the 2010 -- before the 2010 amendments -- that we empower the Boards to do this voluntary gating for the one week period. And that was not included in the 2010 amendments. So any of these other ideas that people come up with regarding liquidity and other kinds of gates, we think would be wise to combine it with giving the Boards the power to do this."

Donahue explained, "The reason for that is very simple. Based on the experience of Putnam, that Board made a wise choice ... to treat all shareholders the same. We think that kind of flexibility [is] important, if you are approaching some of these other liquidity triggers that others are looking at.... We really believe that the SEC ... has done a commendable job on money funds. There have only been two have [broken the buck] in all those years, and that the jurisdiction of the SEC is well recognized by Secretary Geithner, and obviously the SEC."

Bloomberg wrote an article entitled, "BlackRock, Fidelity Seeking Money Fund Deal With SEC", which says, "Investment managers including BlackRock Inc. and Fidelity Investments, under pressure to preempt action by a new super-committee of regulators, are seeking to end an impasse over money-fund reform. Officials from several firms, as well as representatives from the Investment Company Institute, the industry's trade group, are scheduled to meet with the Securities and Exchange Commission and Treasury Department officials today to discuss proposals for a potential compromise, BlackRock spokeswoman Bobbie Collins and Fidelity spokesman Vincent Loporchio said today. The industry helped block a plan in August that was backed by SEC Chairman Mary Schapiro.."

Bloomberg writes, "The firms are pushing for an agreement amid the threat of action from the Financial Stability Oversight Council, or FSOC, a multi-agency panel of senior regulators formed by the Dodd-Frank Act. FSOC's most powerful figures, Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben S. Bernanke, have said money funds are a systemic threat to global financial markets. The body could intervene and submit money funds to direct regulation by the Fed."

The piece adds, "BlackRock, the world's largest asset manager, has held talks previously with SEC staff over a proposal that would include temporary withdrawal restrictions when money funds are under stress, said two people familiar with the matter, who asked not to be identified because the discussions were private. BlackRock published an outline of its plan in a Sept. 27 paper, proposing that money funds, under some circumstances, impose "stand-by liquidity fees" on investors who withdraw money. The fee would be triggered only when a fund's liquidity failed to meet existing minimums, or when a fund's mark-to-market share value dipped below a certain level." (See `Crane Data's Oct. 3 News "BlackRock Says Schapiro Proposals Flawed, Proposes Liquidity Fees".)

In other news, Federated Investors released its Third Quarter 2012 Earnings late yesterday (and hosts an earnings conference call Friday at 9am). The release says, "Federated Investors, Inc. (NYSE: FII), one of the nation's largest investment managers, today reported earnings per diluted share (EPS) of $0.54 for the quarter ended Sept. 30, 2012 as compared to $0.37 for the same quarter last year. Net income was $55.8 million for Q3 2012 compared to $38.3 million for Q3 2011. Federated's Q3 2012 financial results include the recognition of insurance proceeds, which reduced pre-tax operating expenses by $17.3 million and increased EPS by $0.11 per share, after tax. Federated reported YTD 2012 EPS of $1.33 compared to $1.09 for the same period in 2011 and net income of $138.5 million compared to $114.0 million for the same period last year."

It explains, "Money market assets in both funds and separate accounts were $269.6 billion at Sept. 30, 2012, down $2.1 billion or 1 percent from $271.7 billion at Sept. 30, 2011 and up $4.1 billion or 2 percent from $265.5 billion at June 30, 2012. Money market mutual fund assets were $244.8 billion at Sept. 30, 2012, down $0.5 billion from $245.3 billion at Sept. 30, 2011 and up $6.2 billion or 3 percent from $238.6 billion at June 30, 2012. Additionally, Federated announced in July that the commonwealth of Massachusetts had selected the company to manage two pools of assets with more than $9 billion in liquidity and short-term bond assets. Federated is expected to begin managing those assets in early 2013."

The company adds, "Revenue increased by $24.4 million or 11 percent due primarily to a decrease of $19.4 million in voluntary fee waivers related to certain money market funds in order for these funds to maintain positive or zero net yields. The reduction in fee waivers was primarily the result of improved yields available on securities held by money market funds. In addition, revenue increased due to an increase in average fixed-income and equity assets. See additional information about voluntary fee waivers in the table at the end of this financial summary. During Q3 2012, Federated derived 52 percent of its revenue from equity and fixed-income assets (31 percent from equity assets and 21 percent from fixed-income assets), 47 percent from money market assets and 1 percent from other products and services."

Though things have been relatively quiet on the money market fund consolidation front of late, another small deal was announced yesterday. A press release, entitled, "Reich & Tang Acquires Value Line U.S. Government Money Market Fund," says, "Reich & Tang, the third longest running money market mutual fund complex in the world, today announced that it has acquired the Value Line U.S. Government Money Market Fund. The transaction was completed on October 19, 2012." The release adds, "Reich & Tang, a subsidiary of Natixis Global Asset Management S.A., has been providing money market funds and liquidity solutions for nearly four decades and has built a reputation as a conservative investment manager within its peer group."

Michael Lydon, Chief Executive Officer of R&T, comments, "We are pleased to have completed a deal with Value Line that accomplishes its primary goal of adding shareholder value. The deal also underscores Reich & Tang's commitment to growing its money fund business and diversifying its shareholder base."

The release adds, "The market environment for money funds over the past few years has prompted many investment managers to reconsider their money market fund offerings to focus on the growth and distribution of their core investment products. The ancillary benefit of managing money market funds in addition to core fund offerings has significantly diminished over the past couple of years."

Mitchell Appel, President of Value Line Funds, states, "By adding the Reich & Tang Daily Income Fund U.S. Government Portfolio to our suite of products, our retail shareholders benefit by investing in a larger pool of assets with a lower gross expense ratio. As a result, the Value Line Funds' investment adviser can focus more resources on managing our equity and hybrid funds, many of which are rated 4 and 5 stars overall by Morningstar and are leaders in their categories."

The release also says, "Reich & Tang remains one of the largest companies in the nation dedicated solely to money funds, and deposit and liquidity solutions." Lydon concludes, "Our singular focus provides shareholders with access to the money fund management expertise of Reich & Tang while preserving the brand integrity of Value Line, which is an ideal solution that extends the promise of providing shareholders with more choice and flexibility with their cash investments."

Reich & Tang is the 28th largest manager of U.S. money funds (out of 73 tracked by Crane Data) with $7.4 billion. The company manages the Daily Income Funds as well as the new, top-yielding Reich & Tang Natixis Liquidity Prime Portfolio. The company also offers a series of FDIC insured products to brokerages and others. Note that Crane Data did not track the now-deceased Value Line US Govt MMF.

While it's been four months since we've seen any money funds liquidate or consolidate in the U.S., there has been some activity in Europe. In August, Bank of America announced plans to liquidate its Euro Money Fund (see Crane Data's Aug. 21 News "BofA to Close and Liquidate Global Liquidity Euro Money Fund"), and Tuesday Moody's withdrew its Aaa-mf money market fund rating on PIMCO Funds: Global Investors Series plc, Euro Liquidity Fund (sometimes the sign of a pending liquidation). (For the last updates on liquidations and mergers, see Crane Data's June 28 News "Federated Acquiring Trustmark's Money Funds in 3rd Rollup of Year" and the April 2012 issue of our Money Fund Intelligence newsletter, "Another Two Bite the Dust: Consolidation Becomes Real," which discussed Fifth Third's and KeyBank Victory's exits from the money fund business.

As we said in our April MFI, "In the past two years, we've seen Old Mutual, Paypal, Pacific Capital, Pioneer (partial), Scout (UMB), Ridgeworth (merged into Federated), Eagle (Raymond James), and a handful of others announce liquidations. The number of funds tracked by Crane Data has fallen from 1,310 to 1,209 [it's now 1,193], which also includes lots of mergers and streamlinings." (See also our April 6 Crane Data News "Federated To Acquire (The Rest of) Fifth Third Money Market Funds" and our Dec. 22, 2011 News "Federated to Acquire Prime Rate Sterling, Euro, USD Liquidity Funds".)

We learned from ignites about an Investment Company Institute comment letter entitled, "ICI Files Letter Regarding Banking Organizations' Regulatory Capital Proposals," which discusses potential changes to the risk-weighting treatment of money market mutual funds on bank's balance sheets. The letter, addressed to the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation, and regarding the Basel III Capital Proposals, says, "The Investment Company Institute appreciates the opportunity to comment to the Office of the Comptroller of the Currency, the Federal Reserve Board and the Federal Deposit Insurance Corporation on the three notices of proposed rulemaking to implement the Basel III capital accords in the United States. ICI's comments focus on (i) the removal of the 7 percent risk-weighting option for equity exposures to money market funds under the Advanced Approaches NPR, (ii) the suggestion that this removal would subject money market fund exposures to a 20 percent risk-weight floor; (iii) the look-through approaches under the Standardized and Advanced Approach NPRs and, in particular, their application to investments in money market funds; and (iv) the proposed deduction for investments in unconsolidated financial institutions. Each of these issues is discussed below." (See the original proposal, "Agencies Seek Comment on Regulatory Capital Rules and Finalize Market Risk Rule.")

ICI argues that "The 7 Percent Risk Weighting for Money Market Funds Should Be Retained," writing, "Section 54(e) of the Agencies' existing advanced approaches rules allows banking organizations to apply a 7 percent risk weight to equity exposures to money market funds that are subject to Rule 2a-7 under the Investment Company Act of 1940 and that have an external rating in the highest investment grade category. The Advanced Approaches NPR proposes to eliminate the 7 percent risk weighting, positing that money market funds demonstrated "at times, elevated credit risk" during the recent financial crisis."

The letter explains, "ICI strongly disagrees with the Agencies' proposal to eliminate the 7 percent risk weighting option for money market fund exposures and questions the scant rationale provided by the Agencies for doing so. In 2007, the Agencies adopted the 7 percent risk weighting for money market funds in express recognition of the "low risk" posed by such funds, which the Agencies acknowledged are subject to Rule 2a-7's “portfolio maturity, quality, diversification and liquidity" requirements. In ICI's view, this rationale continues to apply, and the Agencies have provided no data demonstrating to the contrary."

ICI continues, "Rather, in the wake of the financial crisis, which affected not only money market funds but most other financial services industry participants, the Securities and Exchange Commission took steps to enhance significantly the stability and resiliency of money market funds. Specifically, in 2010, the SEC revised Rule 2a-7 to make money market funds more resilient by, among other things, imposing new credit quality, maturity, and liquidity standards, and increasing the transparency of these funds, as well as requiring the funds to conduct extensive stress tests. In the SEC's words, these changes have made money market funds even more "consistent with the objectives of preserving principal and maintaining liquidity.""

The letter says, "All of the foregoing requirements are already in effect, and the cumulative effect of these reforms has been to improve meaningfully the safety and liquidity of money market funds, making money market funds even more appropriate for investment by banks. Notwithstanding these significant and important regulatory changes to money market funds, the Agencies do not acknowledge the changes or explain why the SEC's enhanced regulatory framework for money market funds is insufficient to address any concerns that the Agencies may have. In the absence of any such explanation, ICI believes that the Agencies' elimination of the 7 percent risk weighting for money market fund exposures is arbitrary, capricious, and unduly severe."

ICI General Counsel Karrie McMillan also tells the Agencies, "Under both the Standardized and Advanced Approaches NPRs, equity exposures to investment funds would be risk-weighted according to the Full, Simple Modified, or Alternative Modified Look-Through Approaches. These approaches essentially allow banking organizations to calculate risk weightings based on the underlying assets of, or permissible investments of, the investment funds in which the banking organizations invest. ICI supports the use of the Look-Through Approaches but urges the Agencies to ensure that banking organizations are able to utilize fully the Full Look-Through Approach. In particular, because the Full Look-Through Approach appears to require that a banking organization have extensive information about a fund's underlying investments on a "real-time" basis, any constraint on a banking organization's ability to access such information may prevent it from using this approach and may result in a less favorable capital calculation. This may be a practical issue for banking organization investments in money market funds. As noted above, money market funds publicly disclose certain portfolio holdings information on their websites within 5 business days from month end, and more detailed information (including mark-to market prices) through Form N-MFP 60 days after month end."

Finally, ICI adds, "To address this timing issue, a banking organization should be permitted to apply the Full Look-Through Approach to its money market fund investments in reliance on such funds' most recent public disclosures. Given the limitations of Rule 2a-7, the risk profile of money market funds will not change materially over any 35 day (or even a 60-day) period. Accordingly, banking organizations' use of public money market fund disclosures to conduct Full Look-Through analyses should not raise supervisory or safety and soundness concerns."

Today, we excerpt from the latest issue of Crane Data's Money Fund Intelligence newsletter, which features the monthly "profile" article, "Vanguard's David Glocke: Low Expense Is Our Alpha." It says: This month, we interview Vanguard Group Portfolio Manager and Principal David Glocke, who has been managing money funds for 20 year, 15 of them at Vanguard. The fourth largest money fund manager, with $161 billion, runs the flagship Vanguard Prime Money Market Fund, which opened in 1975, and the money fund management team also includes John Lanius on the taxable side and Pam Tynan and John Carbone on the municipal side. Below, we discuss ultra-low rates, portfolio holdings, and recent developments in the money fund space.

MFI: What is your biggest challenge? Glocke: The low interest rate environment is certainly a challenge, especially for savers. Everybody still wants to know, 'When do you think rates are going to move back up again?' The nice part is that the money funds remain well supported in the marketplace. You haven't seen this massive exodus from money markets. People are still very supportive of the product, believe in it and believe in the team behind it, too. The regulatory environment is also a challenge. There's obviously a degree of uncertainty, which creates concern on the part of investors. That said, investors remain confident and committed to the product.

MFI: How about the challenges historically? Glocke: We hear from peers that the biggest problem is trying to find names in the market. We have a different view of the world, and maybe it's easier to do at Vanguard. But you realize, over time, that conditions change. You go back 20 years or longer and consider the credits we used to buy in a portfolio -- General Motors, Ford, and all the finance companies, as well as a number of European issuers, European banks, etc. The list was considerably smaller. Over time, the dynamics changed. We have seen some asset classes grow rather large and subsequently fall off. But in the money market space, there are always assets out there to take advantage of.

In particular, you look at our funds today, and we maintain a heavy weightings in U.S. Treasuries and Agency securities. The agency space is getting smaller. But we still find plenty to buy, and we can't argue with going out and buying Treasury securities. We still think there is value, certainly from a liquidity perspective and a credit quality perspective. They remain an important element in the portfolio, and with the change in the S.E.C. rules that encourage higher degree of liquidity in the portfolios, we prefer to do that in the U.S. Treasury space than maybe in some other asset classes.

We've diversified into other areas in the last 3 years. The municipal component has grown in the fund. We think there are opportunities in that market, given their rate structure. Today, it makes sense maintain a muni component from a yield perspective. From the credit perspective, it's a different story. However, Vanguard has a deep team of municipal credit analysts that we can rely on to make the right decision about which securities to put in a portfolio.

MFI: Do you have any lessons learned from the crisis? Glocke: There are some big picture issues that we sit back and thank our lucky stars for. Vanguard has had some prudent policies in place, such as refusing hot money, not having large concentrations from individual investors, etc. When I came on board here 15 years ago, these guardrails were new. But I understood Vanguard's purpose for such policies, and these long-term policies that Vanguard had in place saved the day during the 2007-08 period. We didn't have the volatility that others experienced.

MFI: What kept you away from SIVs? Glocke: The philosophy at Vanguard was the asset-backed commercial paper market had attractive options. But we wanted to limit our exposure to, initially, the programs that had large sponsors behind them. We also wanted to make sure that there was 100% liquidity behind the program, so it didn't rely on asset sales like the SIV market. We wanted multiple sources of underwriting, more well-diversified sources. We are conservative by nature, so we avoided the landmines like SIVs and securities arbitrage-type programs.

MFI: What are you buying or avoiding? Glocke: Our asset-backed exposure is pretty small. Straight-A is probably one of the bigger ones, on average, but it is a fairly small exposure.... We made a choice about the European situation back in 2010. Like everybody else. we had bank exposure throughout Europe. With the start of all the concern about the European periphery, we decided to cut our exposure. Throughout the course of 2010, the frustration with the European body not being able to tackle the problem made us really concerned, so we walked away from our French bank exposure.

We are early responders to problems. We don't wait for them to happen. We try to anticipate where things are going and adjust the portfolio accordingly. In 2011, for example, we had limited exposure to the northern Europeans, U.K. banks, etc. That became a problem in late summer. As the European situation eroded further, we concluded it was best to get completely out of the sector. All of our direct bank exposure to Europe was eliminated by the end of 2011, and we haven't had any direct exposure to the European banks since. (Look for more excerpts from our Vanguard "profile" in coming days or contact us to request the latest issue of MFI.)

The Financial Times continues its odd fascination the heavily U.S.-centric money market mutual fund sector with two articles Sunday, "No let up for money market funds" and "Plan to ban money fund bailouts." In a first for major media coverage, the FT questions the effectiveness and collateral damage of proposed reforms, writing, "Mary Schapiro, chairman of the US Securities and Exchange Commission, tried and narrowly failed to push through tougher reforms that would either force funds to abandon their fixed $1 share price or restrict liquidity by requiring funds to set aside a capital buffer, possibly combined with restrictions or penalties on withdrawals. These proposals were fiercely opposed by the industry, but their demise has brought little cheer; other regulators such as the Financial Stability Oversight Council have instead taken over the reform baton. Europe's regulators are also on the case."

The first article explains, "Emil Paulis, a director at the European Commission, said recently the Commission had a "firm intention" to overhaul the rules. Paul Tucker, a deputy governor of the Bank of England ... dismisses money market funds as "narrow banks in mutual fund clothing". Now, as we report in this issue, the European Systemic Risk Board, set up post-crisis to monitor risks to the financial system, is keen for a piece of the action. Indeed, money market funds are considered so vitally important that they are the subject of the ESRB's first “occasional paper"."

The FT adds, "Some of the proposed reforms may make sense. Penalties for withdrawals during periods of market stress, such as an unrecoverable liquidity fee, proposed by HSBC, would remove the bulk of the first-mover advantage that early escapees from a constant net asset value fund might hope to capture, although this might need to be backed by the power to limit withdrawals in a full-blown crisis. Abandoning the CNAV structure full stop would appear to make sense, as these are investment funds. But given that some variable NAV funds experienced runs and needed sponsor support during the crisis, it is unclear what it would achieve."

The article ends, "However, the greatest oversight is that very few of the regulatory reviews even attempt to analyse what the effects of their proposed reforms would be. Money market funds have traditionally been the major provider of short-term financing to banks. If regulators are going to propose further changes they should first commission independent impact studies of the likely ramifications. Hobbling banks further might please populists but it isn't going to help anyone’s economy grow faster."

In its other piece Sunday, the Financial Times comments, "European regulators are believed to be exploring controversial plans to ban managers of money market funds from bailing out investors if their funds suffer a loss. Such "sponsor support" has proved crucial to the stability of the $4.1tn money market fund industry, which is a vital source of short-term funding for banks, governments and companies."

The article explains, "[T]the European Systemic Risk Board, an EU-wide body established in 2010 to monitor risks to the continent's financial system, is believed to be readying a consultation on whether sponsor support should be outlawed. The ESRB declined to comment but in a paper published in June said that "uncertainty about availability of [sponsor] support", which although often expected is not guaranteed, "may have fuelled runs" on money market funds."

J.P. Morgan Asset Management announced the launch of a new "Flexible Distributing" class for its Luxembourg-domiciled Euro-denominated money market funds, which would allow the funds to maintain a stable NAV in a potential negative yield environment by automatically selling shares to cover expenses and debits from any yields below zero. (The Euro money fund's "Distributing" classes will be closed.) Below, we excerpt from the company's announcement (which was reported in the Financial Times), and we discuss the issue with Managing Director Robert Deutsch. The world's second largest manager of money funds (and largest outside the U.S.) issued a "Notification of share class changes for JPMorgan Euro Government Liquidity and Euro Liquidity Funds" Wednesday. (Note that these funds are not available or intended for U.S. investors and are only open to qualified non-U.S. institutions.)

JPMAM says, "The Board of Directors of JPMorgan Liquidity Funds would like to inform you of the Board's decision to make changes to the Sub-Funds and to the Fund's prospectus. Following the recent decision by the European Central Bank to cut interest rates and the subsequent decrease in European bond yields, it is becoming more difficult to maintain a positive net investment income and to stabilize the net asset value of the (dist.) share classes at the initial subscription price per share, as described in the Prospectus. The Board has therefore decided, due to the changing economic situation relating to the Sub-Funds to close the existing (dist.) share classes and to update the investment objectives and policies of the Sub-Funds to reflect the changing market conditions. Alternative share classes will be offered to electing shareholders, as further detailed below."

The Notification explains, "The Board has launched a new type of distributing share class for the Sub-Funds -- the "(flex dist.) share class". In a positive yield environment, this share class would have similar characteristics to the existing (dist.) share class. However, in a negative yield environment, a specific mechanism would apply in order to stabilise and maintain the net asset value per share at the initial subscription price per distributing share. In this mechanism, an amount representing any shortfall due to the portfolio's low or negative yield as well as the annual total expenses would be calculated daily and deducted from your holding by redeeming an appropriate number of your shares in the relevant class, with the aim that the net asset value of the share class can remain stabilised at the initial subscription price per share. Although the aim is for the net asset value to remain stable even in a negative yield environment, in such circumstances the number of Shares held, and hence the value of your holding, will decrease and you will receive reduced distributions in future. At the time you redeem, you may get back less than you originally invested. These share classes are only available for shareholders who have expressly given their consent to the redemption of shares as described above."

J.P. Morgan's Deutsch tells Crane Data, "We created this new, more flexible share class to provide clients more options regardless of the yield environment. The Flexible Distribution Class was prompted by client feedback seeking a way to automatically preserve the operational simplicity of a stable NAV regardless of the interest rate environment -- positive or negative. As you know, the ECB pushed the reserve rate to zero. And while there is a low probability of a further rate cut at the next meeting, there is a possibility that the rate could go negative over the next six to 12 months. We have taken the lead by offering clients an alternative that operates like business as usual with same-day settlement for purchases and redemptions."

He explains, "While other managers are liquidating funds, eliminating or restricting available investments, we wanted to give clients choice and allow them to retain the benefit of diversification vs. a bank product in a negative rate environment. It's quite an innovative solution that positions clients well short and long term. If the ECB turns monetary policy upside down and takes it negative, the Flexible Distribution Class will automatically set to cover only the yield shortfall and a portion of expenses and charges. When the environment turns positive again, the deduction will cease. Clients will receive a daily yield report showing both positive and should there be, negative, distribution rates."

"In our consultations with Euro clients, they are very appreciative of the flexibility, predictable accounting and investment diversification this new solution provides. J.P. Morgan is actively working on developing a conceptually similar solution for U.S. clients, but it is a bit more complicated given 2a-7 rules," Deutsch adds.

Note: To see a copy of the Euro and "offshore" money market funds covered by Crane Data's Money Fund Intelligence International with recent yields and asset totals, e-mail Natalia and include "MFII" in the Subject line.

Earlier this week, at the Association for Financial Professionals' (AFP) Annual Conference in Miami, attendees were surveyed on a number of questions. Below, we excerpt from the "2012 AFP Annual Conference Onsite Survey Results" and from the organization's earlier annual AFP Liquidity Survey. The release on the survey says, "The Association for Financial Professionals surveyed attendees to the AFP Annual Conference in Miami on October 15, 2012 with the goal of gathering financial professionals' views on the political and economic environment and the potential impact on treasury and finance operations within their organization. The survey generated 949 responses." (Crane Data was among the many attendees and exhibitors in Miami earlier this week.)

The spot survey's Question 1. was: Per the 2012 AFP Liquidity Survey, 51 percent of organizations' short-term investment balances are held in bank deposits. With the pending expiration of unlimited FDIC insurance on non-interest bearing transaction accounts at the end of the year, do you anticipate that the percentage of corporate balances held in bank accounts will be higher, lower or the same six months from today?" The responses were: 3% Higher, 48% No significant change, and 49% Lower."

The 2012 AFP Liquidity Survey, which was published in late June, says on the topic of bank cash, "Most tellingly, financial professionals report their organizations are currently keeping over half of their short-term investment portfolios in bank deposits. Fifty-one percent of short-term investment balances are maintained in bank deposits, an increase of nine percentage points from the 42 percent reported in 2011 and the highest share reported in the seven-year history of the AFP Liquidity Survey. The increase in bank deposits as a percentage of short-term investment portfolios occurs even as organizations, on average, use as many investment vehicles as they have in recent years. Organizations still invest in an average of 2.4 vehicles for their cash and short-term investment balances, a mean value that has not changed from the 2010 and 2011 surveys. Overall, many organizations continue to allocate most of their short-term investment balances -- an average of 74 percent -- in three safe and liquid investment vehicles: bank deposits, MMFs and Treasury securities."

AFP's survey explains, "As treasury departments focus on managing counterparty risk, they should be cognizant of the transfer from one risk-free asset class to another (e.g., the shift from Treasuries to FDIC-insured non-interest bearing bank accounts). At the end of the day, the U.S. Government is the backstop for both programs and, with a balance of around $2.7 trillion in unlimited insurance and a depository insurance fund balance of approximately $15 billion, there is a perceived moral hazard in extending unlimited FDIC insurance. At the time of publication of this report, there appears to be little appetite to extend the FDIC program beyond its scheduled expiration date at the end of 2012. Of course, that mood could shift before that date."

AFP's original Liquidity Survey adds, "A majority of financial professionals do not expect significant changes to their organizations' strategies for short-term investments in bank accounts when (if) unlimited FDIC insurance is phased out at the end of 2012. However, two in five respondents do indicate their organizations may diversify their holdings by reducing short-term investment in non-interest bearing accounts. This figure rises to nearly half of net investor and publicly owned companies, representing significant potential withdrawals from banks. The most likely destination for the cash held in non-interest bearing bank accounts would be prime MMFs, Treasury-based MMFs, Treasury securities and/or agency bonds. None of these vehicles emerge as the preferred investment choice across organizational demographics."

Finally, a table entitled, "Possible Destinations of Investments Currently Held in Bank Deposits in Reaction to Scheduled End of Corporate Access to Unlimited FDIC Insurance at the End of 2012 shows: 59% answering "No significant reduction in short-term investments currently held in non-interest bearing bank accounts"; 17% responding "Prime MMFs <b:>`_; 16% saying "Treasury-based MMFs"; 14% answering "Treasury securities and/or agency bonds"; 6% Repos; and 8% "Other".

In other news, Fitch published a brief entitled, "Room for Improvement in Repo Disclosure Practices," which says, "Expanded disclosure requirements for money market funds (MMFs), set forth by the Securities and Exchange Commission (SEC) in 2010, have facilitated the task of evaluating money funds' holdings and, more broadly, provide an unparalleled data source for evaluating the risk attributes of an important segment of the tri-party repo market. The granularity of these disclosures enabled Fitch Ratings' recent research on repo collateral, which was based on the repo activity of the 10 largest U.S. prime money market funds."

They comment, "Still, Fitch sees some areas of potential improvement in current MMF reporting practices that should be addressed if high-quality data from funds is to be analyzed effectively by regulators, market participants, and third-party researchers. Under SEC Rule 30b1-7, approved in February 2010, money funds are required to submit detailed information on security holdings to the SEC on a monthly basis. The data is disclosed publicly with a 60-day lag. This information, detailed on SEC Form N-MFP, provides thorough disclosure of MMF asset composition and risk profiles and represents the most granular, publicly available data source on tri-party repo transaction attributes (e.g. counterparty, yield, maturity) as well as security level details for the underlying repo collateral (e.g. issuer, valuation). Yet, repo collateral disclosure practices could be materially improved."

A press release sent out yesterday entitled, "U.S. Chamber Report Examines Stability, Transparency of Money Market Mutual Funds; Analysis Shows 2010 SEC Reforms Are Working," says, "The U.S. Chamber of Commerce's Center for Capital Markets Competitiveness (CCMC) released a white paper entitled, "Money Market Funds Since the 2010 Regulatory Reforms: More Transparency, Increased Liquidity, and Lower Credit Risk" at an event in Washington today. The paper analyzes how money market mutual funds (MMMFs) performed leading up to the 2008 financial crisis and after the implementation of additional regulations in 2010, including the EuroZone crisis which followed a year later."

The release explains, "Authors Dr. David W. Blackwell, Professor of Finance at the University of Kentucky, Dr. Kenneth R. Troske, Professor of Economics at the University of Kentucky, and Dr. Drew B. Winters, Chair in Finance at Texas Tech University, analyzed the changes made to regulations of MMMFs in 2010 and found that: MMMFs are now more liquid and better able to handle a significant change in redemptions; Dramatically increased transparency and disclosure frequency allows investors to now obtain timely, accurate data on the risk of any fund in which they invest; Overall, there is no evidence that the CP market experienced a "freeze" despite substantial redemptions in 2011; Funds experienced net-inflows during the Summer of 2011, as both institutional and retail investors sought the liquidity and resilience of MMMFs; Based on existing research, there is no evidence that any retail investor was affected by a run on MMMFs; [and] The variance in monthly redemptions means a 'one-size-fits-all' rule limiting redemptions will be extremely difficult to adopt."

David Hirschmann, president and CEO, of CCMC comments, "Regulators are basing their assumptions largely on what happened in 2008, but it is imperative that any further MMMF reforms be informed by the effects of the 2010 reforms. For more than a year, the Chamber has asked regulators to define the specific remaining problems that they hope to solve before proposing additional reforms. Instead, they have repeatedly floated solutions that would dramatically reduce a vital source of short-term funding for businesses, cities and states. Regulators should adopt a 'first do no harm' approach to further reforms."

The 46-page paper's Executive Summary says, "Since the 2008 financial crisis, there has been a vigorous debate among academics, policymakers, and money market participants surrounding the role of money market funds (MMFs) during the crisis. In response to large redemptions from MMFs during the crisis, the government intervened with the guarantee of MMF shares by the Department of the Treasury. In the wake of the financial crisis, under the apparent presumption that Reserve Primary's "breaking the buck" precipitated a run on MMFs, the Securities and Exchange Commission (SEC) implemented an overhaul of MMF regulation through changes to Rule 2a-7 of the Investment Company Act that were adopted on January 27, 2010. The major changes to Rule 2a-7 tightened credit quality and liquidity constraints and mandated that MMFs conduct stress tests to determine whether net asset value (NAV) could be maintained in response to hypothetical risks. In addition, the SEC required new reporting standards with detailed monthly disclosures for MMFs."

It adds, "Despite little specific evidence about the efficacy of the 2010 reforms, regulators such as SEC Chairman Mary Schapiro, Secretary of the Treasury Timothy Geithner, and Federal Reserve System Chairman Ben Bernanke continue to call for additional regulation of MMFs, largely based on what happened in 2008. The debate about further MMF reform needs to be informed by the impact of the 2010 reforms. This report starts to fill that gap by presenting some analysis of MMF data on liquidity, credit risk, redemption patterns, and net cash flows from 2008 to 2012, focusing in particular on what has happened in the industry since the 2010 reforms. We also examine whether redemptions from MMFs since the reforms have had any impact on the supply of funds in the commercial paper (CP) market. We used MMF data filed with the SEC to examine changes in liquidity, credit risk, redemptions, and net cash flow and CP data available from the Federal Reserve System to examine the impact of the MMF market on the CP market. Finally, we examine the issues in light of the post-2008 academic literature on MMFs."

Yesterday, Moody's Investors Service published "Frequently Asked Questions: Impact of Negative Yields on Money Market Funds," which discusses issues with European money funds, and Standard & Poor's published, "Reigniting The U.S. Money Market Fund Reform Debate," which discusses the possibility of future money fund regulatory changes. Moody's writes, "Over the past two years, the persistently low yields offered by high-quality, short-term investments have remained a challenge for money market fund (MMF) managers seeking to generate a positive yield whilst maintaining a stable net asset value and providing daily liquidity for their investors. Faced with historically low yields, many MMF managers have reduced or waived their management fees in order for their MMFs to deliver a positive net yield."

They continue, "The prospect of a prolonged period of low to negative yields on high-quality, short-term investments adds to the challenges already faced by the MMF industry and is creating a number of unprecedented issues for MMF managers. In the immediate term, the greatest impact will be on Euro-denominated government funds, given their limited investment options; however, in due course, zero to negative-yielding securities will exert pressure on prime funds in Europe, as well as government and prime funds in the US."

Moody's adds, "In response to this anticipated negative yield environment, MMF managers have started taking various actions -- beyond fee waivers -- that include suspending subscriptions, or closing down or restructuring funds. In general, we view actions intended to avoid NAV deterioration as credit positive, and will evaluate them on a case-by-case basis. However, if a fund decides to change its structure, objectives or strategy, maintaining a high fund rating would only be achievable if the fund offers investors an option to redeem their shares at par (and based on all the MMF's original terms), before implementation of the proposed changes or transition. We will continue to use the tools in our existing Money Market Rating Methodology to evaluate MMFs, including the effects of any of these changes."

S&P's "Reigniting The U.S. Money Market Fund Reform Debate" comments, "Ever since the Reserve Primary Fund "broke the buck"--its share price fell below $1.00 per share--in the midst of the global credit market crisis of 2007-2008, financial market regulators have stressed the need for additional money market fund regulations. In 2010, the SEC took an important first step by adopting revisions to the regulations to enhance money market funds' resiliency. But the SEC hinted that this was only the first phase and that the industry was in need of a second, more comprehensive overhaul. Regulators said the 2010 amendments did not address what they believe is the industry's susceptibility to runs and a source of financial market instability."

They explain, "When SEC Chairman Mary L. Schapiro announced on Aug. 22, 2012, that a majority of SEC commissioners did not support her phase two reform proposals for money market funds (MMFs) and that she was not proceeding with a vote to solicit public comment on additional reforms, the money fund industry breathed a sigh of relief. However, numerous public comments and a recent letter from Treasury Secretary Timothy Geithner, chairman of the Financial Stability Oversight Council, indicate that additional reform is almost certain--it's just a matter of when."

Finally, S&P's "Overview" says, "As the debate over money market fund (MMF) reform heats up, it seems that additional reform is almost certain--it's just a matter of when. The impact that the reforms could have on our principal stability fund ratings depends largely on the details in the final proposals, as well as whether they impair an MMF's ability to maintain a stable net asset value. Based on what we've heard from market participants, a particular reform's ability to reduce MMFs' perceived susceptibility to runs will likely determine how much consideration the regulators give it."

Late last week, Fitch Ratings released a report entitled, "U.S. Money Market Funds: Third-Quarter Review and Outlook, which was subtitled, "MMFs Conservative on Credit; Extend Maturities." Under the heading, "MMFs Favor North America and Japan" it says, "U.S. prime money market funds (MMFs) rated by Fitch Ratings continue to favor investments in Canadian and Japanese entities, which together account for nearly 23% of the rated funds' assets. Recent Fitch rating actions on the long-term ratings of top-tier Japanese banks have not affected this trend. In addition, MMFs seek U.S. exposures, which mainly come in the form of U.S. government securities and repurchase agreements (repos)."

The report also comments, "MMFs Stick by European Banks: During the third quarter, MMFs have maintained a steady eurozone exposure of approximately 18.3%. MMFs prefer secured investments such as repos, which reached 27% of the total investments in eurozone banks.... Nonfinancial commercial paper (CP) outstandings are up by 17% this year helped by strong demand from MMFs and other short-term investors. Total CP outstanding nevertheless has declined, mainly due to a 14% decline in asset-backed commercial paper (ABCP). In August 2012, Fitch-rated prime MMFs allocated 6.4% of their assets to ABCP and are expected to continue the declining trend."

Fitch continues under "Fragile Growth Prompts More Easing," "On Sept. 13, 2012, the Federal Reserve (Fed) announced its third round of quantitative easing through purchases of agency mortgage-backed securities until the labor market improves. The exceptionally low interest rates through at least mid-2015 are expected to renew pressure on MMF yields." The report adds on "MMF Consolidation Picks Up," "Even sizable MMF sponsors are not immune to the challenges of operating in a prolonged low-yield environment and the need to achieve scale. Fitch expects to see more fund consolidation, as smaller fund complexes weigh the cost/benefits of their MMF platforms."

Finally, the special report says that "Further MMF Reform Remains Possible. It explains, "On Aug. 22, 2012, SEC Chairman Mary Schapiro announced that the SEC will not release for public comments the much debated MMF reform proposals. Following this announcement, Treasury Secretary Timothy Geithner urged members of the Financial Stability Oversight Council (FSOC) to recommend that the SEC should still proceed with the MMF reform. On Oct. 9, 2012, the International Organization of Securities Commissions (IOSCO) published recommendations for a common set of regulatory standards for MMFs."

Crane Data's latest Money Fund Portfolio Holdings, which were released to Money Fund Wisdom subscribers Wednesday, show that money market securities held by Taxable U.S. money funds inched up by $7.0 billion in September to $2.273 trillion. As they normally do at quarter-end, repurchase agreement holdings plummeted, losing $67.9 billion (or -3.1%) to $515.5 billion (22.7% of assets), while Government Agency Debt jumped by $25.4 billion (up 1.1%) to $325.4 billion (14.3% of assets) and Other Instruments (Time Deposits) jumped by $28.2 billion (1.2%) to $134.6 billion (5.9% of assets). Certificates of Deposit (CDs) also increased sharply, rising $18.4 billion (0.8%) to $435.3 billion (19.2% of assets). European-affiliated holdings declined again in September, falling from $9.5 billion to $644.4 billion, or from 28.9% to 28.4% of securities. (Crane Data counts repo, ABCP and anything related to a European parent as "Europe".) Eurozone-affiliated holdings also dropped by $13.1 billion and now account for 12.9% of overall taxable money fund holdings ($293.7 billion) in September.

Though it fell sharply, Repo remains the largest segment of money fund holdings; total repo was comprised of 11.9% (of total holdings) Government Agency Repurchase Agreements ($271.3 billion), 7.6% Treasury Repurchase Agreements ($172.4 billion), and 3.2% of Other Repurchase Agreements ($71.8 billion). Treasury Debt was the second largest holding. It rose by $8.8 billion (0.3%) to $463.4 billion (20.4% of taxable assets. Treasuries were followed by CDs and Commercial Paper (CP), which fell by $5.7 billion (-0.3%) to $337.9 billion (14.9% of taxable holdings). Commercial Paper is the combined total of Financial Company Commercial Paper's 8.1% ($183.2 billion), Asset Backed Commercial Paper's 4.7% ($105.9 billion), and Other Commercial Paper's 2.1% ($48.7 billion). VRDNs (including Other Muni Debt) were flat (down $196 million) at $61.2 billion (2.7% of holdings) in September.

The 20 largest Issuers to taxable money market funds as of Sept. 30, 2012, include the US Treasury (22.1%, $463.4 billion), Federal Home Loan Bank (7.5%, $157.5 billion), Barclays Bank (4.0%, $84.5B), Credit Suisse (3.5%, $74.0B), Federal National Mortgage Association (3.3%, $69.1B), Federal Home Loan Mortgage Co (3.2%, $67.2B), Bank of America (3.1%, $64.0B), Deutsche Bank AG (2.9%, $61.0B), RBC (2.8%, $57.9B), Bank of Tokyo-Mitsubishi UFJ Ltd (2.7%, $56.8B), Sumitomo Mitsui Banking Co (2.6%, $54.5B), `JP Morgan (2.4%, $51.2B), Bank of Nova Scotia (2.3%, $48.3B), Citi (2.0%, $42.1B), RBS (1.8%, $36.7B), Goldman Sachs (1.7%, $36.6B), Bank of Montreal (1.6%, $34.3B), BNP Paribas (1.6%, $33.6B), Mizuho Corporate Bank Ltd (1.5%, $32.0B), and Rabobank (1.5%, $31.7B).

The United States remains the largest segment of country-affiliations with 51.1%, or $1.161 trillion, while No. 2 Canada continue to grow. Canada (8.8%, $200.6B), Japan (7.3%, $166.4B), the UK (7.1%, $162.4B), and France (5.1%, $116.2B) rank second through fifth among the largest country affiliations. Switzerland (4.6%, $103.6B) jumped ahead of Germany (4.2%, $96.0B), which saw holdings plunge (down $16.4B). Australia (3.9%, $88.9B), Netherlands (3.1%, $71.1B) and Sweden (3.1%, $70.7B) ranked eighth through 10th. The US (up $21.7B), Canada (up $10.1B), Switzerland (up $9.1B), and Netherlands (up $5.5 billion) showed the largest gains in September, while Germany (down $16.4B), Australia (down $11.6B), France (down $8.2B) and the UK (down $6.0B) showed noticeable declines.

Taxable money funds now hold 24.4% of their assets in securities maturing Overnight, and another 13.6% maturing in 2-7 days (38.0% total in 1-7 days). Another 19.9% matures in 8-30 days, while 23.2% matures in the 31-90 day period. The next bucket, 91-180 days, holds 14.0% of taxable securities, and 5.0% matures beyond 180 days. Crane Data's Taxable MF Portfolio Holdings (and Money Fund Portfolio Laboratory) were updated Wednesday, while our MFI International "offshore" Portfolio Holdings and our Tax Exempt MF Holdings will be updated Friday and Saturday, respectively. (Visit our Content center to download files or visit our Money Fund Portfolio Laboratory to access our "transparency" module.)

Finally, Crane Data is pleased to announce the availability of a new Weekly Money Fund Portfolio Holdings module, a data set of institutional money market funds that provide daily, weekly or twice-monthly portfolio holdings reports to investors. We've been collecting, cleaning, tagging, compiling and publishing weekly holdings for the past 2 months, and we continue to expand our fund list and collections. Our domestic U.S. money fund dataset is now "live" while our "offshore" money fund data set will continue "beta" testing for another 2-3 weeks.

Subscriber note: Crane Data published its latest Money Fund Portfolio Holdings Wednesday with data as of Sept. 30, 2012 yesterday. Visit our Content center to download files or visit our Money Fund Portfolio Laboratory to access our "transparency" module.... On Wednesday, Federal Reserve Board Governor Daniel K. Tarullo gave a lecture at the University of Pennsylvania Law School in Philadelphia on "Financial Stability Regulation" which included a section on shadow banking and money market mutual funds. Tarullo says after extensive comments on other Dodd-Frank issues, "Having just a few months ago devoted an entire speech to the shadow banking system, I wanted to spend more time today on the interpretive issues just discussed. However, to give a sense of the complementary regulatory challenges in dealing with the shadow banking system, let me describe one specific, current issue and just briefly mention a much broader concern. The specific issue is that of money market funds."

He explains, "As many of us in the government have pointed out, money market funds remain a major part of the shadow banking system and a key potential systemic risk even in the post-crisis financial environment. In fact, the industry's survival in its present form is likely due in no small part to the unprecedented interventions by the Treasury and the Federal Reserve in providing insurance and liquidity support, respectively, to the industry in response to the run prompted by the failure of the Reserve Primary Fund in 2008."

Tarullo continues, "The interesting point here is that a regulatory agency, the Securities Exchange Commission (SEC), has ample regulatory authority to address the systemic risk problem. Indeed, the legality of money market funds continuing to publish a fixed net asset value (NAV) of one dollar per share, even as the actual value of the underlying assets varies within a modest range, is itself the consequence of the SEC's Rule 2a-7, which exempts money market mutual funds from the requirement of a floating NAV generally applicable to open-end mutual funds. In amending its rules in 2010, the SEC took some good first steps to improve the resilience of money market funds, but many--including Chairman Schapiro--do not believe these are sufficient to mitigate the run potential in money market funds."

He says, "Unfortunately, a majority of the current SEC commissioners has to this point been opposed to moving forward with the reform measures Chairman Schapiro has proposed. The FSOC, meanwhile, has endorsed further reform along these general lines. The question, then, is how the FSOC and its other member agencies should proceed given that the SEC has declined to act. I should note here that, during the debates preceding Dodd-Frank, some versions of proposals for what eventually became the FSOC would have empowered the FSOC to override agency action or inaction within its sphere of authority. Others, including many who favored strong reforms, opposed this power, which would have created a kind of super-agency with veto authority over all the regulators. Instead, the FSOC has the more limited authority to present an agency with recommendations for action and the right to receive an explanation should the agency not accept those recommendations."

Tarullo tells UPenn, "As you may have seen, two weeks ago Treasury Secretary Geithner sent a letter to the members of the FSOC in his capacity as its chair, in which he urged the Council to use its authority under Section 120 of Dodd-Frank, and to consider alternative actions to reduce the structural vulnerabilities associate with money market funds "in the event the SEC is unwilling to act in a timely manner." These alternatives could include FSOC designation of money market funds as systemically important and thus subject to the prudential requirements promulgated under Dodd-Frank. They could also include action by FSOC member agencies, such as the bank regulatory agencies imposing restrictions on regulated financial institutions' ability to sponsor, borrow from, invest in, or provide credit to money market funds that do not have structural protections. From my perspective, at least, each of the options open to the FSOC and the rest of its constituent agencies is decidedly a second-best alternative as compared to a change in SEC rules to remove the fixed net asset value exception, to require a capital buffer that would staunch or buffer runs, or measures of similar effect. And, when I say second-best here, I mean to include the funds themselves. The protective tools available to the rest of us do not fit the problem precisely and thus will not regulate at the least cost to the funds while still mitigating financial risk. But that is the legal situation we all confront. My hope, of course, is that recent indications that other SEC commissioners are now willing to move forward with reforms will lead to the SEC adopting first-best measures in the near-term."

Finally, he adds, "The money market fund example is a noteworthy case study in substantial part because of the interesting institutional issues it raises. More generally, though, the capacity of private financial market actors to create what are, at least in normal times, considered cash equivalents raises broader financial stability questions. Specifically, there may be a need for new macroprudential instruments, such as comprehensive authority to impose margins on all cash-like instruments, regardless of whether a firm creating those instruments is a regulated entity such as a bank holding company. Such possibilities obviously carry significant consequences, not just for the liquidity available to the financial system, but also for values such as the concentration of governmental authority. This is a topic on which much further thought is needed."

Wells Fargo Advantage Money Market Funds discusses the possible and pending expiration of unlimited FDIC insurance in its latest "Overview, strategy, and outlook." The piece says, "Deposits in non-interest-bearing bank accounts currently benefit from unlimited Federal Deposit Insurance Corporation (FDIC) insurance coverage, which is scheduled to expire at the end of December. This has led to much speculation about whether or not the coverage might be extended and, if not, whether the money in those accounts might move to different types of investments, including money market funds."

Wells continues, "The current program of unlimited FDIC insurance is an extension of a series of temporary programs going back to October 2008, when, at the height of the financial crisis, the basic insurance limit was increased from $100,000 to $250,000 through the end of 2009 as part of the Emergency Economic Stabilization Act of 2008. That month, the FDIC implemented the Transaction Account Guarantee (TAG) Program, which provided unlimited insurance for all noninterest-bearing transaction accounts (NIBTAs) through the end of 2009. In May 2009, the increase in the basic ceiling was extended through the end of 2013, while in August 2009, the TAG Program was made optional at a sliding fee scale.... When offered the opportunity to drop the fee-based unlimited FDIC coverage, more than 1,100 banks, most of them smaller-sized institutions, chose not to continue."

The commentary explains, "In July 2010, the Dodd-Frank Act was passed, making the increase in the basic insurance ceiling permanent and extending the unlimited insurance on NIBTAs through December 31, 2012. As we approach year-end, policymakers face three alternatives with respect to NIBTAs. They could extend the Dodd-Frank Act provisions, however this would require Congressional approval, and an extension was not included in the recently passed continuing resolution. With elections looming next month and control of the House and Senate split at least through January, this alternative doesn't seem likely at this point. There is also the question of where the executive branch sits on the matter."

Wells tells us, "A second option would be to adopt a form of unlimited or significantly higher insurance limit for a fee, and to allow banks to opt in or out, similar to the amended TAG Program. This might be more politically acceptable, since many of the bigger banks would be likely to opt out of the program, but again it would require the approval of Congress and the president. The third alternative would be to do nothing and simply allow the insurance to lapse. While potentially most disruptive to the current scheme, the political ease of the "do nothing" aspect of this decision makes it seem to us the most likely outcome."

The piece adds, "The backing of the U.S. government, constant value, and ease of transacting has made NIBTAs favored by many institutional investors, especially in the corporate treasury space. Earnings credits against services also mean that these accounts, while not bearing interest, are not without some positive economic benefit to the depositors. Should the unlimited FDIC insurance expire, investors would seem to be faced with an array of investment decisions they haven't had to contemplate for a while."

Wells says, "With respect to their newly uninsured balances, they could: Leave the money where it is as an uninsured deposit. Diversify among different banks to keep balances under the $250,000 insurance limit at each bank. Invest in longer-term securities or other investments. Invest in short-term securities, either on a self-directed basis, through a managed account, or by purchasing shares in a money market fund (MMF)."

Finally, the article adds, "Given that these soon-to-be-uninsured depositors are most likely to have larger balances at larger banks, which of their limited investment options are they most likely to choose? The 2012 AFP survey indicates that much of this money is likely to stay right where it is, with 59% of the respondents indicating that in the event of the termination of the unlimited FDIC coverage, they expect no significant reduction in short-term investments held in NIBTAs, where they now hold on average 51% of their short-term cash."

The European-based International Organization of Securities Commissions (IOSCO) published its "Policy Recommendations for Money Market Funds today. The paper, the release of which was not backed by the majority of the IOSCO-member SEC, says on "Background," "The September 2008 run on some money market funds (MMFs) alerted regulators to the systemic relevance of MMFs. Although MMFs did not cause the crisis, their performance during the financial turmoil highlighted their potential to spread or even amplify a crisis. Despite the significant reforms already adopted by regulators to address some of the issues identified during the 2007-2008 crisis, concerns remain regarding the stability of the money market fund industry and the risks it may pose for the broader financial system. In this regard, the Financial Stability Board (FSB) asked the International Organization of Securities Commissions (IOSCO) to undertake a review of potential regulatory reforms of MMFs that would mitigate their susceptibility to runs and other systemic risks and to develop policy recommendations. This work is part of the efforts undertaken by the FSB to strengthen the oversight and regulation of the shadow banking system. It follows the endorsement by the G20 Leaders of the FSB's initial recommendations and work plan regarding Shadow Banking submitted at the November 2011 Cannes Summit."

The IOSCO report continues, "The FSB's mandate indicated that a key issue to be considered was the Constant Net Asset Value (CNAV) feature of some money market funds. In developing its policy recommendations, IOSCO has considered this crucial question but also other aspects of MMF regulation where greater harmonization between jurisdictions and improvements to existing regulations were seen necessary."

It explains, "On 27 April 2012, IOSCO published a consultation report, Money Market Fund Systemic Risk Analysis and Reform Options, which provided a preliminary analysis of the possible risks that money market funds could pose to financial stability and proposed a broad range of possible policy options to address those risks as well as to address other potential issues identified with regard to money market funds. This report used the results of a mapping exercise conducted in June 2011 to assess and compare existing regulatory frameworks for MMFs among IOSCO members. IOSCO's Committee 5 on Investment Management also held two high-level hearings with industry representatives at the beginning of 2012. In addition to presenting possible policy options, IOSCO's consultation paper included a background report that reviewed the historical development of MMFs, their market significance and investor base, their role in funding markets, the experience during the 2007-2008 financial crisis, the changes to MMF regulatory frameworks adopted since then, as well as a review of some of the recent literature on MMFs. This background report is provided in Appendix III." (See Crane Data's May 5, 2012, News, "IOSCO Money Market Fund Risk, Reform Report Is Europe's Answer to PWG".)

The Final Report continues, "The consultation period ended on 27 June 2012, after a one-month extension of the initial deadline. A total of forty-one contributions were received, from twelve countries (Canada, China, France, Ireland, India, Japan, Oman, South Africa, Spain, Switzerland, the United Kingdom and the United States), as well as from several international and regional associations. The majority of answers came from the asset management industry, although IOSCO also received contributions from representatives of customers, one credit rating agency, and regulators. A feedback statement is provided in Appendix II highlighting the main opinions and elements for consideration provided in those answers, together with the list of respondents. Non-confidential answers are available on IOSCO's website."

IOSCO explains, "The MMF industry is significant in size, since it represents approximately US$ 4.7 trillion in assets under management at first quarter 20122 and around one fifth of the assets of Collective Investment Schemes (CIS) worldwide. The United States and Europe represent around 90 percent of the global MMF industry. Money market funds provide a significant source of credit and liquidity. Recent figures for US MMFs show that "These funds owned over 40 percent of U.S. dollar-denominated financial commercial paper outstanding at the end of 2011 and about one-third of dollar-denominated negotiable certificates of deposit." Data for Europe show that money market funds play a significant role in money markets, with "short-term debt securities with an original maturity of less than one year representing around one half of total MMF assets", and are key providers of short-term funding for banks, which represent roughly three-quarters of the MMF total assets in the euro area. MMFs are broadly used by retail and institutional investors (including non-financial corporations) as an efficient way to achieve diversified cash management."

The report's recommendations include: Recommendation 1: Money market funds should be explicitly defined in CIS regulation. MMFs present several features which make them unique among the CIS universe. Accordingly, money market funds should be explicitly defined in the regulation. As a basis, and although definitions may slightly vary from jurisdiction to jurisdiction, money market funds may generally be defined as investment funds that seek to preserve capital and provide daily liquidity, while offering returns in line with money market rates. The definition should ensure that all CIS which present the characteristics of a MMF or which are presented to investors or potential investors as having similar investment objectives are captured by the appropriate regulation even when they are not marketed as a "MMF" (e.g. "liquid" funds, "cash" funds)."

They continue, "Recommendation 2: Specific limitations should apply to the types of assets in which MMFs may invest and the risks they may take. Requirements on MMFs should include restrictions on the type of assets that are permitted to be held, i.e. money market funds should invest mainly in high quality money market instruments and other low-duration fixed income instruments.... MMF regulation should define limits on the average weighted term to maturity (WAM) and the weighted average life (WAL) of the portfolio.... Recommendation 3: Regulators should closely monitor the development and use of other vehicles similar to money market funds (collective investment schemes or other types of securities)."

IOSCO writes, "Recommendation 4: Money market funds should comply with the general principle of fair value when valuing the securities held in their portfolios. Amortized cost method should only be used in limited circumstances.... Recommendation 5: MMF valuation practices should be reviewed by a third party as part of their periodic reviews of the funds accounts.... Recommendation 6: Money market funds should establish sound policies and procedures to know their investors.... Recommendation 7: Money market funds should hold a minimum amount of liquid assets to strengthen their ability to face redemptions and prevent fire sales. Recommendation 8: Money market funds should periodically conduct appropriate stress testing. Recommendation 9: Money market funds should have tools in place to deal with exceptional market conditions and substantial redemptions pressures."

The recommendations continue: "Recommendation 10: MMFs that offer a stable NAV should be subject to measures designed to reduce the specific risks associated with their stable NAV feature and to internalize the costs arising from these risks. Regulators should require, where workable, a conversion to floating/ variable NAV. Alternatively, safeguards should be introduced to reinforce stable NAV MMFs' resilience and ability to face significant redemptions. Recommendation 11: MMF regulation should strengthen the obligations of the responsible entities regarding internal credit risk assessment practices and avoid any mechanistic reliance on external ratings. Recommendation 12: CRA supervisors should seek to ensure credit rating agencies make more explicit their current rating methodologies for money market funds. Recommendation 13: MMF documentation should include a specific disclosure drawing investors' attention to the absence of a capital guarantee and the possibility of principal loss."

Finally, they include: Recommendation 14: MMFs' disclosure to investors should include all necessary information regarding the funds' practices in relation to valuation and the applicable procedures in times of stress. Recommendation 15: When necessary, regulators should develop guidelines strengthening the framework applicable to the use of repos by money market funds, taking into account the outcome of current work on repo markets."

The October issue of Crane Data's Money Fund Intelligence was sent to subscribers Friday morning, along with our September 30, 2012 monthly performance data and rankings. Our Money Fund Wisdom database query website was also updated, and our Money Fund Intelligence XLS monthly spreadsheet, and Crane Index money fund averages were released. (Our next monthly Money Fund Portfolio Holdings with 9/30/12 data are scheduled to be released on the 7th business day, Wednesday, Oct. 10.) The latest edition of MFI features the articles: "MMF Reform Undead: Geithner Urges FSOC to Rise," which discusses the possible revival of regulations; "Vanguard's David Glocke: Low Expense Is Our Alpha," which interviews the veteran portfolio manager of Vanguard Prime Money Market Fund; and, "Gating Gains Momentum: BlackRock's SLF Breaker," which reviews a new "way forward" for money fund reform.

Our MMF Reform Undead piece comments, "Following the SEC's decision to withdraw a vote on reforming money market funds, the issue seemed dead, or at least in the critical ward. But last week, U.S. Treasury Secretary Timothy Geithner reopened the issue, sending a letter to members of the Financial Stability Oversight Council.."

Geither wrote, "I urge the Council to use its authority under section 120 of the Dodd-Frank Act to recommend that the SEC proceed with MMF reform. To do so, the Council should issue for public comment a set of options for reform to support the recommendations in its annual reports. The Council would consider the comments and provide a final recommendation to the SEC, which, pursuant to the Dodd-Frank Act, would be required to adopt the recommended standards or explain in writing to the Council why it had failed to act. I have asked staff to begin drafting a formal recommendation immediately and am hopeful that the Council will consider that recommendation at its November meeting."

Our monthly "profile" of says, "This month, we interview Vanguard Group Portfolio Manager and Principal David Glocke, who has been managing money funds for 20 year, 15 of them at Vanguard. The fourth largest money fund manager, with $161 billion, runs the flagship Vanguard Prime MMF, which opened in 1975, and the money fund management team also includes John Lanius on the taxable side and Pam Tynan and John Carbone on the municipal side. Below, we discuss ultra-low rates, portfolio holdings, and recent developments in the money fund space."

Glocke says of his biggest challenge, "The low interest rate environment is certainly a challenge, especially for savers. Everybody still wants to know, 'When do you think rates are going to move back up again?' The nice part is that the money funds remain well supported in the marketplace. You haven't seen this massive exodus from money markets. People are still very supportive of the product, believe in it and believe in the team behind it, too. The regulatory environment is also a challenge. There's obviously a degree of uncertainty, which creates concern on the part of investors. That said, investors remain confident and committed to the product."

Our Gating article says, "BlackRock recently published a white paper entitled, "Money Market Funds: A Path Forward," which criticizes the money market fund reform options championed by SEC Chairman Mary Schapiro and which proposes a new "circuit breaker" or "standby liquidity fee" (SLF) option as a reform solution. A "gating" or "toll" option has gained momentum following its mention by SEC Commissioners Gallagher and Paredes in their Aug. 28 letter, and following Treasury Secretary Tim Geithner's mention in his letter to the FSOC last week."

The October MFI also contains monthly News, Indexes, top rankings and extensive performance tables. E-mail info@cranedata.com to request the latest issue. Subscriptions to Money Fund Intelligence are $500 a year and include web access to archived issues and fund "profiles". Additional users are $250 and bulk pricing and "site licenses" are available. Crane Data's other products include: Money Fund Intelligence XLS ($1K/yr), MFI Daily ($2K/yr), Money Fund Wisdom ($4K/yr), MFI International ($2K/yr), and Brokerage Sweep Intelligence ($1K/yr).

The Investment Company Institute released its "Worldwide Mutual Fund Assets and Flows Second Quarter 2012" yesterday, which says, "Mutual fund assets worldwide decreased 3.2 percent to $24.77 trillion at the end of the second quarter of 2012.... Money market funds worldwide experienced $53 billion of net outflows in the second quarter of 2012, which was somewhat slower than the $81 billion of net outflows recorded in the first quarter of 2012. The global outflow from money market funds in the second quarter was driven predominately by the outflows of $62 billion in the Americas, while the Asia and Pacific region registered inflows of $11 billion in the second quarter. Money market funds in Europe posted small net outflows of $1 billion in the second quarter after witnessing net inflows of $29 billion in the previous quarter."

The U.S. accounts for 54.8% of the worldwide total with $2.514 trillion (down $68 billion in Q2'12). France remained the second largest market with $483.2 billion (assets translated into U.S. dollars), or 10.5% of the market, while Ireland ($373.6 billion, or 8.2%) and Luxembourg ($360.4 billion, or 7.9%) ranked third and fourth. Australia ranked fifth with $324.9 billion (7.1%). Korea ($53.4B), China ($56.7B), Mexico ($55.6B), Brazil ($43.8B), and Canada ($32.0B) round out the top 10 largest markets for money funds worldwide.

France, Ireland and Luxembourg all lost over $17 billion in Q2 (down 3.4%, 4.4%, and 5.1%, respectively), while Australia showed gains (up $23.5 billion). China (up $9.5B) and India (up $12.8B) grew strongly, while Italy (down $10.9B) and Mexico (down $7.5B) contracted sharply. Europe overall saw assets fall by $69.7 billion, or 4.9%, on the quarter (to $1.36 trillion). To request the "Largest Money Fund Markets Worldwide spreadsheet we compile using data from ICI's Tables, e-mail us at info@cranedata.com.

ICI also put out its weekly "Money Market Mutual Fund Assets report, which says, "Total money market mutual fund assets increased by $8.52 billion to $2.576 trillion for the week ended Wednesday, September 26, the Investment Company Institute reported today. Taxable government funds increased by $5.29 billion, taxable non-government funds increased by $4.74 billion, and tax-exempt funds decreased by $1.51 billion."

In other news, Fitch Ratings published a "Tri-Party Repo Primer for U.S. MMFs," which says, "The triparty repo market stands at about $1.8 trillion, with money market funds (MMF) providing about 35% of trading volume, according to data provided by the Tri-Party Repo Infrastructure Task Force and iMoneyNet. Prime MMFs invested about 18% of their assets (approximately $260 billion) in repos, while government MMFs allocated, on average, 38% of their assets (approximately $330 billion) to this market."

Fitch adds, "Prime MMFs' proportion of secured exposure in the form of repurchase agreements (repos) has seen a sharp rise, especially post-crisis. Fitch attributes this trend to a number of factors, including risk aversion, which has led to increased demand for secured assets and broadening collateral practices. Importantly, amendments to Rule 2a-7 contributed to demand for repos by requiring taxable MMFs to hold at least 10% of their assets in daily liquid instruments, such as overnight repos."

Finally, the report says, "Fitch believes that MMFs will be able to liquidate U.S. government and agency collateral without material loss of value. It is generally assumed this type of collateral will benefit from a flight to quality following a counterparty default. However, other types of collateral may become illiquid, leading to mark-to-market losses upon disposal."

The Investment Company Institute posted two "Viewpoint" pieces related to money market funds yesterday. The first, "The Facts and Principles That Must Guide Money Market Fund Reform," written by ICI Global President Dan Waters, urges global regulators to take recent facts into account. (ICI is hosting an "International Money Market Funds Summit" Thursday in Brussels, Belgium.) The second Viewpoint, entitled, "The Wall Street Journal’s Blind Spot on Money Market Funds"," contains a response from Paul Schott Stevens to yesterday's Wall Street Journal editorial "Money-Fund Reboot", which again endorsed a floating NAV option for money market funds.

ICI's Waters writes, "In Madrid this week, the board of the International Organization of Securities Commissions will choose their course of action on money market funds. Their decisions will be weighty, given the significance of these funds to the global economy, their use by tens of millions of investors, and the global debate around their regulation. How should regulators approach reform? For the global fund industry, which also gathers this week for a conference in Brussels on money market funds, the answer is clear. Regulators must respect the facts of recent developments around money market funds. They also must hew closely to a few commonsense principles that have always served regulators well and apply them in the context of money market funds."

He explains, "Let's start with the facts. It is beyond doubt that regulators in many jurisdictions have made great strides in improving the rules governing money market funds since the financial crisis of 2007–2008. Simply put, in many places these funds are a different, and much stronger, product than they were prior to the crisis. In Europe, the Committee of European Securities Regulators, the predecessor organization of the European Securities and Markets Authority, published guidelines in 2010 on a common definition of European money market funds to improve investor protection.... For its part, the Institutional Money Market Funds Association (IMMFA) updated its Code of Practice, adopting tough new standards on fund liquidity and disclosure to which its members adhere."

Waters continues, "In North America, Canadian regulators have approved new investment standards for money market funds, such as new daily and weekly liquidity requirements as well as new maturity restrictions. Meanwhile, the U.S. Securities and Exchange Commission (SEC) in 2010 adopted a sweeping set of similar changes designed to strengthen money market funds, and to provide greater protections for investors in a fund that finds itself unable to maintain its constant net asset value (NAV) per share."

He adds, "These efforts have measurably bolstered money market funds and helped them easily weather recent market turmoil, such as the fallout from debt crises in Europe and the United States. Today, IMMFA and U.S. money market funds maintain liquidity at levels that exceed new standards. Indeed, U.S. money market funds hold liquid assets that are more than two times greater than the money market fund outflows during the chaotic week of September 15, 2008, when Lehman Brothers failed and a U.S. money market fund, buckling under the pressure of heavy investor redemptions, could not maintain its $1.00 NAV."

Waters tells us, "Even with this progress, there is global discussion about additional regulatory steps for money market funds. Reform has been uneven, and some jurisdictions may want to consider doing more. As they take action, regulators should be guided by a few simple and sensible principles. First, proceed from solid facts. An essential first step for regulators working on this issue is to evaluate carefully the effectiveness of money market fund reforms implemented since the crisis. The fund industry stands ready to help in this effort with data and analysis. Second, build on success. Heightened requirements for money market funds adopted in the wake of the crisis have proven their worth, but they have not been adopted broadly. Great potential exists for wider adoption, especially regarding liquidity and disclosure standards. Third, carefully align proposals to concerns. Some reform proponents point to variable NAVs as a way to address redemption pressures like those faced by money market funds in 2008. Yet a review of that period reveals that mutual funds that float their NAVs were not immune to redemption pressure. Solutions must actually address the problem in question."

Finally, he writes, "Fourth, respect local market differences. One size does not fit all in financial regulation, simply because markets differ from country to country. In some countries, for example, institutional investors may have a large presence in money market funds. In others, retail investors may play the predominant role. The rules need the flexibility to accommodate such distinctions. Finally, preserve competition and choice for investors. Drastic proposals -- such as mandating capital requirements or variable NAVs -- will make money market funds costly or cumbersome for investors. Such policies could end the availability of money market funds as a convenient, diversified, conservative investment choice. Assets then would migrate either to banks, concentrating risk, or to less-regulated alternatives. That would be a bad outcome for investors, issuers, and the financial system as a whole. Regulators can best avoid that with a fact-based, principled approach to reform."

The Wall Street Journal, in "Money-Fund Reboot", says, "It's been lonely pushing money-market reform up the hill, but suddenly we're getting more company. Last week a Republican on the Securities and Exchange Commission and the Democratic Treasury Secretary called for a more stable, healthier financial system. A month ago, reform appeared dead after a 3-2 SEC majority blocked a draft rule. But one of the three opponents now says he favors giving investors accurate prices in real time. Commissioner Daniel Gallagher told Bloomberg that requiring money funds to have fluctuating share prices "is an attractive option that I am likely to support.""

ICI's Stevens responds, "The Wall Street Journal editors' Sisyphean labors on money market fund regulation apparently have rendered them incapable of understanding the plain facts of the case. Contrary to what they suggest in a recent editorial, what's at stake is not the business model of one industry, but the survival of a cash-management and financing vehicle used throughout the economy -- by businesses of every size, state and local governments, nonprofit institutions, and families. Groups representing these investors and issuers have recognized that floating the value of these funds will destroy their usefulness -- and have registered their opposition, alongside mayors and dozens of members of Congress from both parties, to the Securities and Exchange Commission proposals."

He adds, "The Journal's blindness to these views is revealed by the editors' cavalier dismissal of Commissioner Daniel Gallagher's thoughtful concerns over the tax and accounting issues raised by floating money market fund values. Those are exactly the kinds of issues that would drive hundreds of billions of dollars out of floating money market funds and into banks or alternative -- cash-management funds that are less regulated and less transparent thus increasing systemic risk. Meanwhile, forcing floating net asset values on money market funds will do nothing to improve U.S. financial stability. Hard experience shows that floating-value mutual funds are not immune to redemption pressure."

BlackRock, the world's fourth largest manager of money market funds with over $145 billion, published a "ViewPoint" white paper last week entitled, "Money Market Funds: A Path Forward," which criticizes the money market fund reform options being discussed to date and which proposed a new "circuit breaker" or "standby liquidity fee" (SLF) as a possible compromise solution. BlackRock writes, "Policymakers globally continue to grapple with the regulation of Money Market Funds ("MMFs") in the wake of the 2007/2008 financial crisis. A seemingly simple product has challenged some of the best regulatory, industry and academic minds, and consensus on a proposal for additional MMF reforms still appears to be elusive. We at BlackRock have been deeply engaged in these discussions and – like others – have worked on numerous proposals for reform based on the lessons learned in 2008. In this ViewPoint, we propose a path forward that takes into account the various concerns and objections that have been raised in past discussions. We make three basic proposals that address the concerns of those who believe that MMFs are a systemic risk while preserving the benefits of the product for investors and the short-term funding markets. Importantly, these proposals can be applied to MMFs that are subject to regulation in various jurisdictions globally."

The paper, written by Barbara Novick, Rich Hoerner, and Simon Mendelson, explains, "We believe that any proposed further regulation of MMFs must pass two basic tests. First, it must preserve the core benefits of the product. The benefits to investors in MMFs are well known: diversification, ease of operation and accounting, and market competitive returns. But what is often overlooked are the benefits to borrowers in the capital markets (e.g., issuers of commercial paper, certificates of deposit and sovereign and supranational securities). Looking at MMFs solely as "shadow banks" misses this point; MMFs are better considered as a form of market finance."

It continues, "The second test for further regulation of MMFs is that it must address the issue of "runs". There is no question that in 2008 -- for the first time in history -- "Prime MMFs" (US MMFs that are not limited to holding only exposure to US Agencies/Treasuries) experienced unprecedented redemption demands, coupled with a complete failure of market liquidity as investors fled any exposure to banks and mortgage securities. The events of September 2008 created a significant contraction of credit and were part of the broader global financial crisis. As a result, any successful MMF reform must address this scenario – massive client redemptions."

BlackRock says, "Most ideas on the table today fail the two-part test.... The proposals recently considered by the SEC were to add continuous redemption holdbacks and capital requirements to MMFs. Under those proposals, redeemers from MMFs would leave behind a fixed percentage of their deposit, which would only be returned after a delay. This would be in force even during times of normal functioning in the markets. These ideas fail both parts of our test. First, the proposals would have destroyed the MMF industry. In our discussions with our US MMF clients, they uniformly told us that they would abandon the product if the SEC proposals were implemented. Many current managers of MMFs and their service providers would not have undertaken the expensive operational work required to deliver the product because it was unclear that an industry would exist afterward."

They add, "Second, it was not clear that the proposals would have reduced the risk of mass redemptions. Clients in our research told us that the punitive nature of the holdback would make them more likely to redeem, if they invested at all, and they would do so sooner in order to secure their investment before market stresses took hold. In short, the SEC proposals were fundamentally flawed and failed to win Commission and industry support. They would have caused a major contraction in short-term funding without solving the core issue of mass redemptions."

BlackRock's latest ViewPoint tells us, "Another idea often discussed is to do away with CNAV accounting for MMFs. Our research suggests that this would change but would not destroy the industry; indeed, both CNAV and VNAV products are offered and are successful in Europe. If CNAV funds were eliminated, we believe the industry would contract significantly but would survive in reduced form. However, this idea fails the second of our two tests – it will not solve the problem of mass redemptions. Both CNAV and VNAV funds experienced substantial redemptions during the 2007/2008 financial crisis. The safety of MMFs is driven fundamentally by three things: the quality of the assets in the funds, the duration of those assets and the amount of available liquidity held in the funds. CNAV versus VNAV merely relates to the accounting treatment of the calculation of the NAV of the fund. Economists speculate about the potential first mover advantage of CNAV versus VNAV, but in our experience, clients decide to leave the fund based on their assessment of the quality of assets, duration of assets and liquidity levels and whether those are deteriorating in an unusually dramatic way. The "run" on prime MMFs in 2008 did not represent fears of investors regarding the pricing structure of one type of MMF, but rather their concern regarding the creditworthiness (that is, solvency) of financial institutions in which the MMFs had invested. Even in a pure floating VNAV fund, clients will run for the exits if they believe that those NAVs will be substantially (and perhaps irreparably) worse in the future."

It explains, "The CNAV/VNAV debate is further confused by the fact that the terms are used in an imprecise manner. We believe there are actually three types of funds [CNAV funds, floating NAV and "accumulating" funds].... While it is tempting to believe that a simple change in accounting treatment is all that is needed to provide run-protection for this industry, none of these types of funds is insulated from runs. Each type has its pros and cons but none passes the second of our two tests, the need to be more resilient to significant client redemptions. As discussed above, a major regulatory change focused on VNAV will be expensive, time consuming, and ultimately will not achieve the goal of reducing systemic risk."

BlackRock also critiques "capital requirements" then states, "Having now spent considerable time engaged in the debate on MMF regulatory reform, we have identified three regulatory steps that pass our two-part test of preserving the benefits of the product and answering the challenge of "runs". Upon reflection, we realize that the term "shadow banking" may have diverted attention from the real issues. It implied that MMFs are best understood as a kind of bank and therefore bank-like solutions should work. But when we focused on MMFs as a form of market finance, this led us to consider ideas that have helped to ensure the robustness and safety of markets: asset standards; disclosure; and circuit breakers."

They explain, "Based on this concept, we recommend the following steps be taken by global regulators with appropriate tailoring to local markets: 1. Consistent Standards for Asset Quality, Duration and Liquidity.... 2. Enhanced Disclosure.... 3. Circuit Breakers. Build in circuit breakers to all MMFs to limit runs in the time of a crisis. We believe these should take the form of stand-by liquidity fees (SLFs). We recommend these have the following features: a) Objective triggers. The SLFs would not be active during times of normal market functioning. They would be triggered when a fund has fallen to half the requirement for NAV rounding or to one quarter the required liquidity levels based on the standards set above. In the case of US Rule 2a-7 MMFs, this means that the SLFs would be triggered when the fund fell below a mark-to-market NAV of 99.75 or when its 1-week liquidity fell below 7.5%. b) The amount of the fee is a simple calculation. We recommend the amount of the fee charged when the SLFs are in force to be twice (2x) the difference between the mark-to-market NAV and $1. As an example, if the mark-to-market NAV fell to 99.70%, the fee would be 60 basis points (30 bps x 2). The rationale for this fee is to create a positive cycle as clients redeem in place of a negative cycle. As each client redeems and leaves behind twice the deficit, the NAV for the remaining shareholders is strengthened."

Finally, BlackRock writes, "Finding a solution to money market fund reform has been elusive. We continue to search for a workable solution that meets the needs of investors, issuers, policy makers, and MMF sponsors. The three steps outlined above would pass our two-part test for the regulation of MMFs. While many clients may initially object to the idea of SLFs, and the industry will initially contract (perhaps substantially at first), we believe clients will adjust. Those that simply cannot tolerate any form of liquidity limits will favor government MMFs. Others may choose to use government MMFs for some portion of their assets and Prime MMFs subject to liquidity fees for their longer term cash. The SLFs will also encourage fund managers to deal with potential problems sooner, to avoid tripping a SLF trigger. Borrowers from MMFs (e.g., issuers of commercial paper) will continue to use MMFs but will limit their reliance to ensure other sources of funding. The changes proposed in this paper will preserve the industry in providing its important function in the short-term capital markets. And, this approach will create an effective brake on a run by introducing a mechanism that requires runners to pay for the cost of their liquidity plus an increment to protect clients that do not redeem."

Yesterday's Boston Globe featured the story, "Banks' record-low interest rates frustrate nation's savers." The article is one of a number of news items recently highlighting retirees and savers frustrations with the Federal Reserve's zero-rate policy. The revolt is gaining so much steam that Federal Reserve Board Chairman Ben Bernanke took the unpredicted step of defending his punishing rate policy in a speech in Indiana Monday.

The Globe story says, "Neil Silverman, a Framingham engineer, diligently saved for decades, accumulating a nest egg worth more than $1 million. But when Silverman reached retirement age, he encountered an unexpected hurdle: interest rates so low that his savings are generating little income. Even $1 million in the bank at 1 percent interest yields just $10,000 a year -- not much to live on. So at 69, Silverman says, "I'm the proverbial retiree next door and I can't afford to retire.""

It adds, "Just when you thought rates on popular savings vehicles couldn't possibly go lower, they do. The average interest on a savings account is 0.08 percent a year, down one-third from last year, according to the Federal Deposit Insurance Corp. That means $10,000 would generate just $8 a year in interest."

The Globe explains, "Ultra-low rates are a by-product of the Federal Reserve's efforts to revive the economy by making it cheaper for Americans to borrow money for everything from purchasing a home to investing in a new business. But what has been good for borrowers has been bad for savers, especially seniors who depend on interest from savings to supplement their income."

Bernanke defended his increasingly unpopular rate policy in a Q&A yesterday. One question he addressed was "How Does the Fed's Monetary Policy Affect Savers and Investors?" He commented, "One concern in the here and now is about the effect of low interest rates on savers and investors. My colleagues and I know that people who rely on investments that pay a fixed interest rate, such as certificates of deposit, are receiving very low returns, a situation that has involved significant hardship for some. However, I would encourage you to remember that the current low levels of interest rates, while in the first instance a reflection of the Federal Reserve's monetary policy, are in a larger sense the result of the recent financial crisis, the worst shock to this nation's financial system since the 1930s."

He added, "A second observation is that savers often wear many economic hats. Many savers are also homeowners; indeed, a family's home may be its most important financial asset. Many savers are working, or would like to be. Some savers own businesses, and--through pension funds and 401(k) accounts--they often own stocks and other assets. The crisis and recession have led to very low interest rates, it is true, but these events have also destroyed jobs, hamstrung economic growth, and led to sharp declines in the values of many homes and businesses. What can be done to address all of these concerns simultaneously? The best and most comprehensive solution is to find ways to a stronger economy.... Without a job, it is difficult to save for retirement or to buy a home or to pay for an education, irrespective of the current level of interest rates."

In other news, the Investment Company Institute released a study entitled, "Retirement Assets Total $18.5 Trillion in Second Quarter 2012" last week. It says, "Total U.S. retirement assets were $18.5 trillion as of June 30, 2012, down 2.0 percent from $18.9 trillion recorded on March 31, 2012. The decrease in retirement assets was driven by the drop in corporate equity values -- for example, the S&P 500 Index fell by 2.8 percent in the second quarter. Retirement savings accounted for 36 percent of all household financial assets in the United States at the end of the second quarter of 2012."

The study shows money market mutual funds accounting for just $392 billion, or 6.5%, of the $6.061 trillion in mutual fund retirement assets, and just over 2% of the entire $18.5 trillion marketplace. Given money funds asset totals of approximately $2.568 trillion, this means retirement-related assets account for approximately 15.3% of all money fund assets. IRAs showed the highest level of usage among types of accounts, with $213 billion in money market funds representing 9.1% of the overall $2.334 trillion in IRA fund assets. Money funds accounted for just $99 billion (5.0%) of the $1.996 trillion in 401(k) plan mutual fund assets.

The Investment Company Institute's latest statistics show money fund assets and repo holdings continued to rise in August. Money funds will likely show big gains in September too, according to Crane Data's MFI Daily, their third straight monthly gain. ICI's "Trends in Mutual Fund Investing: August 2012" shows that money market mutual fund assets rose by $5.3 billion in August to $2.554 trillion. Money fund assets continue to lose share to bond fund assets, though; bond funds rose by $45.1 billion to $3.286 trillion. ICI's "Month-End Portfolio Holdings of Taxable Money Market Funds shows Repurchase Agreements jumping again in August and Government Agencies falling again.

ICI's August "Trends" says, "The combined assets of the nation's mutual funds increased by $200.2 billion, or 1.6 percent, to $12.549 trillion in August, 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.... Money market funds had an inflow of $5.63 billion in August, compared with an inflow of $34.69 billion in July. Funds offered primarily to institutions had an inflow of $5.17 billion. Funds offered primarily to individuals had an inflow of $457 million."

ICI's latest weekly "Money Market Mutual Funds Assets" says, "Total money market mutual fund assets increased by $8.52 billion to $2.576 trillion for the week ended Wednesday, September 26, the Investment Company Institute reported today [Thursday]. Taxable government funds increased by $5.29 billion, taxable non-government funds increased by $4.74 billion, and tax-exempt funds decreased by $1.51 billion."

In September, month-to-date through 9/27, assets have increased by another $33.9 billion, according to Crane Data's Money Fund Intelligence Daily (note that this total includes a $12 billion increase due to funds being added to MFI Daily though). YTD, we show asset declines of $118 billion, or 4.4%. Our daily series shows the rebound continuing in Prime Institutional funds continued in September; they've gained $21.1 billion month-to-date after rising $15.0 billion in July.

ICI's Portfolio Holdings series shows Repurchase Agreements jumped again in August after rising in July , April and May. Repos remain the largest portfolio holding among taxable money funds with 25.3% of assets. Treasury Bills & Securities remained the second largest segment at 20.0%; holdings in T-Bills and other Treasuries rose by $3.0 billion to $457.7 billion. Holdings of Certificates of Deposits, which rank third among portfolio holdings, increased by $7.1 billion to $397.7 billion (17.4%).

Commercial Paper dipped by $5.3 billion to $331.8 billion, but it remained the fourth largest composition sector with 14.5% of assets. Fifth-ranked U.S. Government Agency Securities fell by $13.0 billion to $316.1 billion, or 13.8% of assets. Notes (including Corporate and Bank) accounted for 5.1% of assets ($117.4 billion), while Other holdings accounted for 3.6% ($82.1 billion).

The Number of Accounts Outstanding in ICI's Holdings series for taxable money funds decreased to 24.43 million from 25.25 million the month before, while the Number of Funds fell by 2 to 413. The Average Maturity of Portfolios lengthened by two days to 47 days in August. (Note that the archived version of our Money Fund Intelligence XLS monthly spreadsheet -- see our Content Page to download -- now has its Portfolio Composition and Maturity Distribution totals updated as of August 31, 2012. We revise these following the monthly publication of our final Money Fund Portfolio Holdings data.)

In other news, Fitch released an analysis of its sample of August portfolio holdings ("U.S. Money Fund Exposure and European Banks: Repos Reflect Caution"), saying, "U.S. prime money market funds slightly increased their exposure to Eurozone banks, which as of end-August represents 9.2% of total MMF holdings or an 8% increase on a dollar basis since end-July 2012.... MMF exposure to eurozone banks remains 74% below the end-May 2011 level on a dollar basis. The preference for secured exposure in the form of repurchase agreements (repos) suggests that MMFs remain somewhat cautious towards banks in the region. The proportion of exposure in the form of repos continues to rise, with repos comprising 37% of MMF allocations to European banks and 39% of allocations to eurozone banks as of end-August. Each of these ratios represents a new high during Fitch's period of study, dating to end-2006."