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We learned from a recent SEC filing that Nothern Trust'​s Northern Funds will launch a series of variable NAV money funds, including Investors Variable NAV Money Market Fund, Investors Variable NAV AMT-​Free Municipal Money Market Fund, Investors Variable NAV U.​S. Government Money Market Fund and Investors Variable NAV Treasury Money Market Fund. When the first of these new funds goes live (​no date is set yet), it will be the second "​floating" NAV money fund, following the launch in 2011 of Deutsche Bank'​s DWS Variable NAV Money Fund.

Northern'​s Form N-​1A registration says, "​The Fund is a money market fund that seeks to maximize current income to the extent consistent with the preservation of capital and maintenance of liquidity by investing exclusively in high-​quality money market instruments. The fund has a variable net asset value ("​NAV"). Unlike a traditional money market fund, the fund will not use the amortized cost method of valuation and does not seek to maintain a stable share price of $​1.​00. As a result, the fund'​s share price, which is its NAV, will vary and reflect the effects of unrealized appreciation and depreciation and realized losses and gains."

The filing adds, "The Fund is managed in accordance with Rule 2a-​7 ("​Rule 2a-​7") under the Investment Company Act of 1940, as amended (​the "​1940 Act"). Rule 2a-​7 imposes strict requirements on the investment quality, maturity, and diversification of the Fund'​s investments. Accordingly, the Fund'​s investments must have a remaining maturity of no more than 397 days, and must be high quality. In addition, the Fund must maintain a dollar-​weighted average maturity of 60 days or less, and a dollar-​weighted average life of 120 days or less, without regard to interest rate resets. The Fund also maintains certain minimum standards regarding daily and weekly liquid assets, and limitations on the purchase of illiquid holdings, as required by Rule 2a-​7." The new funds will have an expense ratio of 0.​35% (​0.​50% with a 0.​15% waiver).

Northern'​s filing doesn'​t give an initial NAV value (​like $​10 or $​100), but comments, "​Each Fund'​s portfolio securities are valued at fair value.... Fixed-​income securities, however, may be valued on the basis of evaluated prices provided by independent pricing services when such prices are believed to reflect the fair value of such securities. Such prices may be determined by taking into account other similar securities prices, yields, maturities, call features, ratings, strength of issuer, insurance guarantees, institutional size trading in similar groups of securities and developments related to specific securities."

Finally, Deutsche Bank, which has had trouble attracting assets and interest to its Variable NAV MF product (​it is $​10.​00 a share and just $​18 million), first announced its intentions in September 2009 (​see Crane Data'​s Sept. 3, 2009, News, "​Deutsche Proposes Floating NAV MMFs to Join Stable in SEC Comment"). DWS said in a previous SEC comment letter, "​In our view the question to ask is whether the Commission should consider and enable mutual fund companies to offer both Stable NAV and Floating NAV money funds. We believe the Commission should do so, and, therefore, propose that Rule 2a-​7 be amended to permit registrants to operate a money market fund under either or both structures. Investors and cash markets would benefit, in our judgment, if Rule 2a-​7 were amended to permit both Stable NAV funds, which would operate pursuant to the amendments proposed by the Commission, and Floating NAV funds, which would operate pursuant to the existing terms of Rule 2a-​7 other than the provisions contemplating a money fund maintaining a stable $​1 net asset value."

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ICI released its November 2012 asset flow and portfolio composition data yesterday, which verified that money fund assets and repo holdings surged in November. (​See Crane Data'​s Dec. 17 news on the continued surge in repos, "Latest Money Fund Portfolio Holdings Show Yet More Repo, CDs Jump.") Money funds will likely show continued asset increases in December too, according to Crane Data'​s MFI Daily (​which shows an increase of $​34.​3 billion month-​to-​date). ICI'​s "Trends in Mutual Fund Investing: November 2012" shows that money market mutual fund assets jumped by $​68.​6 billion last month. ICI'​s "Month-​End Portfolio Holdings of Taxable Money Market Funds shows Repurchase Agreements surging again in November while Commercial Paper and Treasury holdings also jumped.

ICI'​s November "​Trends" says, "The combined assets of the nation'​s mutual funds increased by $​161.​2 billion, or 1.​3 percent, to $​12.​872 trillion in November, according to the Investment Company Institute'​s official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI.... Bond funds had an inflow of $​23.​70 billion in November, compared with an inflow of $​34.​52 billion in October.... Money market funds had an inflow of $​68.​28 billion in November, compared with an outflow of $​3.​54 billion in October. Funds offered primarily to institutions had an inflow of $​52.​61 billion. Funds offered primarily to individuals had an inflow of $​15.​67 billion."

MTD through December 27, assets have increased by $​34.​3 billion, according to Crane Data'​s Money Fund Intelligence Daily. Surprisingly, the increase has been driven by (​taxable) Retail assets, which have increased by $​19.​0 billion, and by Tax Exempt assets, which have increased by $​12.​8 billion. Institutional assets have grown by just $​2.​49 billion and Prime Institutional funds have actually seen declines in December, down $​4.​4 billion. Treasury Institutional money funds have grown by $​5.​9 billion, likely a reflection of investors moving cash ahead of the expected year-​end expiration of the "​TAG" unlimited FDIC insurance program.

ICI'​s latest weekly "Money Market Mutual Fund Assets" also shows assets jumping in the latest week and for the 6th week out of the past eight. It says, "Total money market mutual fund assets increased by $​28.​39 billion to $​2.​665 trillion for the week ended Wednesday, December 26, the Investment Company Institute reported today. Taxable government funds increased by $​12.​53 billion, taxable non-​government funds increased by $​11.​58 billion, and tax-​exempt funds increased by $​4.​28 billion."

ICI'​s Portfolio Holdings for November 2012 show Repurchase Agreements jumping sharply. Repos hit another record level in November, solidifying their position as the largest portfolio holding among taxable money funds with 26.​8% of assets and $​629.​8 billion (​up $​26.​0 billion in November after surging $​80.​5 billion in Oct.). Treasury Bills & Securities remained the second largest segment at 19.​5%; holdings in T-​Bills and other Treasuries rose by $​8.​5 billion to $​457.​7 billion. Holdings of Certificates of Deposits, which rank third among portfolio holdings, increased by $​11.​5 billion to $​426.​9 billion (​18.​2%).

Commercial Paper remained in the fourth largest spot ahead of U.​S. Government Agency Securities; CP rose by $​16.​4 billion to $​331.​3 billion (​14.​1% of assets) but Agencies fell by $​3.​3 billion to $​310.​5 billion (​13.​2% of taxable assets). Notes (​including Corporate and Bank) fell by $​2.​8 billion to $​94.​9 billion (​4.​0% of assets), and Other holdings accounted for 3.​7% ($​86.​2 billion).

The Number of Accounts Outstanding in ICI'​s Holdings series for taxable money funds decreased by 2,​790 to 24.​389 million, while the Number of Funds remained at 405. The Average Maturity of Portfolios rose by one day to 50 days in November. Since November 2011, WAMs of Taxable money funds have lengthened by 8 days. (​Note that the archived version of our Money Fund Intelligence XLS monthly spreadsheet -- see our Content Page to download -- now has Portfolio Composition and Maturity Distribution totals updated as of Nov. 30, 2012. We revise these following the monthly publication of our final Money Fund Portfolio Holdings data.)

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Late last week, the Federal Reserve Bank of New York released a statement entitled, "Recent Developments in Tri-​Party Repo Reform," which said, "The Federal Reserve has intensified supervisory oversight of key tri-​party market participants that it regulates to ensure a timely implementation of the recommendations of the Tri-​party Repo Infrastructure Reform Task Force (​Task Force). Since the July 18, 2012, statement by the Federal Reserve Bank of New York, there have been several noteworthy developments. Last month, the clearing banks delivered two milestones that have begun to reduce the provision of intraday credit: J.​P. Morgan Chase (​JPMC) has stopped the daily unwind of non-​maturing term repo trades, eliminating its intraday credit exposure for these transactions."

It continues, "Bank of New York Mellon (​BNYM) has rolled-​out operational and technology changes that will ultimately eliminate the intraday credit that BNYM provides to dealers against privately-​issued, nongovernment securities that settle through the Depository Trust Company (​DTC). The current transition phase provides a period of accommodation for customers. In February 2013, BNYM dealers will be required to prefund all maturing tri-​party repo transactions involving DTC-​sourced collateral prior to settlement. This change will eliminate BNYM'​s intraday credit exposure to DTC-​eligible collateral."

The NY Fed'​s Statement explains, "Market participants have substantially improved the timeliness of trade matching over the past three months. Sustained progress is important to ensure the success of the changes in the tri-​party market’​s settlement processes currently being developed by the clearing banks. Industry participants are working to establish best practices for three-​way trade matching."

They add, "Over the past two months, the Federal Reserve has received and evaluated the plans of large broker-​dealer affiliates of bank holding companies to adopt business process changes to reduce intraday credit risk. Supervisors will continue to monitor the progress of these broker-​dealers with respect to readiness for the new settlement regimes being introduced by the clearing banks and in achieving incremental risk reduction."

The NY Fed also says, "JPMC and BNYM will be implementing key changes in their settlement processes through 2013 and 2014, respectively. These changes are expected to continue to reduce intraday credit risk while improving the resiliency of the settlement process. The Federal Reserve has recently reiterated to the clearing banks its expectation that final settlement of tri-​party repo transactions should be completed sufficiently in advance of the Fedwire Funds close to provide time for successive funds transfers; 5:​15 PM meets this target and is consistent with the Task Force'​s recommended timeline. Clearing banks and other market participants should work toward establishing appropriate intervening deadlines to ensure timely settlement of tri-​party repo transactions."

It adds, "Dealers and investors will need to make the necessary changes to business practices to fully leverage process enhancements critical to achieving risk reduction and market resiliency. Commitment by dealers and investors to adopt new market practices and contingency plans will be essential to achieving reform goals. It is crucial that market participants sustain progress made to date, adopt the additional business practice and process changes that will be required to ensure the success of reform in this market, and enhance contingency planning for stress events to strengthen the overall stability of the tri-​party repo infrastructure."

Finally, they write, "The Federal Reserve will continue to collaborate with other supervisors and regulators in monitoring the consistent adoption of clearing bank changes and associated changes in market practices by both the dealer and investor participants in the tri-​party repo market. The Federal Reserve views as an important priority the implementation of a tri-​party market and infrastructure that will be more resilient under both routine and stressed conditions. For additional information visit these websites. New York Fed Tri-​Party Repo Infrastructure Reform, Bank of New York Mellon Tri-​Party Repo Infrastructure Reform, and J.​P. Morgan Chase Tri-​Party Repo Market Reforms - Resource Center."

In other news, the Investment Company Institute released a study on 401k Investors and one on Retirement Assets. They continue to show that "401(​k) Plan Assets Are Concentrated in Equities" and that money market mutual funds represent just 4% of the almost $​3 trillion in total assets. GICs and other "​stable value funds" represent 11% on average, while Bond funds represent 12% on average.

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BlackRock'​s BIF AZ Municipal Money Fund (​CAZXX), BIF FL Municipal MF (​CFLXX), and BIF NC Municipal MF (​MNCXX) are the latest and likely the last money funds to liquidate in 2012. (​The BIF funds are the former Merrill Lynch CMA money funds.) The State Tax Exempt Money Fund segment in particular has seen a slew of exits, while smaller operators too continue to withdraw from the beleaguered space. We saw the Sterling Capital money funds liquidate earlier this month, and the Pyxis money funds and some Dreyfus Municipal money funds liquidate last month. (​See our last two "Consolidation" updates, Crane Data'​s Dec. 18 News, "​Fed'​s Stein on Dollar Funding; Sterling Capital Liquidates MMFs" and our Nov. 13 News, "​Consolidation Continues: Pyxis, Some Dreyfus Muni MFs Liquidating"). As we wrote earlier this month, Sterling Capital became the 8th fund manager tracked by Crane Data to liquidate or merge its money market funds away in 2012 (​73 managers remain, several other tiny complexes that we didn'​t cover have liquidated too). Those falling by the wayside last year include: `​MTB (​merged into Wilmington), Fifth Third (​merged into Federated), Victory (​liquidated), Old Mutual (​liquidated), Bishop Street (​liquidated), Highland/​Pyxis (​liquidated), and TCW (​liquidated).

The filing for the BIF Multi-​State Municipal Series Trust, which includes BIF Arizona Municipal Money Fund, BIF Florida Municipal Money Fund, BIF North Carolina Municipal Money Fund, says in its "Supplement dated September 28, 2012 to the Prospectus and Statement of Additional Information, each dated July 27, 2012, "On September 21, 2012, the Board of Trustees of BIF Multi-​State Municipal Series Trust (​the "​Trust") approved a proposal to close BIF Arizona Municipal Money Fund, BIF Florida Municipal Money Fund and BIF North Carolina Municipal Money Fund (​each individually, a "​Fund" and collectively, the "​Funds") to new investors and thereafter to liquidate the Funds. Accordingly, effective 4:​00 P.​M. (​Eastern time) on September 28, 2012, each Fund will no longer accept orders from new investors."

It adds, "On or about December 20, 2012 (​the "​Liquidation Date"), all of the assets of the Funds will be liquidated completely, the shares of any shareholders holding shares on the Liquidation Date will be redeemed at the net asset value per share and each Fund will then be terminated as a series of the Trust. Shareholders may redeem their Fund shares or exchange their shares into shares of another money market fund advised by BlackRock Advisors, LLC or its affiliates at any time prior to the Liquidation Date. Shareholders should consult their personal tax advisers concerning their tax situation and the impact of exchanging to a different fund on their tax situation."

Tax Exempt Money Market Funds, and particularly State funds, have been especially hard-​hit by asset declines and consolidation in 2012. Through Nov. 30, according to our Money Fund Intelligence XLS monthly spreadsheet product, assets of money funds overall have declined by 2.​0% (​down $​44.​0 billion), while Tax Exempt money fund assets have declined by 6.​9% (​down $​19.​6 billion). Tax Exempt money funds now account for just 10.​7% of total money fund assets, down from 11.​2% at the beginning of 2012 and down from 12.​2% from the end of 2010. Look for a full recap of 2012 (​and prior) fund liquidations and changes in the January issue of our Money Fund Intelligence newsletter.

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The Mortgage Bankers Association is the latest organization to register their opposition to the Financial Stability Oversight Council'​s. Their comment letter says, "On Wednesday, December 12, 2012, the Mortgage Bankers Association (​MBA) joined several other groups and trade associations, collectively representing thousands of American businesses, non-​profits, and state and local governments, in opposition to the Financial Stability Oversight Council'​s (​FSOC'​s) consideration of certain regulations aimed at money-​market mutual funds (​the Proposal). MBA thanks FSOC for the opportunity to comment and submits this letter to expand upon the contents of that joint letter, offering the perspective of the mortgage banking industry on why this rule would have a severe adverse impact on the housing market."

David Stevens, President and Chief Executive Officer, writes, "Following the 2008 Financial Crisis (​the Financial Crisis), the Securities and Exchange Commission (​SEC) amended Rule 2a-​7 to further reduce the susceptibility of money-​market mutual funds (​MMMFs) to the isolated problems seen during the financial crisis.... In October, 2010, the SEC issued a formal request for public comment on additional reforms, including floating net asset values and minimum balance at risk requirements. However, in August 2012, the SEC announced that it would "​not proceed with a vote to publish a notice of proposed rulemaking to solicit public comment on potential structural reforms of MMMFs.""

The letter explains, "FSOC is currently considering three options for regulating MMMFs: Require MMMFs to have a floating net asset value per share. MMMFs would no longer be able to rely on a special exemption to use amortized cost accounting and rounding to maintain a stable net asset value of $​1.​00 per share. Allow for a stable net asset value, but require a "​buffer" of up to 1% of assets to absorb day-​to-​day fluctuations in portfolio value. This alternative would also require that 3% of a shareholder'​s highest account value in excess of $​100,​000 during the previous 30 days be made available for redemption on a daily basis, called a minimum balance at risk (​MBR). Allow for a stable net asset value, but require a buffer of 3% of total assets, coupled with other measures, including diversification requirements; increased minimum liquidity levels; and more robust disclosure requirements."

The MBA tells us, "These alternatives are similar to the measures the SEC declined to issue for public comment. It is important to recognize that any of the proposed alternatives would substantially impair the MMMF model by reducing the amount of capital available for investment, which in turn will make the entire vehicle less attractive for investors. MBA submits the below comments to highlight the harmful impact this Proposal would have on mortgage lenders, and in turn the housing market as a whole.... Mortgage REITs are important consumers of the cash supplied by MMMFs, using this liquidity to finance a substantial percentage of their investments.... MMMFs financed more than $​331 billion of agency and GSE-​backed securities and held more than $​513 billion worth of repo assets, including repos that are collateralized by mortgage products, as of the end of the third quarter of 2012."

They explain, "FSOC'​s Proposal would undermine the attractiveness of MMMFs by removing much of the certainty associated with the investment vehicle. For instance, floating the per share net asset value will result in MMMF investors being subject to the risk of a fund'​s share price declining; this risk would far exceed the rate of return garnered by investing in MMMFs. Likewise, a liquidity buffer would limit investors' ability to access their money, denying investors the liquidity that makes MMMFs so attractive.... Both options will result in substantially higher borrowing costs for mortgage REITs due to the elimination of MMMFs' economies of scale, resulting in REITs deleveraging portions of their mortgage portfolios."

Stevens continues, "MBA strongly recommends that FSOC withdraw its Proposal and elect not to recommend these regulations be imposed on MMMFs. The Money-​Market Mutual Fund is a unique investment vehicle that has allowed cash to be allocated far more efficiently. Removing from investors the security and liquidity that is a staple of the MMMF investment would roil the marketplace and unnecessarily raise borrowing costs, harming or even reversing the fragile recovery. MBA remains committed to furthering the recovery of America'​s housing market, and again thanks FSOC for the opportunity to submit these comments."

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Several new comment letters have been posted on www.​regulations.​gov, the website where feedback letters on the `​Financial Stability Oversight Council'​s Proposed Recommendations Regarding Money Market Mutual Fund Reform. Among the latest batch is a "Comment from Arnold & Porter LLP on behalf of Federated Investors." Written by John Hawkes, it says, "​We are writing on behalf of our client, `​Federated Investors, Inc. and its subsidiaries, to provide initial comments in response to the Financial Stability Oversight Council'​s recently issued Proposed Recommendations Regarding Money Market Mutual Fund Reform. The Release is issued pursuant to Section 120 of the Dodd-​Frank Wall Street Reform and Consumer Protection Act of 2010, which authorizes the Council, subject to specified criteria and conditions, to issue recommendations to a primary financial regulatory agency to apply new or heightened standards or safeguards. Federated plans to submit detailed comments and data on the Proposed Recommendations in the coming weeks."

Hawke explains, "​As discussed below, the Council should not issue the Proposed Recommendations, for the following reasons: (​1) Section 120 of Dodd-​Frank should not be invoked arbitrarily where an agency is continuing to consider regulatory reforms, simply because the agency'​s chair is unable to prevail on a particular approach at a particular time. The legitimate concerns raised by a majority of members of the SEC -- an agency bound by statute and its own administrative procedures to consider and assess the economic consequences of any regulatory action -- should have been respected by the Council. (​2) In issuing the Release, the Council failed to consider overwhelming public comments that raised substantial concerns about the costs and effectiveness of the very proposals -- a floating net asset value ("​NAV"), minimum balance at risk, and capital requirement -- that the Council is putting forward. At minimum, the Release should have addressed those comments, which it did not."

The reasons continue, "(​3) The Release fails to meet Dodd-​Frank and SEC statutory and other criteria for economic analysis. It omits any recognition or assessment of significant economic costs that were raised in surveys, analyses and reports in the SEC'​s public comment file. The benefits identified by the Release are purely speculative and contrary to the data, surveys and reports in the SEC'​s file, and the Release admits that the proposed reforms would not prevent runs during a financial crisis. (​4) The Release fails to consider the impact of the proposals in shrinking MMF assets and leading to further growth of the largest systemically important banks and expansion of the federal safety net.... (​7) Bank regulators' inconsistent treatment of bank short term investment funds demonstrates a lack of understanding by the Council of the factors affecting MMF stability. (​8) The Release fails to recommend workable reforms that would enhance, rather than harm, MMFs and their investors and has failed to address the need for actions by regulators other than the SEC to address identified systemic risks. The Council should focus on reforms mandated by Congress that are directly relevant to mitigating or preventing future financial crises."

Hawke'​s letter for Federated also says in a section, "The Council Should Not Use the Dodd-​Frank Section 120 Process at this Time for this Purpose," "The Council issued the Release because the Chair of the SEC was unable to obtain support from three members of the SEC, a majority, for a draft rulemaking release proposing significant structural changes to MMFs, prepared by the SEC staff at the Chairman'​s direction. The Commissioners had access to an extensive docket containing hundreds of individually distinct comment letters, reports, surveys, articles, and other materials filed by a range of MMF users, market participants, government officials and academics. These comments were filed over a two-​year period in response to the SEC'​s request for comment on the 2010 Report of the President'​s Working Group on MMF Reform Options, and, during the past year, in response to public statements made by the SEC Chair in which she outlined what she believed a formal rule proposal would include."

He continues, "Based upon their review of the docket and their analyses of the staff draft proposals, three Commissioners issued statements on August 23 (​Commissioner Aguilar) and August 28 (​Commissioners Gallagher and Paredes) stating their views that the staff draft proposals lacked sufficient foundation; specifically, the draft proposals "​were not supported by the requisite data and analysis, were unlikely to be effective in achieving their primary purpose, and would impose significant costs on issuers and investors while potentially introducing new risks into the nation'​s financial system." The Commissioners' statements called for additional study and analysis but in no way ruled out further MMF reforms. In fact, the statements reflected an intention by the majority of the SEC to "​do better" than the staff draft in addressing MMF regulation."

The letter adds, "The Council'​s Release acknowledges that "[​t]​he SEC by virtue of its institutional expertise and statutory authority, is best positioned to implement reforms to address the risks that MMFs present to the economy." The SEC also is subject to statutory requirements that it consider the effects of any regulations on efficiency, competition, and capital formation, and must comply with its own mandatory requirements to assess the economic consequences of any rule before even proposing it. Yet, the Council invoked Section 120 in an attempt to pressure the SEC to move forward on the very proposals that a majority of the SEC found unsupported by data or sound economic analysis and potentially risky to the financial system. While the Chair of the SEC has the ability to set the agency'​s agenda, each member of the SEC (​1) is appointed by the President, (​2) is confirmed by the Senate, and (​3) has an equal vote and an equal responsibility not to put forward regulatory proposals that he or she believes ineffective in achieving their purpose and costly and potentially risky to investors."

Hawkes continues, "We do not believe Congress intended the Section 120 process to be used arbitrarily and in disregard for agency processes, in circumstances where an agency is continuing to grapple with a regulatory issue under its direct jurisdiction, simply because the agency'​s chair is unable to prevail on a particular approach at a particular time. The Release threatens other actions by the Council -- including actions that exceed the Council'​s authority under Dodd-​Frank -- in the event the SEC fails to move forward with reforms satisfactory to the Council. For these reasons, the Release violates both the letter and intent of the relevant provisions of Dodd-​Frank."

He writes under, "The Floating NAV Proposal Would Not Enhance the Stability of MMFs, But Would Cause MMFs to Shrink," "​Hundreds of comment letters addressed the question of whether MMFs should be required to sell and redeem shares based on a floating NAV. Surveys and other comments provided evidence that the vast majority of investors understand that MMFs may lose value, are not insured, and that the underlying assets may deviate from $​1.​00 per share. MMFs publish their "​shadow" NAV as a regular benchmark, and it is not credible to suggest that investors are misinformed or that a floating NAV would better inform them of MMF risks. Comment letters explained that many instruments in a MMF portfolio cannot be "​marked-​to-​market" in any event, and therefore to promote a floating NAV as a true mark-​to-​market price is misleading."

Hawke tells FSOC, "Most important, the evidence is clear that requiring MMFs to use a floating NAV would not advance the regulatory goal of reducing or eliminating "​runs" in a crisis. Data from floating NAV funds and ultra short bond funds during the recent financial crisis confirm this conclusion. The Council in its Release, as well as the Federal Reserve Bank of New York in a recent staff report, acknowledge this."

He writes, "Congress in Dodd-​Frank did not direct regulators to take action regarding MMFs, but it did direct the Federal Reserve "[​a]​s soon as practicable" after the date of enactment, to establish, by regulation and in consultation with the Secretary of the Treasury, policies and procedures governing emergency lending for the purpose of providing liquidity to the financial system. Two-​and-​one-​half years after Congress gave the Federal Reserve and the Secretary of the Treasury this mandate, no rules have been proposed. Instead, the Federal Reserve and the Secretary of the Treasury are advocating the imposition of capital and other requirements on MMFs that the Council, in its Release, admits would not staunch a run in a crisis <​b:>. Instead of using its Section 120 authority arbitrarily to pressure the SEC to adopt these unsupported and ineffective proposals, the Council should address authorities of other financial regulators who have failed to take steps mandated by Congress that are directly relevant to mitigating or preventing future financial crises. `​We urge all members of the Council to give serious thought to these matters and to incorporate appropriate data and rigorous economic analysis before proceeding with the Proposed Recommendations."

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Money fund portals, fund companies and FDIC "​amalgamators" are all gearing up to take advantage of what is expected to be a flood of TAG money coming out of bank noninterest bearing transaction accounts if unlimited FDIC insurance expires as expected at the end of this month. Money fund "​portal" provider Institutional Cash Distributors put out a press release entitled, "ICD'​s 2013 Corporate Treasury Investment Guide Identifies Key Post-​TAG Alternatives," which says, "ICD responds to industry-​wide investor concerns about safe haven replacements for cash as the Dodd-​Frank Act provision extending unlimited FDIC insurance for bank deposits expires on December 31, 2012." The release explains, "Institutional Cash Distributors (​ICD) announced today the publication of its 2013 Corporate Treasury Investment Guide, a timely alternative institutional investments listing with accompanying capital preservation, liquidity and yield attributes. It is estimated that as much as $​1.​6 trillion in corporate cash moved to banks after a temporary emergency government provision -- known as the Transaction Account Guarantee (​TAG) program -- was implemented providing unlimited FDIC insurance for non-​interest bearing bank accounts. That program will end on December 31, 2012."

ICD writes, "At October'​s 2012 AFP Annual Conference in Miami, standing-​room-​only corporate treasury crowds overwhelmed the TAG Expiration sessions as corporate treasurers sought information and direction on institutional investment options. Further evidence of the importance of this issue was the November 30th Treasury & Risk feature story, Unlimited FDIC Coverage Could Be Extended, was one of its Top 10 most read articles in 2012. In response ICD developed the 2013 Corporate Treasury Investment Guide, which summarizes various available investment options in the market and analyzes them based on preservation of capital, liquidity and yield in today'​s global economic environment."

Sebastian Ramos, ICD'​s Senior Vice President, Head of Global Trading said, "Many of our corporate treasury clients have asked for guidance regarding alternative investments to bank deposits. In response, we created our guide listing relevant investment options featuring capital preservation, liquidity and yield attributes to help corporate practitioners in designing a post-​TAG asset allocation plan that matches their investment objectives and risk tolerance." Ramos added, "​Once an allocation strategy has been developed, investments can be further evaluated on an individual and comprehensive basis, through an exposure analytics process, to understand the portfolio'​s aggregated counterparty, country and sector risks."

ICD'​s release adds, "​Given the expected investment inflows due to the termination of FDIC unlimited insurance, expected year-​end seasonal factors, and a declining supply of money-​market instruments, those planning to invest in money market funds -- especially US Treasury and Government funds - should do so well in advance of December 31, 2012."

FDIC "​amalgamator" StoneCastle Partners also put out a release last week. They wrote, "StoneCastle Partners, LLC, a leading asset management company that manages, with its affiliates, over $​5 billion in assets, is available to assist reporters seeking background, insights and comments on to the Senate block to temporarily extend the Dodd-​Frank Transaction Account Guarantee ("​TAG") program. Originally introduced by the FDIC in 2008 as a temporary backstop for banks to avoid the flight of large depositors, it is estimated that TAG currently has $​1.​5 trillion of non-​interest bearing bank balances under its umbrella. StoneCastle executives, who have deep banking knowledge and experience, are available to provide background on the history of the TAG program, potential impact of the outcome of the vote and next steps for both banks and depositors."

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Below, we excerpt from the December issue of our Money Fund Intelligence newsletter.... This month, MFI talks with money fund industry veteran Jeff Avers, who is now VP of Liquidity Product Strategy and Consulting at SunTrust. Avers led a panel in October at the Miami AFP conference entitled, "Regulatory Reform and the Impact on Corporate Liquidity Management," so we asked him to repeat some of his talk'​s themes and to tell us about Basel III, developments in sweep accounts and the expiration of unlimited FDIC insurance. Our Q&​A follows.

MFI: How long has SunTrust been involved in cash management? How long have you been involved? Avers: [​SunTrust has been involved in cash management] since the Bank'​s inception, 100+ years ago. I have been involved in the Cash Management and Liquidity industry for roughly 25 years, and have been with SunTrust since January 2008.

MFI: Tell us about SunTrust'​s sweep and deposit programs. What choices do you offer? Avers: We offer the following options: Repo, Money Fund (​Treasury, Government and Prime), and SunTrust Banks, Inc. Master Notes (​parent company master note).

MFI: What are the yields like vs. money funds? Avers: Generally the yield on passive sweep investments are below the yield of a direct investment into a money fund or other self-​directed investment options. Our sweep clients benefit from the convenience of the automated daily investment process.

MFI: Tell us about the decision to jettison the RidgeWorth (​formerly STI Classic) funds. Do you still offer money funds? Avers: We continue to offer a suite of non-​proprietary money funds to our clients. The Ridgeworth money funds -- which were our proprietary money funds -- were merged into comparable asset class Federated funds in 2010.

MFI: What'​s the biggest challenge in the cash management space today? Avers: Great question. The biggest challenge overall is the tenure of today'​s historically low-​rate environment. This has created a challenging environment for all providers of short-​term investment products, including banks. Keep in mind that as it relates to interest-​bearing deposits, a bank needs to earn a return on the deposit that exceeds the rate the bank pays for the deposit. This is very different than the money fund industry, which earns a fee based on assets under management, or a broker-​dealer that earns a commission on the sale of an investment product.

MFI: What has it been historically? Avers: The biggest challenge historically for SunTrust and the banking industry in general, has been capturing the banking industry'​s fair share of the interest-​bearing portion of corporate and institutional cash. Bank deposits are not sexy. In the 90'​s and earlier this millennium more of the short-​term cash market share was enjoyed by more complicated products, including money funds. Over the last few years investors have opted for the simplicity of bank deposits.

MFI: Can you talk about the expiration of the unlimited FDIC insurance program? Do you expect it to expire? What can clients do? Avers: I won'​t speculate on whether Congress will take action. However, I do believe clients should be prepared with a plan B -- which is whether or not to reallocate their cash portfolio away from their fully insured corporate checking accounts and into another asset class should the unlimited guarantee expire on Dec. 31, 2012. According to the 2012 AFP Liquidity Survey, 59% of corporates do not plan on making a significant change to their checking account balances. Among the 41% that do plan on making a significant change the most popular options cited are: Prime Money Funds (​17%); Treasury Money Funds (​16%); Treasuries/​Agencies (​14%); Repo (​6%); and, Other (​8%). We have been assuming that the 59% that don'​t plan on making any significant changes are both (​1) comfortable with their existing bank and (​2) interested in continuing to enjoy the relative value of the Earnings Credit Rate that the bank treasury management industry has been paying its clients over the last 4-​5 years.

Watch for more excerpts from this interview in coming days, or write us at info@​cranedata.​com to request the full article in our latest MFI newsletter.

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Federal Reserve Governor Jeremy Stein spoke yesterday in Frankfurty on "Dollar Funding and Global Banks," saying, "I will focus my remarks on one important aspect of this issue--​namely, the growing use of wholesale dollar funding by global financial institutions. I'​ll begin by briefly discussing research I'​ve been doing, along with my coauthors Victoria Ivashina and David Scharfstein, which examines some of the consequences of this funding model during times of market stress." We also discuss the most recent liquidation in the money fund space; on Friday, the Sterling Capital Money Market Funds (​formerly BB&​T funds) liquidated.

The Fed'​s Stein writes, "To test the model'​s implications, my coauthors and I focused on events in the second half of 2011, when the credit quality of a number of large euro-​area banks became a concern and U.​S. prime money market funds sharply reduced their lending to those banks. In a span of four months, the exposure of money funds to euro-​area banks fell by half, from about $​400 billion in May to about $​200 billion in September. Coincident with this contraction in dollar funding, the CIP basis widened in the direction predicted by our model, increasing the cost of obtaining synthetic dollars via the FX swap market."

He tells us, "​We used data from the international syndicated loan market to test the model'​s predictions about the reaction of lending to this type of funding stress. We found that dollar-​denominated lending by euro-​area banks fell relative to their euro-​denominated lending, while this result did not hold for U.​S. banks.... Finally, euro-​area banks that relied most on funding from U.​S. money market funds also cut back most sharply on their dollar-​denominated lending."

Stein explains, "​This last result is similar to one in recent work by my Fed colleagues Ricardo Correa, Horacio Sapriza, and Andrei Zlate. They documented that the U.​S. branches of foreign banks that experienced the most shrinkage in their dollar-​denominated large time deposits--​funding that had been mostly provided by money market funds prior to mid-​2011--​cut their U.​S.-​based commercial and industrial lending by more than banks that fared better on this score. Taken together, these findings have two types of policy implications: one for central bank responses to dollar funding pressures and another for measures to regulate foreign banking firms that rely heavily on short-​term wholesale funding."

He adds, "Finally, the central role played by money market funds in the 2011 episode is a reminder of the fragility of these funds themselves--​and of the risk created by their combination of risky asset holdings, stable-​value demandable liabilities, and zero-​capital buffers. The events following the Lehman Brothers bankruptcy in 2008 provide even starker evidence of the risks that money market funds pose for the broader financial system. In light of these vulnerabilities, I welcome the recent proposed recommendations by the Financial Stability Oversight Council for further money market fund reforms."

The prospectus filing announcing the liquidiation of the Sterling Capital Money Market Funds says, "The Board of Trustees of Sterling Capital Funds has approved the liquidation and termination of the Sterling Capital National Tax-​Free Money Market Fund, Sterling Capital Prime Money Market Fund and Sterling Capital U.​S. Treasury Money Market Fund. Accordingly, the assets of each Fund will be liquidated on or about December 14, 2012. After paying in full all known or reasonably ascertainable liabilities of a Fund, including without limitation all charges, taxes and expenses of such Fund, whether due, accrued or anticipated, that have been incurred or are expected to be incurred by the Fund, the Fund will distribute to its shareholders their pro rata share of the proceeds. Proceeds of each Liquidation are expected to equal $​1.​00 per share, and will be distributed to shareholders of the applicable Fund in a complete redemption of their shares on or about December 14, 2012 in the manner set forth below."

Note that the advisor recent launched Sterling Capital Deposit Account and Sterling Capital Ultra-​Short Bond Fund. Sterling Capital becomes the 8th fund manager tracked by Crane Data to liquidate or merge its money market funds away in 2012 (​73 managers remain, several other tiny complexes that we didn'​t cover have liquidated too). These include: MTB (​merged into Wilmington), Fifth Third (​merged into Federated), Victory (​liquidated), Old Mutual (​liquidated), Bishop Street (​liquidated), Highland/​Pyxis (​liquidated), and TCW (​liquidated). See our Nov. 13 News, "​Consolidation Continues: Pyxis, Some Dreyfus Muni MFs Liquidating".

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Crane Data'​s latest Money Fund Portfolio Holdings dataset, with data as of November 30, 2012, were released to our Money Fund Wisdom subscribers last week. Our latest collection shows money market securities held by Taxable U.​S. money funds increased by $​58.​1 billion in November to $​2.​362 trillion (​after rising $​31.​0 billion in Oct.). Repurchase Agreements held by money funds jumped by $​38.​5 billion, or 6.​5%, to $​635.​0 billion (​after soaring $​81.​0 billion last month); repos hit a new record-​high 26.​9% of assets. Certificates of Deposit (​CDs), the third-​largest segment, also jumped, rising $​32.​1 billion, or 7.​8%, to $​445.​7 billion (​18.​9% of holdings), while the second-​largest sector, Treasury Debt, fell by $​8.​2 billion (-​1.​8%) to $​451.​3 billion (​19.​1% of holdings). Commercial Paper (​CP) rose by $​5.​2 billion (​up 1.​5%) to $​348.​2 billion (​14.​7% of holdings), while Government Agency Debt fell by $​7.​9 billion to $​297.​1 billion (​12.​6% of assets). European-​affiliated holdings (​includes repo) rose again in November, rising by $​29.​9 billion in November to $​730.​6 billion, or 30.​9% of securities (​after rising $​53.​9 billion in October). Eurozone-​affiliated holdings also jumped again to $​421.​9 billion in November; they now account for 17.​9% of overall taxable money fund holdings.

Repo, the largest segment of taxable money fund composition, was made up of: Government Agency Repurchase Agreements ($​340.​5 billion, or 14.​4% of total holdings), Treasury Repurchase Agreements ($​215.​4 billion, or 9.​1% of assets), and Other Repurchase Agreements ($​79.​1 billion, or 3.​4% of holdings). Commercial Paper, the fourth largest segment, was made up of the combined total of Financial Company Commercial Paper'​s 7.​6% ($​180.​5 billion), Asset Backed Commercial Paper'​s 4.​6% ($​108.​7 billion), and Other Commercial Paper'​s 2.​5% ($​59.​1 billion). "​Other" Instruments (​including Time Deposits and Other Notes) are the sixth largest sector with $​123.​4 billion (​5.​2%) and VRDNs (​including Other Muni Debt) were the smallest segment with $​61.​5 billion (​2.​6% of holdings) in November.

The 20 largest Issuers to taxable money market funds as of Nov. 30, 2012, include the US Treasury (​20.​8%, $​451.​1 billion), Federal Home Loan Bank (​6.​5%, $​140.​0 billion), Deutsche Bank AG (​4.​1%, $​89.​8B), Bank of America (​3.​2%, $​68.​4B), Credit Suisse (​3.​2%, $​68.​3B), Federal Home Loan Mortgage Co (​3.​0%, $​64.​2B), Barclays Bank (​2.​9%, $​62.​7B), Federal National Mortgage Association (​2.​9%, $​62.​6B), RBC (​2.​7%, $​59.​4B), BNP Paribas (​2.​7%, $​58.​7B), Sumitomo Mitsui Banking Co (​2.​6%, $​56.​7B), `​Societe Generale (​2.​6%, $​55.​7B), JP Morgan (​2.​5%, $​54.​7B), Bank of Tokyo-​Mitsubishi UFJ Ltd (​2.​5%, $​53.​6B), Bank of Nova Scotia (​2.​3%, $​49.​7B), Citi (​1.​9%, $​40.​7B), Bank of Montreal (​1.​8%, $​38.​2B), National Australia Bank (​1.​7%, $​36.​3B), RBS (​1.​7%, $​35.​9B), and Rabobank (​1.​7%, $​35.​8B).

The largest increases among Issuers of money market securities (​including Repo) were shown by Bank of Montreal (​up $​15.​0 billion to $​38.​2 billion), BNP Paribas (​up $​10.​8 billion to $​58.​7 billion), Deutsche Bank (​up $​9.​8B to $​89.​8B), and JPMorgan (​up $​7.​5B to $​54.​7B), while UBS (​down $​9.​6B to $​15.​0B), the US Treasury (​down $​8.​6B to $​451.​1B), RBS (​down $​8.​0 billion to $​35.​9 billion), and Barclays Bank (​down $​7.​2B to $​62.​7B) all showed large declines in issuance.

The United States is still the largest segment of country-​affiliations with 48.​4%, or $​1.​144 trillion. Canada (​8.​8%, $​207.​9B) remained the second largest country, but France moved into third place (​7.​2%, $​170.​1B), ahead of Japan (​7.​1%, $​168.​3B) and the UK (​6.​5%, $​153.​9B). Germany (​5.​7%, $​135.​4B) remained the sixth largest country affiliation, as Deutsche Bank'​s repo issuance jumped again. `​Australia (​4.​3%, $​101.​5B) moved ahead of Switzerland (​3.​8%, $​90.​4B), and Sweden (​3.​5%, $​82.​6B) moved ahead of the Netherlands (​3.​1%, $​73.​9B).

As of Nov. 30, Taxable money funds hold 26.​1% of their assets in securities maturing Overnight, and another 12.​7% maturing in 2-​7 days (​38.​8% total in 1-​7 days). Another 14.​0% matures in 8-​30 days, while 29.​3% matures in the 31-​90 day period. The next bucket, 91-​180 days, holds 13.​2% of taxable securities, and just 4.​7% matures beyond 180 days. Crane Data'​s Taxable MF Portfolio Holdings (​and Money Fund Portfolio Laboratory) were updated last week, while our MFI International "​offshore" Portfolio Holdings will be updated today (​our Tax Exempt MF Holdings were updated Saturday). Visit our Content center to download files or visit our Money Fund Portfolio Laboratory to access our "​transparency" module.

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BlackRock released a comment letter Thursday which argues that the FSOC'​s three primary proposals "​do not achieve the objective of protecting against a systemic run and negatively impact the core benefits of MMFs," and they revise and expand upon their proposal for a "​Constant Net Asset Value with Standby Liquidity Fees". [​We prefer the moniker ELF, for emergency liquidity fees, instead of "​SLF", given The Hobbit'​s arrival today.] The letter says, "BlackRock appreciates the opportunity to respond to the proposed recommendations regarding money market mutual fund ("​MMF") reform (​the "​Proposals") issued by the Financial Stability Oversight Council (​the "​Council"). In addition to reviewing the Proposals, our letter discusses several other reform proposals, including one, a constant net asset value fund ("​CNAV"), coupled with standby liquidity fees ("​SLFs"), that we believe achieves the stated objective of reform: to provide a mechanism for halting mass client redemptions (​or "​runs") while preserving the benefits of MMFs as both a liquidity management tool for investors and as a critical source of short term funding in the capital markets."

They explain, "​We appreciate the extensive discussions and work that the Council has done in preparing these Proposals. We and our clients remain immensely grateful for the work of the various Government agencies throughout the financial crisis in 2008. The swift and decisive actions taken by multiple agencies in concert were essential in restoring confidence and order to the markets. After the 2008 crisis, we and others in the industry worked collaboratively with the SEC in 2009 to modify Rule 2a-​7 under the Investment Company Act of 1940, as amended (​the "​Act"), to enhance the liquidity and safety of money market funds; these proposals were adopted by the SEC in 2010 and are referred to herein as the "​2010 MMF Reforms". Even with the 2010 MMF Reforms, we are in agreement that further measures should be taken to protect MMF investors and the broader financial system."

BlackRock writes, "​Increasingly, there are references to MMFs as "​shadow banks". We would like to address this issue directly. First, the name "​shadow bank" has a negative connotation, when, in fact MMFs play a critical role in what we call "​market finance". Second, the term "​shadow bank" implies that while banks are regulated, MMFs are not regulated. While it is true that banks are subject to capital requirements and other banking regulations, it is also true that MMFs are subject to a host of mutual fund and MMF-​specific regulations."

They tell us, "While some bank deposits are guaranteed by the Federal Deposit Insurance Corporation ("​FDIC"), MMFs clearly disclose that shares are not insured by the FDIC, the Federal Reserve Board or any other agency and are subject to investment risks, including the possible loss of principal amount invested. While many cite an "​implied guarantee" for MMFs, in the case of The Reserve Fund, investors did not recoup $​1.​00 upon liquidation of the Reserve Fund; the final recovery for investors was approximately $​0.​99. Clearly, MMFs are not guaranteed and investors understand that they bear the risk of investment results." Banks and MMFs also differ in terms of both transparency and liquidity."

BlackRock explains, "One of the primary concerns expressed about MMFs is the potential for a "​run". Sometimes this issue is linked to the accounting conventions used in MMFs which allow the net asset value to be rounded to $​1.​00; these funds are called stable NAV or CNAV funds. An assumption is made that investors will run when the market value of the portfolio (​also known as the mark-​to-​market or shadow NAV) is less than the "​official" NAV of $​1.​00. In reality, the adoption and continued use of MMFs by investors are driven fundamentally by three things: the quality of the assets in the MMFs, the limited duration of those assets and the amount of available liquidity held in the MMFs."

They continue, "Economists speculate about the potential first mover advantage in a CNAV fund; however, in our experience, clients decide to leave a MMF based on their assessment of the quality of assets, duration of assets and liquidity levels and their assessment of whether those are deteriorating in an unusually dramatic way. Moreover, we and academics who have studied this believe that in FNAV MMFs, the potential for a first mover advantage is still present. Because MMFs will sell their most liquid assets first to support redemptions, the remaining investors will be left with a riskier, less liquid portfolio. Consequently, the first mover advantage still exists whether the NAV of a fund is floating or constant. In observing actual investor behavior, the primary reason for a run is a crisis of confidence. In 2008, liquidity had already seized in the capital markets well before The Reserve Fund broke the buck. This incident was simply the final straw which shattered what little remained of investor confidence and led to panic behavior. Investors were fearful about the creditworthiness of the underlying assets given the seeming meltdown of the global financial system, and they made the decision that they could not take any risk given the overall environment; they therefore liquidated their holdings in Prime MMFs."

The BlackRock letter says, "Agreeing on the objectives and scope of additional reforms is critical to defining potential solutions. Many commenters, including the Chairman of the SEC, have cited protecting against systemic runs (​and protecting taxpayers) as the key objective of MMF reforms. Others have noted the need to be able to support an individual fund which is experiencing a credit impairment. Yet others want to be assured that investors recognize the risk of MMFs and even want investors to explicitly pay for the CNAV feature. And, finally, investors and borrowers have expressed concern that MMFs remain a viable product given the important role of MMFs in the broader economy. As discussed in the prior section, investors have demonstrated that they understand the risks of investing in MMFs. We believe that any further MMF regulation must satisfy a two-​part test: a. Preserve the benefits of the product as a liquidity management tool for investors and preserve the functioning of the short-​term funding markets; and b. Provide a mechanism for managing mass client redemptions, or "​runs" and minimize the risk of a run on a single fund triggering a systemic run."

They add, "The Council further suggests that there may be a solution involving liquidity gates and/​or redemption fees. In a subsequent section, we present our CNAV with SLFs proposal, and we present an evaluation of each of the Council'​s Proposals. As detailed further in the discussion of each Proposal, we are concerned that the three primary Proposals do not achieve the objective of protecting against a systemic run and negatively impact the core benefits of MMFs, whereas the CNAV with SLFs Proposal is specifically designed to address these issues."

BlackRock tells us, "​Several additional topics have been raised in discussions of MMF reform. We have included a special section addressing a range of topics that examine the potential structural reforms of MMFs. These topics include (​i) the scope of the new rule in terms of which types of money market funds will be covered; (​ii) the benefits of single versus multiple types of Prime MMFs; (​iii) sponsor support; (​iv) the importance of a transition period for any new rules; (​v) the need for and the approach to harmonizing rules on cash products regulated outside of Rule 2a-​7; (​vi) the value of transparency into data on underlying clients in managing MMFs; and (​vii) the challenges of differentiating between retail and institutional clients."

The description of "BlackRock'​s Constant Net Asset Value with Standby Liquidity Fees Proposal," says, "The Council'​s Proposals considered alternative ideas for structural reform, and Section V. D of their recommendations describes a potential solution using liquidity fees and/​or gates. This section also raised the question of whether this structure would increase the likelihood of preemptive runs along with a number of other important questions. Below, we describe a structure that uses a CNAV Fund with SLFs to stop a run, and we also respond to the questions raised by the Council."

They explain, "The basic features of a CNAV fund with SLFs would include: 1. Objective triggers. The SLFs would not be active during times of normal market functioning. We recommend that SLFs be triggered when a fund has fallen to one half of the required weekly liquidity levels under Rule 2a-​7.... 2. Enhanced transparency. This proposal would include a requirement of a weekly public disclosure with a 5-​business day delay of the mark-​to-​market NAV and daily disclosure of Weekly Liquid Asset Levels based on the prior day'​s close. 3. Gates.... 4. Standby Liquidity Fee. We recommend that a fee of 1% be imposed on withdrawals occurring after the gate has been put in place.... With SLFs in place, the NAV of a fund would improve as investors who leave are charged a fee, which would create a natural brake on a run, and investors remaining in the fund would be protected from the behavior of those who redeemed. 5. Removal of SLF and Special Distribution. Any SLFs gathered by the fund would be retained in the fund to restore the NAV. Once the NAV reached $​1.​00, the SLF would be removed and the fund would return to functioning normally."

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The U.​S. Chamber of Commerce'​s Center for Capital Markets Competitiveness sent a letter to U.​S. Department of the Treasury Secretary Timothy F. Geithner and members of the Financial Stability Oversight Council Wednesday, "signed by organizations representing thousands of American businesses, State and Local governments, and nonprofit organizations that depend on money market mutual funds (​MMMFs) as an efficient and critical financial tool to the FSOC today urging them not to proceed with any regulatory actions on MMMFs." The letter says, "We, the undersigned organizations representing thousands of American businesses, State and Local governments, and nonprofit organizations that depend on money market mutual funds (​MMMFs) as an efficient and critical financial tool, write to you as the Chair of the Financial Stability Oversight Council (​FSOC) to urge the FSOC not to proceed with any planned regulatory actions with respect to Rule 2a-​7."

It explains, "Many of the changes you outlined in the letter to your fellow Council members in September -- such as a floating net asset value (​NAV) and "​minimum balance at risk" redemption holdbacks -- are the same proposals that the SEC rejected. These proposals were rejected because they would fundamentally alter MMMFs and harm the ability of the organizations we represent to finance basic operations. The negative repercussions of such changes would impede our ability to sustain economic growth and create jobs."

The Chamber writes, "​Following the 2008 financial crisis, the SEC amended Rule 2a-​7 to further reduce the susceptibility of MMMFs to the isolated problems seen during the financial crisis. These changes included requiring MMMFs to hold a higher proportion of their assets in highly liquid, high-​quality assets; to diversify even more broadly; and to disclose their holdings monthly. MMMFs are now better able to withstand financial market turbulence and fluctuations in the economy than at any time in their 40-​year history."

They add, "The regulatory changes being considered will have a significant and adverse impact on the vitality of the organizations that we represent -- American businesses, State and local governments, and nonprofits -- that rely on MMMFs as a secure, efficient means to provide short-​term funding for business expansion, daily operations, and critical infrastructure maintenance and expansion. MMMFs are the largest investors in short-​term municipal bonds, holding $​288 billion in assets and approximately 57 percent of all outstanding short-​term municipal debt. These funds also provide funding to nearly 40 percent of the corporate commercial paper market."

The letter continues, "Implementing a floating net asset value, redemption restrictions, or other regulatory changes that disrupt the existing structure and characteristics of MMMFs will cause many investors to divest a significant percentage of their holdings in MMMFs, denying low-​cost capital to businesses and municipalities and driving assets into less regulated vehicles. In light of the foregoing concerns, we again urge the FSOC to avoid moving forward with recommendations for any additional regulations related to MMMFs at this time."

The Chamber adds, "We need a different approach that begins with the SEC focusing only on necessary reforms that will strengthen rather than destroy a product we rely on. Our economy simply cannot afford for regulators to act in haste and propose measures that will have a very real and negative impact on a critical financing vehicle that is a trusted and essential resource for our members."

The letter is signed by the following organizations: Agricultural Retailers Association, American Association of State Colleges and Universities, Association for Financial Professionals, Education Finance Council, Financial Executives International, Government Finance Officers Association, International City/​County Management Association, International Municipal Lawyers Association, Mortgage Bankers Association, National Association of College and University Business Officers, National Association of Corporate Treasurers, National Association of Counties, National Association of Health and Educational Facilities Finance Authorities, National Association of State Auditors, Comptrollers and Treasurers (​NASACT), National League of Cities, Property Casualty Insurers Association of America, Retail Industry Leaders Association (​RILA), U.​S. Chamber of Commerce, and the U.​S. Conference of Mayors.

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The Federal Reserve Bank of New York'​s Liberty Street Economics blog recently posted an article entitled, "Why (​or Why Not) Keep Paying Interest on Excess Reserves?" Written by Gara Afonso, it says, "​In the fall of 2008, the Fed added new policy tools to its portfolio of techniques for implementing monetary policy. In particular, since October 9, 2008, depository institutions in the United States have been paid interest on the balances they hold overnight at Federal Reserve Banks (​see Federal Reserve Board announcement). Several other central banks, such as the European Central Bank (​ECB) and the central banks of Canada, England, and Australia, have somewhat similar deposit facilities allowing banks to earn overnight rates on their balances. In this post, I discuss the benefits and costs of this new tool in an environment where excess reserves in the United States have now exceeded $​1.​4 trillion and account for close to 95 percent of all reserves."

The post says, "It has typically been argued that the interest rate paid by central banks on required reserve balances effectively compensates depository institutions for the implicit tax that reserve requirements impose on them, while the interest rate paid on excess balances provides the central bank with an additional tool for conducting monetary policy. Central banks differ, however, in the strategies they use to implement the rates paid on excess reserves. For example, the ECB does not pay interest on excess reserves directly but instead offers a deposit facility where banks can place excess reserves overnight. The Fed, by contrast, pays interest on depository institutions' excess balances directly."

Afonso writes, "Since the implementation of this new policy in the United States, reserves have increased to unprecedented levels (​see chart in article). And although there is no doubt that adding a new tool has strengthened the Fed'​s ability to conduct monetary policy, some economists have recently begun to discuss the current costs and benefits of remunerating excess reserves: Should the trade-​off between benefits and costs be reconsidered at this time? Or put differently, how would it matter if the Fed lowered the interest rate on excess reserves?"

He explains, "The textbook benefit of lowering interest rates is the stimulative effect on economic activity. The tactic is generally used by central banks to reduce the real cost of borrowing and encourage consumption and investment when the economy starts to weaken. However, it has been suggested that the effectiveness of lowering rates may be limited when rates are already very close to zero. Another benefit of reducing rates would be to lower money market rates and stimulate bank lending, although the effect may also be marginal in the current environment. An additional argument in favor of lowering rates can be found in traditional and recent theories of money that typically argue that a zero nominal interest rate leads to an optimal allocation of resources in the economy."

The NY Fed blog continues, "​What about the costs of lowering rates? Reducing rates in an ultra-​low-​interest-​rate environment may lead to a deflationary spiral. However, many economists have suggested that the risks of a deflationary trap are probably small. Additional costs were also pointed out at the Federal Open Market Committee (​FOMC) meeting held on September 20-​21, 2011 (see Minutes). When discussing the possibility of lowering the interest paid on reserves, participants at the meeting raised concerns that a close-​to-​zero rate could lead to disruptions in several financial markets. In particular, lowering rates could further depress the volume traded in the federal funds market. In a thinner market, the rate could then be driven by infrequent transactions that are no longer representative of overnight borrowing costs. The information that this rate may convey would then be lost. Very low interest rates could also place money markets funds under stress -- an outcome that could disrupt access to short-​term credit for some borrowers, including large firms. As pointed out by Todd Keister in a post on November 16, 2011, on the zero lower bound, financial distress could also reach the U.​S. Treasury market if rates were to become negative."

Finally, he says, "Overall, reducing the rate paid on excess reserves would push the fed funds rate closer to zero, which could have detrimental effects on several financial markets. Uncertainty about the scope of these disruptions to financial markets seems to be preventing central banks from lowering rates further."

In other news, the Senate voted to consider an extension of unlimited FDIC insurance on noninterest bearing accounts. The New York Times writes in "​Bill to Extend Deposit Insurance Program Moves Forward in the Senate", "A bill extending a federal program guaranteeing deposits in noninterest-​bearing accounts at federally insured banks easily cleared a procedural hurdle on Tuesday, setting it up for a vote on final passage later this week. But the bill, which is supported by most of the banking industry and by the White House, still faces an uphill battle in the Senate and the House."

The article adds, "The Senate voted 76-​20 to continue debate on the bill, which would extend by two years a program created to help stabilize the banking system in the 2008 crisis. It was extended in 2010 until the end of this year.... The two sides were still negotiating on whether amendments to the bill would be allowed. If an agreement is not reached, it is unlikely that Senate Republicans will help provide the 60 votes needed for the bill to pass the next procedural milestone."

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The Association for Financial Professionals released a brief study yesterday entitled, "2013 AFP Business Outlook Survey, which surveyed corporate treasurers on plans for the new year and on some recent issues impacting cash management. AFP writes, "Beyond the immediate issues related to the fiscal cliff, the survey identifies other areas which financial professionals think Washington should address -- effective corporate tax rates, taxation on repatriated foreign earnings and regulatory relief -- that will ease the uncertainty currently paralyzing corporate decision-​making. Survey respondents also indicate that organizations will begin to move cash and short-​term investments away from bank accounts when (​should) unlimited FDIC insurance currently available on non-​interest bearing corporate bank accounts expires at the end of 2012." (​Note that the Senate is expected to vote on the extension of unlimited FDIC insurance at 2:​30pm Tuesday. See Politico.​com and today'​s WSJ editorial for details.)

The survey says, "In an environment of uncertainty or where future prospects may look weak, some companies tend to build out cash reserves to ride out an expected downturn. Twenty percent of organizations have increased their cash and short-​term investment cash holdings as a direct result of the possibility that the fiscal cliff could occur at the end of 2012. Should the fiscal cliff actually occur without any alteration, 26 percent of survey respondents expect their organizations will build out their cash holdings."

It explains, "But these organizations are the exceptions -- 73 percent of organizations have not altered the amount of cash that they hold against the possibility of the fiscal cliff while two-​thirds of survey respondents do not anticipate their organizations will change the amount of cash that they hold should the fiscal cliff occur.... Other actions taken by organizations as a result of the threat of the fiscal cliff include: Shortened the duration of the short-​term investment portfolio (​cited by 22 percent of organizations that have taken an action)."

On "FDIC Unlimited Insurance," AFP'​s survey tells us, "​According to the 2012 AFP Liquidity Survey, 51 percent of organizations' cash and short-​term investment holdings are maintained in bank accounts. The share of such investments held in bank accounts has grown dramatically in recent years. As recently as 2006, the percentage of cash and short-​term investment holdings held in bank accounts was 23 percent. There are a number of reasons for the shift of short-​term investments into bank deposits, including organizations' greater preference for safety over yield as a result of the financial crisis and recession. But another factor is the availability of unlimited FDIC insurance on corporate (​commercial) deposits held in non-​interest bearing accounts. Corporate access to unlimited insurance was most recently extended with the passage of the Dodd-​Frank Wall Street Reform and Consumer Protection Act, but this extension is scheduled to expire at the end of 2012."

It adds, "At the time of publication of this report, there were some calling for the continued availability of this unlimited FDIC insurance, but it is unclear whether such an extension would be agreed upon by Congress. Should unlimited FDIC insurance expire at the end of the year, 51 percent of organizations expect to move at least some of their cash and short-​term investment portfolios away from non-​interest bearing bank accounts into other investment vehicles."

AFP says, "Organizations that plan to reduce the amount of their short-​term investments currently held in bank accounts if unlimited FDIC insurance expires after December 31, 2012 plan to reduce such holdings by a median of 20 percent. Twenty-​eight percent of organizations that will reduce bank deposits will do so by between 10 and 24 percent while 21 percent of organizations will reduce these holdings by between 25 and 49 percent. Some organizations will make an even more dramatic shift: 20 percent of these organizations will reduce the size of their current bank deposits by at least half."

Finally, they write, "The most likely destinations for any cash and short-​term investments removed from bank accounts would be money market funds and Treasury securities/​agency bonds. These choices reflect the continued preference of corporate investors for the safety of their investments over any possibility of yield. Forty-​two percent of organizations would move at least some of these funds into Treasury-​based money market funds while 41 would invest in Treasury securities and/​or agency bonds and 36 percent anticipate using prime money market funds as destinations for investments currently held in bank accounts."

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We wrote last Thursday about the SEC'​s new study, "​Response to Questions Posed by Commissioners Aguilar, Paredes, and Gallagher," which "addresses the questions posed by Commissioners Aguilar, Paredes, and Gallagher in their September 17, 2012 memo to Chairman Schapiro." While the 98-​page study has very little new information and many of its conclusions appear predetermined and speculative, there is an interesting section on Investment Alternatives to Money Market Funds. The SEC attempts to answer the question, "If money market funds were to be fundamentally restructured and investors were then to shun such funds, to where would those assets migrate?" They say, "​Money market fund investors have many investment options, each offering a different combination of price stability, risk exposure, return, investor protections, and disclosure. This subsection analyzes the characteristics of money market fund alternatives and discusses where current money market fund investors might invest if they find money market funds are no longer a viable investment."

The study explains, "Table 6 [​see page 38-​39] outlines the principal features of various cash investment alternatives to prime and Treasury money market funds, as currently defined. The features examined include how alternatives are valued, their investment risk relative to a "​Benchmark" (​defined as a representative prime money market fund), current redemption restrictions, expected yield relative to the Benchmark, whether products are regulated, and whether restrictions exist on investor eligibility. Existing investment alternatives to prime funds include the following: bank deposit accounts, bank collective trust funds, local government investment pools, offshore funds, private funds, separately managed accounts, ultra-​short bond funds, short-​duration exchange-​traded funds, and direct investments in money market instruments. Each of these choices involves different tradeoffs, and none are perfect substitutes for money market funds."

The SEC study continues, "[​M]​oney market fund investors would have to analyze the various tradeoffs associated with a shift to one of the available cash investment alternatives. These alternatives may create additional operational costs or complexities, and they may impose redemption restrictions or other limitations on liquidity. For example, investors that highly value principal stability would likely consider shifting investments to Treasury money market funds or bank deposits, but would be unlikely to prefer ultra-​short bond funds, short-​duration ETFs, collective investment funds, or separately managed accounts that do not offer principal stability. If such investors shift their investments to Treasury money market funds, they would sacrifice yield, but they would not generally increase investment risk, principal stability, or liquidity. If they shift to bank CDs, they would not increase investment risk or principal stability, but they would sacrifice liquidity. Most other alternatives would likely involve increased investment risk."

It says, "​Thus, the extent to which investors would use the above investment vehicles as substitutes for prime money market fund shares, in part, depends on individual preferences. Some alternatives, such as LGIPs, STIFs, offshore money market funds, separately managed accounts, and direct investments in money market instruments involve significant restrictions on the types of investors that can be accepted, which would render these alternatives unavailable to most current money market fund investors. For example, offshore money market funds can only sell shares in private offerings to U.​S. investors, and many prefer to avoid doing so, because it may result in the loss of certain Securities Act exemptions and create adverse tax consequences."

The SEC writes, "Some qualified investors may have additional self-​imposed restrictions or fiduciary duties that limit the risk they can assume. Many unregistered or offshore potential money market fund substitutes -- unlike registered money market funds in the United States -- are not prohibited from imposing gates or suspending redemptions. Several other alternative investments also can impose redemption restrictions. Investors placing a high value on liquidity may find the potential imposition of these restrictions unacceptable and thus not view them as viable alternatives. Investors who value the disclosure and protections afforded to them by U.​S. securities regulations may not regard private funds and some offshore funds as alternatives to prime money market funds."

It adds, "Money market fund investors that prefer yield over principal stability and low investment risk are likely to shift their investments into floating NAV offshore money market funds, floating value enhanced cash funds, ultra-​short bond funds, collective investment funds, short-​duration ETFs, or separately managed accounts. One practical constraint is that some investors may not have access to LGIPs, STIFs or offshore money market funds due to the significant restrictions on who is eligible to participate. For example, most existing LGIPs are not registered with the SEC, as states and local state agencies are excluded from regulation under the U.​S. federal securities laws. By contrast, STIFs only are offered to accounts for personal trusts, estates, and employee benefit plans that are exempt from taxation under the U.​S. Internal Revenue Code, and offshore money funds are investment pools domiciled and authorized outside the United States."

The SEC tells us, "Finally, investors are unlikely to view private funds, such as enhanced cash funds that are privately offered to institutions, wealthy clients, and certain types of trusts, as equivalent investments because of their greater investment risk, limitations on investor base, and lack of legal protections. However, some investors could shift to stable NAV private funds because they provide a closer substitute to money market funds."

They say, "As noted above, some retail investors, particularly those with investment levels that are fully covered by the FDIC insurance limits, may shift their assets to bank deposits. The shift to bank deposits would increase reliance on FDIC deposit insurance and increase the size of the banking sector, which raises additional concerns about the concentration of risk in the economy. However, it is unlikely that many large institutional investors will follow suit. Interest-​bearing accounts at depository institutions are insured only through $​250,​000. Although non-​interest bearing transaction accounts at depository institutions are fully insured today, starting in January 2013 they also will only be insured up to $​250,​000."

Finally, the study adds, "[​B]​oth individual and business holdings in checkable deposits and currency have significantly increased in recent years relative to their holdings of money market fund shares. The 2012 AFP Liquidity Survey indicates that bank deposits account for 51 percent of the surveyed organizations' short-​term investments in 2012, which is up from 25 percent in 2008. Money market funds account for 19 percent of these organizations' short-​term investments in 2012 down from 30 percent just a year earlier, and down from almost 40 percent in 2008. This shift has likely been motivated by the availability of unlimited FDIC insurance on non-​interest bearing accounts since the end of 2010, and may be likely to reverse if it is eliminated in January 2013."

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Crane Data is making preparations to host its third annual Crane'​s Money Fund University at The Roosevelt Hotel in New York City, Jan. 24-​25, 2013. Money Fund University was designed to offer attendees an affordable and comprehensive two day, "​basic training" course on money market mutual funds, educating attendees on the history of money funds, interest rates, Rule 2a-​7, ratings, rankings, money market instruments such as commercial paper and repo, and portfolio construction and credit analysis. With our first New York City show, we will continue our expanded focus on money fund regulations and Rule 2a-​7, with two sessions on the topic (​past and potential future), and we'​ve added new sessions on "​offshore" money funds and technology tools. (NOTE: Our Money Fund Intelligence, MFI XLS and November 30 performance data and products was sent to subscribers and updated on the website Friday morning. Our Money Fund Wisdom database has also already been updated.)

The morning of Day One of the 2013 MFU agenda includes: Welcome to Money Fund University, History & Current State of Money Market Mutual Funds with Peter Crane, President & Publisher, Crane Data and Sean Collins, Sr. Economist, Investment Company Institute; The Federal Reserve & Money Markets with Joseph Abate, Director F-​I Strategy, Barclays Capital and Brian Smedley, U.​S. Rates, Bank of America Merrill Lynch; Interest Rate Basics & Money Fund Math with Phil Giles, Adjunct Professor, Columbia University; and, Ratings, Monitoring & Performance with Viktoria Baklanova, Senior Director, Fitch Ratings, Joel Friedman, Senior Director, Standard & Poor'​s, and Crane Data'​s Peter Crane.

Day 1'​s afternoon agenda includes: Instruments of the Money Markets Intro with Alex Roever, Managing Director, J.​P. Morgan Securities; Instruments: Repurchase Agreements with Ellie Boldenow, Executive Director, J.​P. Morgan Securities; Instruments: Treasuries & Govt Agencies with Sue Hill, Senior Portfolio Manager, Federated Investors and Michael Duke, Asst. VP, G.​X. Clarke & Co.; Instruments: Commercial Paper & ABCP with Rob Crowe and Jean-​Luc Sinniger of Citi Global Markets; Instruments: CDs, TDs & Bank Debt with Garret Sloan, F-​I Strategist, Wells Fargo Securities and Dave Lummis, President, J.​M. Lummis & Co.; Instruments of the Money Markets: Tax-​Exempt Securities, VRDNs, TOBs & Muni Bonds with Colleen Meehan, Senior PM, The Dreyfus Corp. and Rick White, Director, Wells Fargo Securities; and, Credit Analysis & Portfolio Management with Adam Ackerman, VP & Portfolio Manager, J.​P. Morgan Asset Management.

Day Two'​s agenda includes: Money Fund Regulations: 2a-​7 Basics & History with John Hunt, Partner, McLaughlin & Hunt LLP and Joan Swirsky, Of Counsel, Stradley Ronon; Regulations II: Recent & Future Rule Changes with Stephen Keen, Partner, Reed Smith and Joan Swirsky; Offshore & European Money Fund Primer, with Peter Crane and John Hunt; and, Technology Tools: Money Market Software, with Crane discussing his Money Fund Wisdom database, Bloomberg'​s Anthony Mossa talking about their money market functions and data, and Investortools discussing their SMART Rule 2a-​7 compliance software.

New portfolio managers, analysts, investors, issuers, service providers, and anyone interested in expanding their knowledge of "​cash" investing should benefit from our comprehensive program. Even experienced professionals should enjoy a refresher course and the opportunity to interact with peers in an informal setting. Attendee registration for Crane'​s Money Fund University is $​500. Exhibit space is $​2,​000 and sponsorship opportunities are $​3K, $​4.​5K, and $​5K. A small block of rooms have been reserved at the Roosevelt Hotel in New York. The conference negotiated rate of $​229 plus tax is available through December 31st.

We'​d like to thank our 2013 MFU sponsors -- G.​X. Clarke & Co., Fitch Ratings, Dreyfus/​BNY Mellon CIS, J.​P. Morgan Asset Management, BofA Global Capital Management, Invesco, Investortools, and Standard & Poor'​s -- for their support, and we look forward to seeing you in New York next month. E-​mail Pete for the latest brochure or visit www.​moneyfunduniversity.​com to register or for more details.

Crane Data is also preparing to publish the preliminary agenda and is accepting registrations for its big show, Money Fund Symposium, which will be held June 19-​21, 2013, at the Hyatt Regency in Baltimore, Md.. (​See www.​moneyfundsymposium.​com for details.) Let us know if you'​d like more information on this event, and watch for more information in coming weeks.

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U.​S. Securities & Exchange Commissioner Luis Aguilar has released a "Statement on Money Market Funds as to Recent Developments," which announces the release of an SEC study on investors behavior, the 2010 2a-​7 amendments and the impacts of future reform. Aguilar says, "There have been recent developments related to the Securities and Exchange Commission'​s consideration of potential reform of money market funds that I would like to highlight. On November 30, 2012, the SEC staff delivered to the Commission its report delving deeper into the causes of investor redemptions in 2008, the efficacy of the Commission'​s 2010 amendments to strengthen Rule 2a-​7 (​the principal rule that governs money market funds), and the potential impacts of future reform on issuers and investors. This is a welcome development. As I previously stated (​see Aguilar'​s Aug. 29 comment), I have been requesting this analysis so that it could inform the dialogue as to any further money market fund reform. The staff'​s report is a response to a request made in mid-​September by a majority of the Commission (​Commissioners Aguilar, Paredes and Gallagher) that asked the Division of Risk, Strategy, and Financial Innovation to conduct a study to answer a series of questions intended to inform the continuing dialogue. I look forward to the staff'​s report being made public, so that the Commission can benefit from the public dialogue. (​This report was just released.)"

He continues, "There have also been developments in the consideration of the potential impact of assets migrating from existing transparent, regulated money market funds to opaque, unregulated funds (​sometimes referred to as Liquidity Funds) as a result of structural changes to money market funds. Given the level of transparency and investor engagement in regulated, transparent money market funds subject to Rule 2a-​7 (​the principal rule governing money market funds), it remains a concern that assets could flow to unregulated, opaque funds. Many do not realize that due to the 2010 Amendments, money market funds have become one of the most transparent financial instruments for both regulators and investors. The SEC worked very hard to implement new disclosure requirements that now provide a great deal of useful information on individual money market funds, and the industry as a whole. As a result of these new requirements, the SEC receives monthly reports on Form N-​MFP that contain a wealth of data, which is also made available to the public on a delayed basis. Moreover, investors and interested parties are able to monitor a fund'​s portfolio holdings through its website. Additionally, other domestic and foreign regulators have relied on the data to understand money market fund holdings as they affect other regulated entities within the financial system. Accordingly, the transparency of regulated money market funds provides a crucial safeguard in monitoring systemic risk."

Aguilar explains, "The outflow of money fund assets to an unregulated market is a significant systemic risk concern, and can result in harm to our market and investors. As was stated by an SEC spokesperson, this was not a concern shared by the SEC staff. However, the SEC staff'​s recent report has now identified the issue of migration to unregulated products and is, for the first time, offering a more in-​depth analysis. Moreover, the new Director of Investment Management, Norm Champ, who has experience with unregulated funds, has indicated to me that the staff is now actively considering this issue."

He writes, "​Additionally, both Secretary Geithner and FSOC have expressly raised the need to address the concern of money fund assets migrating to an opaque, unregulated market as a result of structural changes to money market funds. The serious consideration by the SEC staff and FSOC of the potential migration of money fund assets to opaque, unregulated funds is also a welcome development. These developments are important to address the issues that have been identified regarding money market funds and will serve to inform the nature of any needed reforms. The goal is to act in the best interests of investors and the public interest."

The 98-​page SEC study, "Response to Questions Posed by Commissioners Aguilar, Paredes, and Gallagher," which was prepared by the SEC'​s staff of Division of Risk, Strategy, and Financial Innovation, says, "This report addresses the questions posed by Commissioners Aguilar, Paredes, and Gallagher in their September 17, 2012 memo to Chairman Schapiro and Director Lewis. The Commissioners' specific questions can be grouped into three categories. The first category addresses the causes of investor redemptions of prime money market fund shares and purchases of Treasury money market fund shares during the 2008 financial crisis. Many potential explanations exist for the money market fund flows during this period. Since the explanations are not mutually exclusive, it is not possible to attribute shareholders' redemptions and purchases to any single explanation. This report provides evidence in support of each of the different explanations such as flights to quality, liquidity, transparency, and performance. The failure of Lehman Brothers and the breaking of the buck by The Reserve Primary Fund occurred contemporaneously with fund flows, perhaps triggering them. Investors, however, did not appear to react to the earlier financial distress of Bear Stearns or the government'​s support of Fannie Mae and Freddie Mac."

The Executive Summary continues, "The Commissioners asked whether money market funds that break the buck outside a period of financial distress would cause a systemic problem. RSFI documents that a number of funds received or requested sponsor support during non-​crisis times, an indication that defaults and rating downgrades have led to significant valuation losses for individual funds. With the exception of The Reserve Primary Fund, however, these funds' distress did not trigger industrywide redemptions. This finding suggests that idiosyncratic portfolio losses may not cause abnormally large redemptions in other money market funds. However, data is limited even on these and other potential events because the instances where sponsor support was provided generally were not publically disclosed to money market fund investors and thus, it is difficult to determine the exact number of funds that might have been affected or the consequences if investors had been aware of sponsor support."

The study says, "The second category of Commissioner questions covers the efficacy of the 2010 money market fund reforms in three general areas: fund characteristics, the events during the summer of 2011 and an analysis of the potential effect of the reforms on money market funds in 2008 had they been in place. First, the report considers the effects of the reforms on fund characteristics, including interest rate risk, liquidity, and credit risk. The report documents that the reduction in maximum weighted average maturity (​WAM) from 90 to 60 days did not cause all funds to lower their WAMs. Instead, the largest effect was on funds that had WAMs above 60 days. For example, the 95th percentile decreased from approximately 70 days at the end of 2009 to approximately 55 days at the end of 2010. The range of fund shadow prices contracted after the 2010 reforms."

Finally, the summary adds, "Third, the Commissioners asked how money market funds would likely have performed during the events of September 2008 had the 2010 reforms been in place at the time. The effect of heightened liquidity standards on fund resiliency, given specific levels of capital losses and redemption activity, is examined using money market fund portfolio holdings in September 2008. The findings indicate that funds are more resilient now to both portfolio losses and investor redemptions than they were in 2008. That being said, no fund would have been able to withstand the losses that The Reserve Primary Fund incurred in 2008 without breaking the buck, and nothing in the 2010 reforms would have prevented The Reserve Primary Fund'​s holding of Lehman Brothers debt. The third set of questions relates to how future reforms might affect the demand for investments in money market fund substitutes and the implications for investors, financial institutions, corporate borrowers, municipalities, and states that sell their debt to money market funds." (​Look for more excerpts from the Study tomorrow.)

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As we wrote yesterday, comment letters have begun to appear on www.​regulations.​gov, the website where feedback on the FSOC'​s recent "​Proposed Recommendations Regarding Money Market Mutual Fund Reform" is submitted and posted. Several oddball letters have appeared, but a second legitimate posting, by the Chamber of Commerce, urges the FSOC to allow more time for feedback. The Chamber'​s letter says, "The U.​S. Chamber of Commerce ("​Chamber") is the world'​s largest business federation representing the interests of over three million companies of every size, sector and region. The Chamber created the Center for Capital Markets Competitiveness ("​CCMC") to promote a modern and effective regulatory system for the capital markets to promote economic growth and job creation. The CCMC appreciates the opportunity to comment on the Proposed Recommendations Regarding Money Market Mutual Fund Reform ("​the Proposal") issued by the Financial Stability Oversight Council ("​FSOC" or "​the Council") and published in the Federal Register on November 19, 2012."

The Chamber'​s David Hirschmann writes, "As acknowledged in the Proposal, the potential changes to money market mutual fund regulation could have a significant impact on the how businesses, states, and municipalities manage short-​term liquidity -- both as investors and as issuers of short term debt. Money market mutual funds play an important role in the U.​S. economy. Many of the Chamber'​s members rely on these funds both as investment products as well as short-​term financing vehicles for their cash management practices. As such, the CCMC supports regulations that strengthen the utility and vibrancy of these funds, including the amendments to Rule 2a-​7 that the Securities and Exchange Commission adopted in 2010."

He explains, "The reform concepts included in the Proposal, however, appear to present some harmful consequences to users of money market mutual funds. We hope the FSOC comment process will provide an opportunity for a thorough analysis of the each concept and its corresponding impact on short-​term investment and financing for companies, cities, states, as well as the impact on retail investors who rely on money market mutual funds. We also note that the FSOC has requested input on other alternatives that could build on the reforms already implemented, to strengthen the resiliency and safeguard the utility of this valuable cash management product."

The Chamber continues, "Accordingly, and for the reasons outlined below, we are writing to respectfully request that the FSOC extend the comment period an additional 60 days, in order to allow corporate and other users of money market mutual funds the necessary time to provide detailed analysis of the economic and operational implications resulting from the Proposal. Comments on the Proposal are due January 18, 2013. In that regard, the CCMC is concerned that the business community, state and municipal governments, and other stakeholders, will not have sufficient time under the current schedule to thoroughly analyze and comment on the Proposal."

The letter adds, "The CCMC believes that the request for an extension is reasonable and appropriate in light of the present circumstances. First, the Proposal would make fundamental structural changes to money market mutual funds, an important cash management tool for investors, businesses, and state and municipal governments. The Proposal sets forth three different alternative approaches that may have significantly different impacts on investors and parties that receive funding from money market mutual funds and, accordingly, must each be evaluated and analyzed by commenters. The significance of these potential changes cannot be understated, as money market mutual funds provide investors, businesses, and state and municipal governments with the flexibility needed to meet short-​term funding obligations and deploy reasonable cash management strategies that support their everyday operations. By playing this critical role in sound financial management, these funds provide the benefits of stability, liquidity, and return. Money market mutual funds represent a major source of funding, owning nearly 40% of corporate commercial paper and more than 60% of the short-​term municipal securities outstanding today. This source of financing is vital for businesses to meet their working capital needs and for state and local governments to fund critical infrastructure projects. No alternatives with the same multiple benefits are available to replace money market mutual funds."

The Chamber says, "Second, the comment period falls during a time when many of the corporate and state and local treasurers and other finance officials who will be dealing with the consequences of new money market mutual fund regulation will be busiest -- year end. Treasurers and other finance officials are working to ensure adequate financing is in place for their respective companies and municipalities, improvements to cash balances on companies' financial statements are made by calendar year-​end, and that books are closed within weeks of year end. The fourth quarter is also a time when many companies' annual budgets must be finalized. Further, many state and local governments are in the throes of administration changes after last months' election. Therefore, the time constraints of the comment period may severely impair the ability of interested parties to study and comment on the Proposal."

The letter tells us, "Finally, because the Council provided only a cursory economic analysis of the impact of the proposed changes to investors and issuers, and failed to adequately explain the many assumptions that it used, it is incumbent on stakeholders to fill the void and provide data necessary for the Council to perform the requisite analysis. Some of the options included in the Proposal will require significant information technology changes to treasury workstations and accounting systems, as well as development, testing, and implementation of clearing systems that would feed fund data to institutional investors. As such, stakeholders will need adequate time to consult with third parties to assess the costs and time needed to implement the options outlined in the Proposal in order to have the ability to provide fully considered comments to the Council."

Finally, the Chamber writes, "For these reasons, the CCMC respectfully requests that FSOC extend the comment period to respond to the Proposal by an additional 60 days. Given the scope and complexity of the Proposal and the impact that this Proposal -- if implemented -- could have on the economy, we believe that this request is reasonable and appropriate. We thank you for your consideration of this request and would be happy to discuss these issues with the Council."

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The first legitimate comment letters responding to the Financial Stability Oversight Council'​s Nov. 13 "​Proposed Recommendations Regarding Money Market Mutual Fund Reform" have begun appearing on the www.​regulations.​gov website. (​Search for FSOC-​2012-​0003.) The first is a letter from Reed Smith'​s Stephen Keen, who questions inconsistencies in the FSOC'​s proposals on behalf of client Federated Investors. Keen writes, "​This letter is in regard to your Proposed Recommendations Regarding Money Market Mutual Fund Reform, 77 Fed. Reg. 69455 (​Nov. 19, 2012) (​the "​Proposal"). We are writing on behalf of Federated Investors, Inc. to request that the Financial Stability Oversight Council ("​FSOC") amend Alternative One in the Proposal to specify whether FSOC is proposing to recommend to the Securities and Exchange Commission (​the "​SEC"): (​a) that the SEC "​remov[​e] the special exemption that currently allows MMFs to utilize amortized cost accounting and/​or penny rounding to maintain a stable NAV," as stated on page 30 of the Proposal, or (​b) that the SEC also adopt new regulations requiring money market funds ("​MMFs") to set their price per share at $​100 and calculated their share price to the nearest penny, as described on page 31 of the Proposal."

Keen explains, "The current Proposal makes it impossible for the public to tell whether FSOC'​s proposed recommendation would be "​consistent with the requirements that apply to all other mutual funds," as represented in the Proposal, or whether FSOC is proposing to recommend that MMFs comply with a standard ten times more onerous than the standard for other mutual funds. FSOC cannot expect the public to provide meaningful comments on its proposed recommendation, as required by section 120 of the Dodd-​Frank Wall Street Reform and Consumer Protection Act, if FSOC does not clearly inform the public of what it proposes to recommend."

He continues, "There are no current laws or regulations that require any investment company registered under the Investment Company Act of 1940 (​the "​1940 Act") to offer its shares at any particular price. Although MMFs customarily seek to maintain a stable $​1 price per share, this is not required by rule 2a-​7 (​the regulation "​that currently allows MMFs to utilize amortized cost accounting and/​or penny rounding to maintain a stable NAV"). The tendency of other types of investment companies to offer their shares at an initial price of $​10 is also a market custom, not mandated by any regulation."

Keen writes, "Thus, removing the special exemption provided by rule 2a-​7 would not require MMFs to change their current share prices from $​1. Instead, loss of the exemption would require MMFs to comply with Accounting Series Release No. 219 ("​ASR 219"), as noted in footnote 69 of the Proposal. All that ASR 219 requires is for: any money market fund which reflects capital changes in its net asset value per share [​to] calculate, and utilize for purposes of sales and redemptions, a current net asset value per share with an accuracy of one-​tenth of one percent (​equivalent to the nearest one cent on a net asset value of $​10.​00)." The reference to $​10 is clearly an illustration and not a requirement. ASR 219 would permit a MMF to continue to use a $​1 share price, provided the fund calculated its net asset value per share ("​NAV") to the nearest one-​tenth of a cent."

He tells FSOC, "The Proposal claims, however, that "[​u]​nder this alternative, each floating-​NAV MMF would reprice its shares to $​100.​00 per share (​or initially sell them at that price) to be more sensitive to fluctuations in the value of the portfolio'​s underlying securities than under a $​1.​00 share price." To illustrate this point, the Proposal states that, "​If the fund'​s shares were priced at $​100.​00, ... [​following a 5 basis point loss] the fund'​s share price would decrease by 5 cents to $​99.​95." This would happen only if the SEC (​a) adopted a new regulation requiring certain funds to offer their shares at a price of $​100 and (​b) changed its interpretation of the 1940 Act to require these funds to calculate their NAV more accurately than currently required by ASR 219."

Keen comments, "This means that the current Proposal either (​a) incorrectly describes the consequences of recommending that the SEC remove the current exemption provided by rule 2a-​7 or, more likely, (​b) incorrectly states the recommendation proposed as Alternative One. In either case, this error will confuse and mislead members of the public who may be affected by the recommendation and interested in commenting on Alternative One. Our greatest concern is that the Proposal misrepresents what FSOC intends to recommend. This might lead some users of MMFs who would be willing to accept fluctuations in a MMF'​s share price "​consistent with the requirements that apply to all other mutual funds," but who would strongly object to the imposition of a higher standard, not to comment on Alternative One or even to comment in support of Alternative One because they do not understand its true import."

He tells us, "The Proposal'​s inconsistent explanation of Alternative One will also impair FSOC'​s ability to interpret the comments it receives. Unless the commenter goes into further detail, FSOC could not tell whether general comments in support of "​requiring money market to float their net asset value," "​the floating net asset value alternative" or Alternative One support imposition of the same standard as other mutual funds or support imposition of a much higher standard. Even comments explicitly in favor of a consistent standard for all mutual funds (​including MMFs) could not be interpreted as definitively against imposing a high standard, due to the Proposals inaccurate illustration of the current standard for calculating a mutual fund'​s NAV."

Keen writes, "Assuming that FSOC intends to propose that the SEC impose a higher standard for accuracy on MMFs than on other mutual funds, the Proposal also lacks two key elements needed for meaningful comments. First, FSOC needs to explain which mutual funds it would recommend subjecting to the higher standard. Otherwise, the "​other open-​end investment companies that hold a significant amount of debt securities" also addressed in ASR 215 cannot tell whether the recommended higher standard may apply to them as well. Second, FSOC must explain how a higher standard would be consistent with the provisions of sections 2(​a)(​41) and 22 of the 1940 Act, and rule 2a-​4 thereunder, which were interpreted by the SEC in ASR 219. In particular, FSOC should explain how these provisions authorize the SEC to apply inconsistent standards of accuracy to different classes of mutual funds."

He says, "​Congress clearly wanted FSOC to consider the views of affected parties before making a recommendation to a principal agency under section 120. This cannot happen if FSOC fails to articulate clearly the proposed recommendation in its notice of the public. The difference between recommending that MMFs adhere to the same standards as other mutual funds and recommending that they adhere to a standard that is ten times more exact is striking and cannot be overlooked. Unless corrected, it threatens to undermine the integrity of the public comment process."

Finally, Keen writes, "We therefore request that FSOC amend Alternative One of the Proposal either: (​a) to conform the illustration on page 31 to the recommendation stated and described on page 303 or (​b) to conform the proposed recommendation to the example, by stating that FSOC proposes to recommend new requirements as well as the removal of exemptions, and describing to which funds the new requirements would apply and what they would entail. The amendment also should extend the public comment period to allow a full sixty-​day period to comment on the revised Proposal. Failure to amend the Proposal may jeopardize the validity of any recommendation FSOC ultimately may make to the SEC regarding a floating NAV for MMFs."

Note: Stephen Keen will again be part of our faculty for Crane'​s Money Fund University, which will take place Jan. 24-​25, 2013, at The Roosevelt Hotel in New York City. He will present, along with Stradley Ronon'​s Joan Swirsky, on "Regulations II: Recent & Future Rule Changes."

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In late November, law firm Bingham put out a brief entitled, "FSOC Turns Up the Heat on Money Market Fund Reform, which sums up the situation regarding future money fund regulations following the FSOC'​s release of its "Proposed Recommendations Regarding Money Market Mutual Fund Reform." The alert, written by Lea Anne Copenhefer, Roger P. Joseph and Caroline W. Cai," says, "On November 13, 2012, stating that "[​r]​eforms to address the structural vulnerabilities of money market mutual funds ... are essential to safeguard financial stability", the Financial Stability Oversight Council ("​FSOC") voted unanimously to propose for public comment possible recommendations for money market fund reform. FSOC'​s vote signals a growing impatience with the status quo and in effect rejects reform measures proposed by the money market fund industry such as implementing liquidity fees and/​or temporary restrictions on redemptions during times of market stress."

Bingham explains, "Three months ago, the U.​S. Securities and Exchange Commission Chairman Mary Schapiro announced that the SEC was unable to move forward with the staff'​s money market fund reform proposal due to a lack of support from a majority of the SEC commissioners. Shortly thereafter, U.​S. Treasury Secretary Timothy Geithner, who also serves as the Chairman of FSOC, urged FSOC to step in and take up money market fund reform. FSOC complied, and it did so quickly. Just 47 days after Secretary Geithner urged FSOC to act, it published for comment three recommendations to reform money market funds pursuant to its authority under Section 120 of the Dodd-​Frank Wall Street Reform and Consumer Protection Act."

The alert continues, "According to the FSOC release, the proposed recommendations aim to "​address the activities and practices of money market funds that make them vulnerable to destabilizing runs: (​i) the lack of explicit loss-​absorption capacity in the event of a drop in the value of a security held by an money market fund, and (​ii) the first-​mover advantage that provides an incentive for investors to redeem their shares at the first indication of any perceived threat to a money market fund'​s value or liquidity." However, FSOC itself asks whether the recommendations would if implemented in fact achieve the desired results."

Bingham adds, "FSOC'​s proposed recommendations are not the latest words on the topic of money market fund reform. Pressure for reform continues to build as regulators from around the world zero in on money market funds. Five days after FSOC published its proposed recommendations, the Financial Stability Board issued a report on global shadow banking in which it identified money market funds' susceptibility to runs as a systemic risk. In particular, the Financial Stability Board endorsed the policy recommendation issued by the International Organization of Securities Commissions to move money market funds from a stable NAV to a floating NAV."

They conclude, "The pressure on money market funds and the money market fund industry is clearly mounting, and some kind of further regulatory action appears increasingly likely. Whether that action will effectively address the issues faced in 2008 is uncertain. Likewise, it remains to be seen whether regulatory action will make money market funds less attractive to investors, and thus cause the industry to shrink, with potentially negative economic repercussions. Nonetheless, the concern by global financial regulators about shadow banking helps to explain FSOC'​s insistence on quick action, even in the face of uncertainty as to its effects."

In other news, we noticed a startling increase in the size of the money fund industry in FSOC'​s "​Proposed Recommendations". They write in their "Description of Money Market Funds, "MMFs are a type of mutual fund registered under the Investment Company Act of 1940 (​the "​Investment Company Act"). Investors in MMFs fall into two categories: (​i) individual, or "​retail" investors; and (​ii) institutional investors, such as corporations, bank trust departments, pension funds, securities lending operations, and state and local governments, that use MMFs for a variety of cash management and investment purposes. MMFs are widely used by both retail and institutional investors for cash management purposes, although the industry has become increasingly dominated by institutional investors. MMFs marketed primarily to institutional investors account for almost two-​thirds of assets today compared to about one-​third of industry assets in 1996."

FSOC continues, "MMFs are a convenient and cost-​effective way for investors to achieve a diversified investment in various money market instruments, such as commercial paper ("​CP"), short-​term state and local government debt, Treasury bills, and repurchase agreements ("​repos"). This diversification, in combination with principal stability, liquidity, and short-​term market yields, has made MMFs an attractive investment vehicle. MMFs provide an economically significant service by acting as intermediaries between investors who desire low-​risk, liquid investments and borrowers that issue short-​term funding instruments. MMFs serve an important role in the asset management industry through their investors' use of MMFs as a cash-​like product in asset allocation and as a temporary investment when they choose to divest of riskier investments such as stock or long-​term bond mutual funds."

The report adds, "The MMF industry had approximately $​2.​9 trillion in assets under management ("​AUM") as of September 30, 2012, of which approximately $​2.​6 trillion is in funds that are registered with the SEC for sale to the public. This represents a decline from $​3.​8 trillion at the end of 2008. As of the end of 2011, there were 632 such funds, compared to 783 at the end of 2008." A footnote explains that the $​2.​9 trillion is, "Based on data filed on SEC Form N-​MFP as of September 30, 2012;" and that the $​2.​6 trillion is from ICI'​s "​Weekly Money Market Mutual Fund Assets" (​Oct. 25, 2012)." We'​ll let you know once we find out what kinds of funds and which managers account for the $​300 billion increase.

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