​

Eric Rosengren, President & Chief Executive Officer of the Federal Reserve Bank of Boston gave a presentation in London yesterday entitled, "Avoiding Complacency: the U.​S. Economic Outlook, and Financial Stability," which discussed money funds and risks in the short-​term funding markets." Rosengren says in the middle of his talk, "This past financial crisis was a primer on vulnerabilities to short-​term funding. Specifically, wholesale funding utilized by large global banks dried up during the financial crisis. As large banks sought to reduce their exposure to counterparties of concern, the term of loans made in the marketplace decreased, and the cost of short-​term credit spiked. And many of the problems were occurring outside of traditional depository institutions. Bear Stearns and Lehman Brothers were investment banks, not commercial banks. As counterparties dramatically reduced both unsecured and secured lending to these two entities, funding was no longer available and the firms failed. Similarly, money market mutual funds with exposures to investment banks in many cases required support from parent or sponsoring entities. And one fund without parental support -- the Reserve Primary Fund -- sustained a credit loss that would ultimately lead to its liquidation. This led to a run on prime funds, which in turn further impaired short-​term credit markets."

He continues, "​As Figure 9 shows, the money market mutual fund industry held $​3.​5 trillion in assets under management in mid September 2008. Prime funds, which hold a mix of Treasury and agency securities and other short-​term debt instruments (​including commercial paper and large certificates of deposit), held nearly 60 percent of industry assets, or $​2.​1 trillion. When the Reserve Primary Fund "​broke the buck," outflows from prime funds totaled roughly $​500 billion over a four-​week period. Although much of the outflow went into government money market mutual funds (​which hold only Treasury and agency securities, and repurchase agreements backed by such securities), these inflows did little to ease the strains being felt in the corporate funding markets resulting from the exit from prime funds."

Rosengren explains, "U.​S. money market funds are thought of and marketed as highly liquid, low-​risk investments with many of the same characteristics as traditional bank deposits. As a result, money market fund investors and money market fund managers should be highly sensitive to changes in underlying risks. The crisis in autumn of 2008 taught us that safeguarding against runs on financial entities like money market funds -- entities that do not have a large, stable, core deposit base and do not have ordinary access to the central bank'​s "​lender of last resort" function -- was and is important, unfinished work if we are to have a more stable financial system."

He comments, "A number of significant reforms are being contemplated by the U.​S. Securities and Exchange Commission (​SEC) to reduce the risks surrounding money market funds. But even with significant reforms such as these -- reforms, by the way, that I am highly supportive of and will say more about at a conference in Atlanta in two weeks -- money market funds will continue to be a potentially unstable source of U.​S. dollar funding. From a financial stability perspective, we need to recognize the possibility of a deterioration in the ability or willingness of the money market funds to keep providing a dependable source of funds to counterparties (​for example, the issuers of commercial paper that the funds purchase). This could occur as a result of a change in the risk profile of those counterparties."

Rosengren adds, "Wholesale funding issues also played an important role in recent European banking problems. Some European banks were too dependent on wholesale funding, particularly funding coming from U.​S. money market funds. Figure 10 shows the European exposure of U.​S. prime money market funds over the past year. Given the changes in the risk profile of some banks, as a result of increases in sovereign debt risk, money market funds have sought to reduce what was their large risk exposure to European financial institutions. Most money market funds in the beginning of 2011 had already dramatically reduced exposure to peripheral financial institutions. Over the second half of last year there was a very significant decline in exposure to euro-​zone financial institutions. (​In addition, remaining exposure was shortened in tenor, meaning time to maturity). Figure 10 highlights the declines across Europe and Figure 11 shows the decline over the course of 2011 more specifically by certain countries."

He tells us, "Because U.​S. money market funds had been a significant source of short-​term funds for European institutions, money funds' move away from short-​term European debt resulted in a significant shortage of dollar funds available to these institutions. I will show you some market indicators of these shortages in a moment. No money market fund encountered a problem meeting investor redemptions during the European sovereign debt crisis. But even without such a problem, money market funds still had an impact on the availability of credit to financial institutions for which the perception of risk had changed."

Rosengren also says, "Problems with financial stability do not require a failure to create a significant disruption in the flow of credit. In light of the incentives facing money market funds, financial institutions that rely heavily on them for funding put themselves in a position where a short-​term change in perceived risk can create significant funding problems. And as we have seen repeatedly over the past several years, funding problems at one institution can quickly spread to the financial system as a whole."

He continues, "​Figure 12 highlights that funding challenges for European banks were developing as money market funds reduced their European exposures. The rise in the LIBOR to OIS spread indicates that financial institutions became more concerned about lending to each other as money market funding declined. Similarly, the sharp rise in the rates on the 3-​month euro-​dollar foreign exchange swap indicates the pressure exerted by reduced dollar funding from the money market funds on European financial institutions' funding."

Rosengren summarizes, "In short, the rational reaction of money market funds to perceived changes in risk -- reducing European exposure -- led to various funding pressures. The issues eventually were addressed by central bank actions that significantly expanded liquidity, both through foreign exchange swaps and through European Central Bank (​ECB) term lending to European institutions. While these actions have been very important for stabilizing financial markets, I believe we need to get to the point of having a more resilient financial infrastructure that does not require central bank interventions during times of stress."

Finally, he adds, "For financial institutions and supervisors this implies thinking more carefully about stress scenarios, and specifically about whether critical funding will evaporate when it is needed most. While Basel Capital Accord proposals will help in this respect, I would strongly suggest that stress testing scenarios assess how well risk-​sensitive sources of short-​term funding will hold up in an environment of heightened risk. This liquidity-​focused assessment would be an important complement to current stress testing, and a prudent aspect of risk management."

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Last week and earlier this week, we'​ve been citing comments from the Investment Company Institute'​s recent Mutual Funds and Investment Management Conference in Phoenix. ICI'​s Jane Heinrichs moderated a panel which included: Robert Plaze, Deputy Director, Division of Investment Management, SEC, Paul Atkins, CEO, Patomak Global Partners, Stephen Keen, Counsel, Reed Smith LLP, Simon Mendelson, Global Co-​Head, Cash and Securities Lending, BlackRock Financial Management, and Lloyd Wennlund, Executive Vice President and Managing Director, Northern Trust Global Investors. We excerpt more comments from our transcription of the panel below.

BlackRock'​s Mendelson, when asked about the last round of Money Fund Reforms, commented, "​We were largely, as a firm, supportive of the [​2010] amendments. For a lot of the players, and this was true for us too, so much of it was reconfirming a lot of the practices that we had always embraced. We always held excess liquidity; we always managed our own liquidity limits. So again, other than the technical compliance issues, it didn'​t change that much. The environment is different now. We spend a lot more time thinking about Sovereigns. We spend a lot more time thinking about headline risk, in terms of names in the funds. But it hasn'​t changed that dramatically in terms of the day-​to-​day."

Keen noted, "​The other interesting thing to me was the slide that showed the excess 7- and 1-​day liquidity well over the limits, clearly not just there as a compliance buffer ... but it was a conscious decision to maintain more liquidity. Frankly, but for the managers maintaining lots of liquidity going into September '​08, there wouldn'​t have been $​300 or almost $​400 billion to pay out to shareholders. The funds have always been best and safest because the managers are always looking out for risk and taking appropriate steps to stop it. One of the ways you test that is to see that most people are behaving beyond the requirements of the rule.... It'​s a validation of that practice."

Atkins intoned, "I really take exception to the appellation of [​the term] '​shadow banking system'. If anything the money market mutual fund system is not operating in the shadows, it is operating as the securities markets ... out in the open. We are not taking bank-​type risks. All of the paper, of course, is very short versus a banking model of highly leveraged and way far out, unmatched obligations as far as risks and maturities and all that. It'​s operating in the open without the distortions of deposit insurance and too big to fail.... So, I think if anything, the "​shadowy" banking system is the one that we ought to argue against, which is the banking system itself. If anything the money market mutual system is an alternative market model. I think that it is powerful and has [​extensive] protections in place."

Mendelson explained later, "​We spent a bunch of time talking to clients about their reaction to floating NAV and we sat them down and we stipulated with them, "We get that you don'​t like this. We get that money markets for you are the '​killer app'. Let'​s imagine it'​s gone now and now you'​re really forced to deal with this floating NAV thing." We pushed them hard. We did not try to induce any outcome. What was clear in the conversations is that a good chunk of the clients would simply run screaming from the room. It'​s not a model that they could get used to. But there is a group that if you really explain to them how little a floating NAV floats.... What we found is that it would be $​10.​00 90% of the days, and plus or minus a penny over 99% of the time. We could get some people to relax about it."

Plaze explained, "The question now becomes not so much [​one of] capital to absorb all this losses, but rather a buffer that would replace the 50 basis point, essentially regulatory forbearance today, with some real assets. I'​m not going to tell you how much there; it is too early. I expect the current staff thinking now is to be indifferent as to how that capital is raised, which provides significant, sufficient exemptive relief so that each fund group can address this in what best fits its business model, which may change over time.... That would be a real funded source from which to absorb at least small losses.... We are talking about a relatively small amount, which is made stronger and provide a greater cushion with the holdback, liquidity restriction that we will talk about a little bit latter."

When asked whether Government funds would be exempt, he answered, "​It is very hard now to define what is a prime fund and what is a government fund.... There is some discussion and thought that a better approach, suggested I think by Fidelity, that would do a more of a risk-​based approach, says on the basis of daily liquid assets or non-​daily liquid assets.... Where it also deals with some of the issues Steve raised in his presentation what happens if you don'​t meet capital requirements.... Let'​s say if you couldn'​t meet the capital requirements then we can limit [​investments] to daily liquid assets or even liquid assets.... That allows for a yield capital that transition to a period of time which yield top off the capitals gets that to departments."

Finally, when asked if the FSOC will act if the SEC doesn'​t, Atkins responded, "I say "​Make my day." Ultimately, Dodd-​Frank has a lot of problems. It was a poorly drafted statute.... With respect to the Financial Stability Oversight Council, it is extremely problematic. It'​s 10 folks gazing into their crystal balls seeing when the next bubble might come up and prick it before it happens. Of course one person'​s bubble is another person'​s livelihood. We are seeing that play out here in respect money fund mutual funds. First questions is do they have the political will to do it? The second is do they have the statutory authority and even more constitutional authority to do it? ... I guarantee if they do act, there will be lawsuits.... I dont think it will pass muster ultimately.... It doesn'​t look like the Chairman of the SEC has the votes, but we will see how it turns out."

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This month, Money Fund Intelligence speaks with Invesco'​s Greg McGreevey, CEO of Fixed Income; Lyman Missimer, head of global cash management; and Tony Wong, head of global cash management research. We ask the three about recent initiatives, pending regulatory proposals, and a number of other money fund-​related issues. Excerpts of our interview follow.

MFI: Tell us a little bit about Invesco'​s history with money market funds. Missimer: Invesco has deep roots in the money fund space dating back to 1980 when we established our first money market portfolio. As a business, we leverage the strength of Invesco as an independent and global investment firm with a diversified base of assets, of which money markets constitute approximately 12%. There'​s a commitment to the space from the highest levels of Invesco'​s management, including Karen Dunn Kelley, Senior Managing Director for Investments, and CEO Marty Flanagan. Both Karen and Marty are very engaged in money market industry policy and leadership.

Wong: Our main differentiator has been and continues to be our long-​term approach to the money market business. We have a clear vision for a future in this industry that is grounded in our investment philosophy, client focus and organizational strength. Our investment philosophy and process have a reputation in the industry for being conservative -- in the positive sense of the word -- being careful and judicious. We embrace that. It'​s something our clients appreciate and have come to expect from us.

MFI: What have you been focusing on? McGreevey: I came on board recently to build on Invesco'​s existing and very solid foundation in the fixed income arena in order to pursue opportunities in a number of key areas where we believe we have a leadership position. Cash in clearly one of these areas. Part of our strategy moving forward will be to grow and support these areas in order to take them to the next level. Missimer: We'​re very conscious of what our shareholders want -- they'​ve been very clear -- to stay out of trouble and to stay away from headline credit risk to the extent possible by continuing to manage using the same proven style we'​ve employed for more than 30 years.

McGreevey: We are dedicated to this business. We absolutely believe that we have the right team and the right focus to continue driving investment performance. I believe that we can lever the 30 years of tremendous experience that we have in the money market business. We have a leadership position that we want to maintain and grow through our dedication to help clients meet their cash management needs.

MFI: What'​s been your biggest challenge? McGreevey: These have been challenging times for money market funds, particularly in the second half of 2011 with the Eurozone debt crisis, the downgrade of U.​S. debt and the persistent ultra-​low interest rate environment. But our long-​term approach to short-​term investing, grounded in principles of safety, liquidity and yield, have kept us well-​positioned to address these challenges. The main concern more recently has been possible additional regulatory reforms in the money market industry.

Missimer: Invesco prides itself on direct and regular communication with clients, and during these challenging times we have put particular emphasis on supplementing this with additional communications to help clients understand if and how the most recent headlines and economic news affect them. For example, in response to European concerns, in June of 2011 we began publishing and distributing exposures by country for all of our prime money market funds. We have been upfront and transparent with our clients.

MFI: You guys have never had any bailouts, correct? Wong: You are absolutely right. There has been no loss; no credit support agreements; no capital injections; no liquidity bailouts. I think this is a testament to how we look at this space and the efficacy of our proven investment process. With the shortest-​term asset class, we take a very long-​term approach focusing on safety and liquidity. That is something that we live by and breathe each and every day. We have a dedicated team on credit for the space as well as on the portfolio side.

Missimer: We'​ve always drawn clear lines between credit and portfolio management where credit would make decisions without undue pressure from the portfolio management team. This allowed them to make unbiased, independent decisions on whether we should buy a credit and for how long. I believe that process kept us out of trouble during the worst of times. That'​s always been a staple of our investment process and I think a lot of our peers have moved to that kind of model since 2008.

MFI: Can you talk about fee waivers and low rates? Missimer: As the Fed indicated in the last FOMC meeting, it intends to keep the target interest rate low well into 2014. So this will clearly continue to be a challenging environment for our industry. A lot has been said about fees being squeezed and expense ratios dropping in the industry. While we are closely monitoring the trend, we are confident our structure is less sensitive to these pressures. Over the past five years, the expense ratios for our funds have been below the industry average. Because our clients are largely institutional, we haven'​t had to waive as many fees. (​Look for more excerpts in coming days, or e-​mail info@​cranedata.​com to request the full Invesco interview.)

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Last Monday, the Investment Company Institute hosted its annual Mutual Funds and Investment Management Conference in Phoenix, Arizona, featured two keynotes with money funds as their main there, plus a panel on money market funds reform. (​See last week'​s "News," "SEC Commissioner Walter Asks Fund Companies to Re-​Engage at MFIMC" and "ICI'​s McMillan Says Plans for MMFs Outrageous, Time for SEC to Move On.") ICI'​s release on the panel explained, "Mutual fund industry experts and a representative from the Securities and Exchange Commission will discuss the current state of money market funds and the potential additional regulatory changes being pursued by the agency during the." ICI Senior Associate Counsel Jane Heinrichs moderated the panel that covered "expected SEC proposals to impose a floating net asset value (​NAV) or capital requirements and redemption restrictions on money market funds and how the proposals would impact investors." Panelists included: Robert Plaze, Deputy Director, Division of Investment Management, SEC, Paul Atkins, CEO, Patomak Global Partners, Stephen Keen, Counsel, Reed Smith LLP, Simon Mendelson, Global Co-​Head, Cash and Securities Lending, BlackRock Financial Management, and Lloyd Wennlund, Executive Vice President and Managing Director, Northern Trust Global Investors. Today, we finally got around to featuring comments from the panel (​we'​re still transcribing), and we feature some quotes from the SEC'​s Bob Plaze today. (​Look for more in coming days.)

After the ICI'​s Heinrich reviewed the current state of money funds, Plaze commented, "One of the things, with all of this [​Form N-] MFP data that we have, we are able to do a great deal and we can look into portfolios. We can understand a lot more what'​s going on than ever before.... We can try to understand and look at that risk that particular fund managers and fund groups are willing to take ... in dealing with this low risk environment. The neat slide that I have showed what the average gross yield.... We can look in to each one of those and understand how they are acquiring this significantly higher yield.... What risks they are willing to take, etc.... Even within 2a-​7, there is an opportunity to take additional risk, and those risks of course have consequences if the bets don'​t turn out the way they did. Which you saw in 2008 with Reserve Fund.... Their chickens ultimately came home to roost."

He continued, "​It'​s a long way of saying that 2a-​7, while narrowing the parameters of risk, still gives a great deal of room, since the ingenuity ... knows no bounds. These outliers are of concern to us because if an event happens with respect to one of these funds, the transmission to the rest of the fund industry is a concern. There'​s "​neighborhood risk" to be concerned about, let'​s call it. If one fund makes a mistake and assumes too much risk and something happens, it'​s not going to be contained to that one fund. It'​s going to spread as we saw in 2008. That'​s what we'​re spending a lot of time watching these days."

Later during the panel, Plaze said, "​Part of the problem with 2a-​7 over the years [​is that] we amend it to take care of the last problem.... We'​re always like generals fighting the last war; regulators fighting the last crisis. The tradeoff implicit in 2a-​7 is we limit your risks and you'​re able to use amortized cost. The question is whether that'​s breaking down, whether it'​s really realistic for us to regulate for risks and risk assumptions, given the fact that you have an industry that'​s driven by yield.... Rulemaking is so much more difficult to do than it was before.... We can see the dynamics play out within fund groups and we can see the risks, [​but] we don'​t always have very good tools to deal with those risks."

On the European concerns of last summer, Plaze commented, "​Something changed with institutional investors, demonstrating their skittishness. There weren'​t losses. There was only the threat of losses, and we saw huge redemptions. While we changed the liquidity side of the balance sheet, something else has happened on the other side of the balance sheet with institutional investors and how quick they are to pull out large amounts of money.... If there were losses, what would have been the consequences?"

He explained, "​The regulators were facing three choices coming out of 2008.... Make them all banks. Every time you use the word "​shadow banking system".... Two, make them more like mutual funds.... I think the third is, we listened to the industry, we need to maintain the stable NAV. It'​s what clients, the investors, want. We are in some sense path dependent. We'​ve done 30 years of stable NAV; floating NAV comes with some downsides also. [​This option would] try to come up with a hybrid in order to put some bank-​like protections in place for MMFs that would allow them to maintain the stable NAV and not lead them to the type of vulnerability to runs that we saw in 2008."

When asked about whether a floating NAV would even float, Plaze responded, "Obviously, they wouldn'​t float if you kept them at a dollar, so you would have to be talking about higher amounts.... These are issues and why that option might not be the optimal option.... If it really doesn'​t float, then investor behavior doesn'​t change. That'​s a weakness of the option."

Next, when asked whether the SEC has done any outreach or surveyed investors on a possible floating NAV, Plaze answered, "I would stipulate that they would not like it.... In some respects, what we'​re doing here is an exercise of taking costs that have been externalized and internalizing them and that'​s going to increase the cost of that product somehow. I don'​t know any investor, myself included, who would vote for that. At the same time, the idea is the sustainability of the product and the effect on the short-​term markets is really what is at issue here."

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The Investment Company Institute'​s Chief Economist Brian Reid posted yet another "Viewpoint," this one in response to comments yesterday from Federal Reserve Chairman Ben Bernanke on money market mutual funds' exposure to European credits. The update, entitled, "Bringing Money Market Funds' European Investments into Focus," says, "​In his written testimony on Capitol Hill today, Federal Reserve Board Chairman Ben Bernanke created a fuzzy and incomplete picture of money market funds and their investments in European-​headquartered financial institutions. Whether by intent or not, the Fed testimony left the impression -- magnified by media accounts -- that these funds have a unique and substantial vulnerability to any future turmoil in overseas markets."

Bernanke said to Congress yesterday, "​To help calm dollar funding markets and support the flow of credit to U.​S. households and businesses, the Federal Reserve acted in concert with major foreign central banks to enhance the U.​S. dollar swap facilities that were originally put in place during the global financial crisis and reestablished in May 2010.... The expanded use of the swap lines has helped to ease funding pressures on European and other foreign banks, lower tensions in U.​S. money markets (​in which foreign banks are major participants), alleviate pressures on foreign banks to reduce their lending in the United States, and boost confidence at a time of considerable strain in international financial markets.... Notably, U.​S. financial institutions have very limited direct net credit exposures to the most vulnerable euro-​area countries, and U.​S. money market funds also have almost no exposure to those countries."

He explained, "​Although U.​S. banks have limited exposure to peripheral European countries, their exposures to European banks and to the larger, "​core" countries of Europe are more material. Moreover, European holdings represented 35 percent of the assets of prime U.​S. money market funds in February, and these funds remain structurally vulnerable despite some constructive steps, such as improved liquidity requirements, taken since the recent financial crisis. U.​S. financial firms and money market funds have had time to adjust their exposures and hedge their risks to some degree as the European situation has evolved, but the risks of contagion remain a concern for both these institutions and their supervisors and regulators. In particular, were the situation in Europe to take a severe turn for the worse, the U.​S. financial sector likely would have to contend not only with problems stemming from its direct European exposures, but also with an array of broader market movements, including declines in global equity prices, increased credit costs, and reduced availability of funding."

ICI'​s Reid answers in his response, "The full picture: the majority of money market funds' European exposure is invested in banks that are integral players in the U.​S. financial system -- including banks that are on the Fed system'​s own list of official counterparties. The fact that they'​re getting some of their financing from money market funds doesn'​t add risk to the U.​S. financial system. What'​s unfortunate is that all the data that the Fed would need to provide a clearer picture are publicly available. We'​ve been pointing out the exaggerations in coverage of this issue for the last nine months."

He explains, "The Fed chairman made headlines with his statement that investments in European banks made up 35 percent of the portfolios of U.​S. prime money market funds in February. That'​s true. But while his testimony was careful to explain away the exposures that U.​S. banks have to potential financial strains in Europe, it failed to provide any of the detail that would put money market funds' investments into similar context."

He continues, "First, it'​s important to note that European-​based financial institutions that borrow in the short-​term U.​S. dollar market are typically large global banks with operations stretching well beyond Europe'​s borders -- including in the U.​S. There'​s also the fact that Europe is a big continent, and the risks of the eurozone debt crisis aren'​t spread evenly. Bernanke correctly noted that "U.​S. money market funds have almost no exposure" to "​the most vulnerable euro-​area countries. In fact, more than half of prime money market funds' European holdings are in banks headquartered in the United Kingdom, Sweden, and Switzerland -- all countries that don'​t use the euro for currency, and thus are outside the single-​currency zone that'​s vulnerable to debt crises in Greece and other "​peripheral" countries."

Reid tells us, "Money market funds' holdings in the eurozone amount to 15.​5 percent of their portfolios, and virtually all of those holding are in banks headquartered in Europe'​s strongest economies -- France, Germany, and the Netherlands. To get the most accurate picture, it helps to drill down to the holdings in individual banks. We can do that because money market funds are the most transparent financial product in America, disclosing every holding in their portfolios to the public every month. Here'​s what we find: 52 percent of U.​S. money market funds' holdings of European-​based institutions are invested in securities of banks that have U.​S. affiliates that serve as "​primary dealers".... Among the instruments of these primary dealers that U.​S. prime money market funds hold, half (​51 percent) are repurchase agreements. Such repos are fully collateralized, usually with U.​S. Treasury and government agency securities that these institutions hold precisely because they are primary dealers."

Finally, Reid adds, "​When money market funds invest in European banks that aren'​t primary dealers, they tend to be institutions with significant U.​S. operations, even if they'​re not household names. For example, Rabobank Nederland NV has both retail and corporate banking operations in the United States. Institutions like Barclays, Deutsche Bank, UBS, HSBC, and Credit Suisse are deeply embedded in the U.​S. financial markets. The fact that money market funds buy their short-​term debt does not create unique risks to the U.​S. financial markets. In fact, as primary dealers, these European-​headquartered banks would be heavy borrowers in the U.​S. markets even if money market funds didn'​t exist. Congress and the public deserve a clear picture of financial risks, and the details do matter."

In similar news, Fitch Ratings released its latest portfolio holdings update entitled, "U.​S. Money Fund Exposure and European Banks: A Partial Disengagement." It says, "U.​S. prime money market fund (​MMF) exposure trends continued to stabilize, as an equilibrium appears to be taking shape after the relatively large reductions in allocations to euro zone banks during second-​half 2011.... MMF exposures to European banks as a whole declined by 4% on a dollar basis since end-​January, while exposures to euro zone banks increased by 21%, driven by higher MMF allocations to French, German, and Dutch banks.... MMF exposures to euro zone banks have increased in each of the last two months but remain more than 60% below end-​May 2011 levels."

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Several more postings have been made in recent days to the SEC'​s "​President'​s Working Group Report on Money Market Fund Reform (​Request for Comment)" website. The latest batch includes another submission by "John D. Hawke, Jr., Arnold & Porter LLP, on behalf of Federated Investors, Inc., which breaks assets into investor types and estimates sweep assets at 14% (​over $​360 billion) of all money fund assets, yet another posting by "John W. McGonigle, Vice Chairman, Federated Investors, Inc., Pittsburgh, Pennsylvania," which blasts minimum balance requirements, and one by Tony Carfang and Cathy Gregg, Treasury Strategies, Inc., which analyzes a capital buffer requirement. We excerpt from each below.

The latest Hawke submission states, "​We are writing to supplement our comment letters dated December 15, 2011 and February 24, 2012, on behalf of our client Federated Investors, Inc., with information on the approximate size of each of the segments of specialized commercial users of money market mutual funds that are described in our previous letters. As discussed in our prior letters, radical changes to MMF regulation, including movement to a continuously floating NAV, a holdback or minimum balance requirement, or bank-​like capital requirements, would seriously undermine the utility of MMFs to businesses, governments, investors, and other private and public sector participants for a variety of specialized applications, including corporate payroll processing, storing corporate and institutional operating cash balances, bank trust accounting systems, storing federal, state and local government cash balances, municipal bond trustee cash management, consumer receivable securitization cash processing, escrow processing, 401(​k) and 403(​b) employee benefit plan processing, holding broker-​dealer and futures commission merchant customer cash balances, and holding cash sweep balances in cash management type accounts at banks and broker-​dealers. MMF shareholders in these segments operate using automated systems and processes that depend upon a predictable NAV, and same day and next-​day settlement of the full balances redeemed or invested."

The comment continues, "Federated has prepared these estimates using its own data as well as data that is commercially available from other sources. For some of the segments, the available information is nearly complete and provides a very close indication of the amounts involved in the segment. For certain other segments, the estimates are based on limited data and may be higher or lower than the actual amounts by a significant amount. The numbers indicate that individually and in the aggregate these specialized uses of MMFs represent very large dollar amounts and may represent 50% or more of aggregate MMF balances."

Hawke'​s post adds, "In light of operational and legal impediments to the continued use of MMFs in these segments after implementation of holdbacks, minimum balance requirements, continuously floating NAV, bank-​like capital requirements or other substantial changes to MMF regulation that are being considered, we believe that the changes to MMF regulation currently under discussion within the SEC Staff would result in significant disruptions for investors in these segments. The Commission'​s regulation and oversight of MMFs has been robust and successful, and the recent amendments to Rule 2a-​7 appear to have been highly effective in enabling MMFs to weather periods of unusual redemptions during last year. Imposition of a holdback, minimum balance requirement, bank-​like capital requirements, a continuously floating NAV, or other substantial changes to MMFs regulation would harm each ofthese specialized applications that have come to rely on MMFs, and would have adverse ripples throughout the economy. The economic importance of these segments, and the amounts involved, are very substantial. Far more detailed and accurate data needs to be gathered before the size of these segments and their economic importance can be fully understood, and the potential impact of any of the major changes upon these segments can be gauged."

The new McGonigle comment says, "We are writing to supplement the comments made in the letter of February 24, 2012, filed by Arnold & Porter LLP on behalf of Federated Investors, Inc., regarding proposals to impose redemption restrictions on money market funds. In this letter, Federated would like: first, to expand upon the March 2, 2012, comment letter of DST Systems, Inc. regarding the insurmountable operational difficulties entailed in imposing a minimum balance on money market fund accounts; and second, to direct the Commission'​s attention to state laws and provisions of fund organizational documents that would prevent money market funds from imposing any form of redemption restriction. Federated believes that the facts reviewed in this letter, coupled with our earlier comments, demonstrate that any form of continual redemption restrictions would seriously impair the utility of money market funds and tremendously increase the cost of their operations."

Finally, the TSI letter says, "On behalf of Treasury Strategies, Inc., we write to call your attention to our recent analysis of the consequences of requiring money market mutual funds to maintain a capital buffer. There are several troubling potential consequences of such a requirement. As we have noted in the enclosed copy of our report, a capital buffer may create incentives for investors and fund managers, as well as new compliance burdens, that would have the opposite result of the intended goals of financial reform."

It explains, "In brief, the existence of a buffer may create an initial false sense of comfort among investors, thereby attracting investors who are not properly cognizant of risk. Yet, this false confidence could easily give way to a run if and when losses are charged against the capital buffer. Any such charge would be likely to act as an "​early warning" signal to fund investors, encouraging them to exit the fund before the buffer was exhausted. Similarly, while financial reform is intended to result in decreased concentration and lower systemic risk, we conclude that a capital buffer may lead to greater risk-​taking as asset managers seek to increase yield, or to greater concentration of capital in the largest banks, as money fund sponsors exit the business. Perhaps most importantly, our analysis reviews the anatomy of financial runs, and summarizes how the Commission'​s 2010 amendments to Rule 2a-​7 have addressed the circumstances that trigger runs. We urge the Commission to consider how those rule changes have benefited the markets, and to evaluate whether further changes are truly needed, or would only result in unintended consequences."

​

Moody'​s Investors Service released a study entitled, "Money Market Funds: 2012 Outlook and 2011 Review" late last week. It says, "Money market funds will continue to be challenged in 2012 by unsettled credit, capital market, economic and regulatory conditions. Such pressures could be exacerbated by the behavior of confidence-​sensitive investors amid the continuation of the European debt crisis and challenging economic conditions in the US, as well as by the final outcomes of our rating reviews of European sovereigns, banks and securities firms with global capital markets operations, and securities supported or guaranteed by these entities, due to their potential regulatory implications."

It explains, "​The profiles of prime funds in particular are, and will likely continue to be, characterized by (​i) high levels of liquidity, (​ii) reduced, and shorter-​maturity exposures to European banks, (​iii) increased investments in US government securities and Aaa-​rated European government issues and (​iv) lower portfolio weighted average maturities (​WAMs) and weighted average lives (​WALs). These factors, combined with active portfolio management, as evidenced by the de-​risking of portfolios by fund managers in response to, and in some cases in expectation of, deterioration in market conditions, support our stable outlook for rated money funds in the US and Europe and their offshore jurisdictions."

Moody'​s Senior VP Henry Shilling writes, "It is our view that if and when the credit quality of eligible securities weakens, at least with respect to rated funds, most money market fund managers will proactively pursue a variety of measures to maintain the credit, liquidity and stability profiles of affected portfolios. Tax-​free funds, which are highly liquid, are expected to come under greater credit and supply pressures, while government and Treasury funds are better positioned to weather more challenging conditions."

He also says, "Money market funds are generally resilient to credit degradation within the investment-​grade universe as they concentrate on near-​term maturities and rotate out of deteriorating credits. That said, these investment vehicles are not entirely insulated from rapidly changing market conditions. While current stresses have been incorporated into our money market fund rating, rating watchlistings or downgrades may be appropriate for certain funds in the event of material deterioration in their credit and/​or stability profile due to sovereign and/​or banking exposures or other market conditions. In the current environment we are closely monitoring portfolios to assess their risk profiles, their managers' risk mitigation efforts, liquidity positions and fund flows for unusual redemption activity."

Moody'​s continues, "Beyond portfolio-​related considerations, additional regulatory changes to address continuing concerns about the susceptibility of money market funds to runs are likely to be proposed in the first half of 2012. Depending on their nature, further reforms could transform the money fund sector. They could accelerate consolidation in an industry that is already highly concentrated, and lead to elevated contagion risk in the long-​term, while increasing near- to intermediate-​term protections for investors against loss of principal."

Finally, it states, "This report summarizes the key events of the past year and focuses on the five factors that are most likely to dominate and shape the money fund sector in 2012, much as they did in 2011. They are as follows: Credit conditions. Credit conditions are expected to remain under pressure given continued uncertainties in Europe and the global banking sector as evidenced by the placement on review and assignment of negative outlooks to European sovereigns, banks and securities firms with global capital markets operations, and supported securities such as ABCP programs, VRDNs and VRDPs.... Supply of eligible securities. Further deterioration in credit quality is expected to reduce an already diminished supply of the highly rated instruments in which prime funds and tax-​free funds, and to a lesser degree, US Treasury and government funds, invest.... Name and sector portfolio concentrations. Prime money market funds are highly concentrated in securities issued by financial institutions, in general, and banks, in particular.... Low interest rates.... [​and] Regulatory developments. Regulatory initiatives by the Securities and Exchange Commission (​SEC) to address "​run risk" associated with money market funds are expected to be proposed this year. Further regulation could transform the money market fund industry."

​

This week'​s Mutual Funds and Investment Management Conference, hosted by the Investment Company Institute and Federal Bar Association featured a keynote address from U.​S. Securities and Exchange Commission Commissioner Elisse Walter urged mutual fund companies to "​re-​engage" and work with regulators to craft an acceptable regulatory solution to money market fund risks. She told the audience of fund lawyers and accountants, "Today, I will speak to you about a topic that is near and dear to your hearts, and to mine -- that is money market funds. The significance of these funds, and the regulatory approach to them, cannot be overstated. Yes, I too just felt the oxygen leave the room. For some reason, lately this topic seems to be making all of us lose our heads. If you don'​t know what I'​m talking about, please rise and head down the corridor, past the bagels and orange juice, to the next ballroom; perhaps your conference is in there. For those of you who are in the right place, I hope that you will take a deep breath and then engage or re-​engage in the discussion on these issues, both during this conference and after."

Walter said, "Simply put: the regulatory process is better with you as a part of it. I have always appreciated the views and involvement of the industry, and believe that your engagement is essential to reaching optimal answers to the important questions posed in securities regulation. The topic of money market funds, in particular, is just too important to let the dialogue play out through a public volley of slogans. I'​ll say at the outset that I'​m not here to talk about my position on the need for any further reform. In fact, I don'​t even have a draft release to consider. And, I understand that the staff plans to set forth a number of options. Before formulating a definitive position, my plan is to continue to discuss these critical questions with the staff, my fellow commissioners, the Chairman, members of the public, and those of you who are interested in that dialogue."

She continues, "In fact, I'​d like to ask for your help in returning to the productive process in which we had been engaged. I believe that all of us would be better served if we took a moment to step back and re-​gain our perspective by reviewing the history of money market funds, placing the issues in context. Of course, please keep in mind that my remarks today represent only my own views."

Walter'​s speech continued, giving an overview of the history of money fund regulation. She explained, "Beginning with the Reserve Fund in 1971, the money market fund sector at first grew slowly.... In the mid-​1970s, the Commission'​s Division of Investment Management commenced a preliminary review to determine whether money market funds presented any significant regulatory questions. The Division observed that although some funds were using market valuation for their portfolio securities, others were using "​amortized cost" valuation.... In 1975, the Commission proposed to prohibit the use of amortized cost.... In 1977, however, the Commission issued an interpretation concerning amortized cost valuation.... Several funds filed applications requesting exemptive orders to permit them to use amortized cost valuation, and after hearings on the issue, the Commission began granting relief in 1979. The Commission did not take lightly the decision to allow amortized cost, however."

She told the audience of 1,​100 in Phoenix, "​The question of whether to codify the exemptive relief was soon before the SEC. In 1982, the Commission proposed to do just that, and adopted rule 2a-​7 a year later. Under the rule, as you know, money market funds are able to use either penny rounding or amortized cost to compute their share price. To reduce the likelihood of material deviations from market value, the rule contains risk-​limiting conditions and procedural requirements for the board, including shadow pricing. If there is a difference of more than 1/​2 of 1%, the fund'​s board must consider what action should be taken, including whether to "​break the buck.""

Walter continued, "When the Commission adopted rule 2a-​7, the nearly 300 registered money market funds held about $​180 billion in assets, and played only a minor role in the short-​term credit markets. Fast forwarding to the present day, more than 640 money market funds are registered with us, and assets under management are tipping $​3 trillion. Overall, they now account for nearly 25% of all investment company assets. And, they play a crucial role in the capital markets. Money market funds are by far the largest holders of commercial paper, providing a substantial amount of short-​term funding to businesses. They also play an important role in other parts of the lending markets, such as repos, government bonds and municipal securities. Moreover, according to one recent survey, companies allocate nearly one-​third of their short-​term investments to money market funds."

Walter also said, "Historically the money market fund sector has had a strong record of stability. But, it has been dependent on fund managers stepping in from time-​to-​time to bail out funds by buying distressed securities. These bailouts occurred irregularly, and in a limited number, until 2007, when they became much more pervasive. Our staff estimates that, from August 2007 to December 2008, more than 100 funds in 18 complexes -- or nearly 20% of the money market fund universe -- received support from managers or their affiliates. Losses in subprime mortgages adversely affected a significant number of funds that had invested in asset-​backed commercial paper issued by Structured Investment Vehicles (​SIVs). While the SIV problems and the resulting fall in prices of commercial paper threatened to force many money market funds to break the buck, they were ultimately able to escape the situation due to outside support."

Walter discussed Reserve and continued, "On September 19, just three days after The Primary Fund'​s announcement that it would break the buck, the Treasury and Federal Reserve Board announced an unprecedented market intervention to stabilize the markets. These programs successfully stemmed the tide, with all but two money market funds participating in the guarantee program. The severe problems experienced by money market funds during this time period and the resulting impact on the financial system prompted the Commission and other regulators to explore how to prevent future harm."

She reviewed the past several years and the last round of amendments, and added, "The Commission'​s release made clear that the proposals were intended to be the first step in addressing the issues, and requested comment on other more far-​reaching and transformative changes, including floating NAV and in-​kind redemptions. In response, the industry strongly objected to changes that would affect stable NAV, but other commenters pointed to recent history in support of more substantial changes. In the fall of 2010, the PWG issued its Working Group Report on Money Market Funds Reform and the Commission published a request for comments on the options discussed in the report. The report identified the run on money market funds as one of several key events during the financial crisis that underscored the vulnerability of the financial system to systemic risk."

Walter explained, "​Although expressing support for the Commission'​s recent rule changes regarding money market funds, stating that they reduce the likelihood of runs, the report also concluded that money market funds should be required to internalize fully the costs of liquidity and other risks associated with their operations. The report detailed a number of options for the Financial Stability Oversight Council (​FSOC) to consider. To date, we have received more than 100 comments on the PWG report. These comments were quite useful, but we felt that a forum would further the dialogue. So last May, the Commission held a roundtable discussion on money market funds and systemic risk.... Following the roundtable, discussions among all interested parties continued, and they worked together to reach possible solutions. The discussions were quite productive -- with an eye to meeting policy goals in a balanced way -- and as they progressed, the number of viable approaches narrowed. Late last year, however, the industry brought its dialogue with the Commission to an abrupt end. It has since moved to the media -- with a flurry of statements in the press. That deeply disappoints me, and the Chairman, and the Commission'​s staff."

She urged, "I would like encourage you to move away from media statements and instead move back to building upon the discussion of the past two years. Let'​s continue a process of "​constructive engagement," instead of one of "​unconstructive disengagement." I would certainly like that, and know I'​m not alone in this way of thinking. Regardless of how you or I may feel about money market fund reform -- past, present, or future -- we can'​t just say that an issue doesn'​t exist. We need to remember that money market funds have changed over time. We need to remember the events of the last financial crisis and the relationship of money funds to systemic risk. And we need to remember that we must anticipate the future. Money market funds today present important questions implicating critical policy goals, related to not only investor protection but also, as I stated, to systemic risk."

Walter added, "I don'​t think that we can simply say that enough has been done -- that the Commission'​s latest rules have addressed all of the problems. We need to continue to discuss that; debate it; try to come to a meeting of the minds or, at the very least, truly informed disagreement. On the broader issue of whether reform is necessary, let'​s look at both sides. On the one hand, money market funds have had a successful history. And, in 2010, the Commission took steps to make money market funds more resilient. This included not only enhancing the risk-​limiting conditions, but also taking other steps such as permitting fund boards to halt redemptions immediately if the fund breaks the buck, and requiring the public disclosure of the "​shadow" price."

She continued, "On the other hand, we all just went through a significant and far-​reaching economic crisis. It severely affected money market funds, more than 100 of which received capital support from their sponsors. Without a well-​funded sponsor, one broke the buck. The resulting massive run by institutional investors -- $​300 billion in three days -- worsened problems in the broader markets. Ultimately, the federal government stepped in with programs specific to money market funds -- putting taxpayer money at risk to shore up a private industry. But the federal government no longer has the same authority to stop a run on money funds. That, in part, is why regulators must consider the structural features of these funds that make them prone to runs."

Walter said, "I understand that there is risk in moving ahead with additional reforms -- especially in a time of low yields. However, there is also significant risk in not acting. Balancing the upsides and downsides to reach hard decisions is what our job -- both yours and mine -- as stewards of the mutual fund industry is all about. The current environment, however, is not, in my view, conducive to reaching the best decisions. Please join with the Commission and change that, as there is no shortage of things to discuss. As Dr. Bob Nelson has said: "​Communicate, communicate, and then communicate some more.""

She added, "To illustrate the types of issues on which we could use your input, I will just mention a few of the options open to regulators (​in no particular order). I do so not to endorse any of them, but to illustrate the breadth and complexity of the issues. For example, there has been discussion of establishing an NAV buffer to absorb losses, in order to allow a stable NAV. Although this could be an explicit substitute for the current implicit buffer of 50 basis points, concerns have been expressed about the cost and source of the funding. Also, the option of floating NAV is on the table. Some have said that it could address the investor misperception that the value of money market fund shares does not fluctuate, and should dampen the incentive that shareholders have to institute a run on money market funds. Conversely, there are concerns that it could undercut the ability of corporate and municipal treasurers to use money funds as a short-​term financing device, and that it correspondingly could undercut the vitality of commercial paper. There has also been discussion about a liquidity or redemption fee to help offset costs. But there are questions about how to structure it equitably, and whether a holdback would create liquidity management issues for shareholders. A two-​tier system is another idea. One variation could be to allow retail investors to choose between floating and stable NAV funds, while institutional investors in certain funds would be limited to a floating NAV. While this might focus on those funds that were at the heart of the issue in the 2008 run, there have been significant questions about how to draw the line in a practical way."

Finally, she said, "There are further options still, but as I'​m running low on time, a simple list includes mandatory redemptions in kind; insurance; private emergency liquidity facilities; funds as special purpose banks; enhanced restraints on unregulated substitutes; revisiting and enhancing the parameters adjusted in our 2010 rules; and, added investor transparency. In conclusion, I ask you to use this conference as an opportunity to think again about the way forward. Engage with me and my colleagues to work toward a solution -- perhaps one that is not your ideal, but one that aims to best serve our nation'​s investors -- in money market funds and the broader marketplace. Let'​s not forget that the only reason we are all here together today is because of investors."

​

Lawyers, accountants, regulators and mutual fund professionals are gathered at this week'​s Mutual Funds and Investment Management Conference in Phoenix, Arizona, and money market mutual fund regulation is expected to be a hot topic. (Crane Data'​s Peter Crane will be in attendance, and a high-​powered panel on money funds will take place Monday afternoon, so look for more coverage in tomorrow'​s "​News".) Karrie McMillan, General Counsel of the Investment Company Institute, presents first with a talk entitled, "Clouds Overhead: Financial Regulation After the Crisis." The transcript of her speech says (​in relation to money funds), "Then there'​s the long-​running saga of money market funds. It'​s been 3-​1/​2 years since Reserve Primary Fund broke the dollar, and more than two years since the Securities and Exchange Commission adopted the post-​crisis amendments to Rule 2a-​7. But we'​re still waiting for the promised "​Round Two" changes."

She says pieces of the Volcker rule can be fixed, but "​I can'​t say the same about the second dark cloud -- the SEC'​s push for "​structural changes" in money market funds." McMillan says, "We'​ll have a panel this afternoon on money market funds, where we hope to gain a better understanding of the SEC'​s plans and proposals. However, there have been enough leaks and enough public commentary that we all have a pretty good handle on where Chairman Schapiro and the staff are going. Let me cut through all the detail -- all the rhetoric -- all the arguments. Let me just state something that should be obvious to us all: What the SEC is considering doing to money market fund investors is outrageous. Outrageous."

She continues, "No other mainstream financial product in this country has a regulator-​imposed freeze on assets. No other mainstream financial product has been ordered to routinely tell its customers, "​You can put your money in -- but you can'​t get it all back when you want it." This is not a minimum account balance, where depositors pay higher fees or sacrifice interest if their balances fall. No -- this is Washington saying to investors: "​You can'​t have your own money back" without an arbitrary delay. Not just in a crisis -- but in good times and bad. For more than 70 years, mutual funds have operated on the opposite idea -- the principle that funds will redeem their shares -- in full -- on any day that the markets are open. Yet the staff of the SEC now appears to be ready to say that this core principle doesn'​t apply for money market fund investors. Investors who depend on the stability, convenience, and liquidity of money market funds -- all the features the SEC'​s proposals would take away."

McMillan explains, "Now, mix a redemption freeze that will lock up investors' assets with a capital buffer that deprives them of yield, and you have one of the reported SEC proposals. The other is that old chestnut -- floating the value of money market funds. We'​ve been batting that idea down for three years now. And we'​ve won some important converts. Not among the banking regulators -- I'​ll grant you that. But we'​ve certainly created doubts among many at the SEC. The record is clear that floating the NAV of money market funds won'​t change investor attitudes or behavior ... won'​t prevent redemptions in a crisis ... and won'​t reduce systemic risk. What it will do is destroy the value of money market funds for investors -- and for the economy. If they'​re listening to investors, the staff and leadership at the SEC should have gotten that message loud and clear."

She adds, "​We'​ve looked at what happened to money market funds' mark-​to-​market values last summer, at the height of the eurozone crisis. We looked at the prime funds with the greatest exposure to European financial institutions. We found that their "​floating" value dropped by nine-​tenths of a basis point. On a $​1 share, that'​s a dollar sign followed by: 0.​00009. If you'​re trying to follow along, that'​s nine one-​thousandths of a penny. That kind of "​float" is not going to move a share priced at $​1, and it'​s not going to move a $​10 share. It might -- in extreme conditions like the eurozone crisis -- move the price of a $​100 share. Forget about "​breaking the buck" -- funds will have to "​break the Benjamin." But if the SEC really wants money market funds to float, our research suggests they'​re going to have to reprice them to $​1,​000 a share. Otherwise, they'​re going to force investors to swallow all the legal, tax, and accounting burdens of floating funds -- only to discover that whatever funds are left won’​t actually float at all."

McMillan also says, "​I said earlier that I thought the potential damage of the Volcker Rule is inadvertent. Here, however, the damage is no accident. Money market funds are one of the great success stories of modern financial regulation. Throughout the history of these funds, the SEC has carefully crafted rules that balance these funds' competing objectives of stability of principal, liquidity, and yield. These rules have enabled money market funds to flourish and innovate -- to the great benefit of investors and the economy. The 2010 amendments to Rule 2a-​7 built upon that success. They raised the bar for what it means to be a money market fund -- and the new model is far stronger. These reforms were tested and proven last summer, when they made money market funds more resilient in the face of crisis. They have made investors more secure, at a reasonable price. They have reduced systemic risk. They are a success."

She explains, "But the SEC'​s "​Round Two" proposals could easily destroy its "​Round One" gains. Think about it -- the 2010 amendments reduced portfolio risks; increased liquidity; empowered boards to make sure investors are treated fairly; and made these funds more transparent. By contrast, Round Two would drive billions of dollars away from of money market funds and into unregistered cash products that have no risk-​limiting regulations, no required liquidity, no board governance, and no transparency. Round Two would undo Round One—​and then some. It'​s time for the SEC to recognize the success of its 2010 reforms -- and move on."

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U.​S. Securities and Exchange Commission Chairman Mary Schapiro spoke Thursday night at the Society of American Business Editors and Writers (​SABEW) Annual Convention in Indianapolis, and featured money market mutual funds as one of her major topics. She said, "​The second memory that I want to refresh arises from the more recent financial crisis. In September 2008, the Reserve Primary Fund held just over 1 percent of its assets in commercial paper issued by Lehman Brothers. When Lehman declared bankruptcy, the fund took a hit and declared that it could not return to investors the full dollar per share that they had put in. This phenomenon -- known as "​breaking the buck" -- triggered a run on the fund and, in short order, a run on other money market funds as well."

Schapiro explained, "This happened, in part, because most investors treat money market mutual funds like bank accounts -- where customers are guaranteed to get at least one dollar back for every dollar they deposit. However, these products are, in fact, not bank accounts, but investment vehicles whose value can on occasion slip below or move above a dollar. Following Lehman'​s bankruptcy, investors redeemed $​40 billion, or roughly two-​thirds of the Reserve Fund'​s total value, in just two days. And, then the fear began to spread."

She said, "Within the week, investors had withdrawn $​310 billion from prime money market funds -- 14 percent of those funds' total assets, with some firms hit much harder than others. This helped freeze short term credit markets, resulting in the loss of short-​term financing that businesses and institutions needed for operations. The run stopped, but only after the government stepped in with a taxpayer-​funded Treasury guarantee that reassured investors and calmed the market -- and that also left the American taxpayer implicitly on the hook for $​3 trillion in money market fund shares."

Schapiro continued, "That event vividly underscored the need to tighten liquidity and risk requirements. And so the SEC, in 2010, adopted new rules that for the first time imposed robust liquidity requirements on money market funds. The reforms also required higher-​quality credit, shorter maturity limits, and periodic stress tests, making money market fund portfolios stronger and more resilient. But, when we passed these reforms, I clearly stated that we needed to do more -- that those reforms were just a first step. Because, despite changes in the assets they hold, money market funds remain susceptible to a sudden deterioration in quality of holdings and consequently, remain susceptible to runs."

She told the audience of business writers, "The companies that manage money market funds often go to great lengths to avoid breaking the buck. They have been quick to infuse their own capital to prop up the value of money market funds, and over the past two years they have waived investor fees in order to prevent fund values from falling below $​1.​00. SEC staff provided no-​action assurances that allowed more than 100 money market funds to enter into capital support agreements with their parent companies in 2007-​2008. Without these capital infusions and other support, these funds might have broken the buck, kicking off other destabilizing runs. These numbers underscore the fact that the Reserve Primary Fund'​s collapse should not automatically be regarded as an isolated incident."

Schapiro added, "Because Congress eliminated the possibility of another Treasury guarantee, there would be little regulators could do to manage or stop such a run. Indeed, money market funds remain particularly vulnerable to exogenous shocks, like a sovereign debt crisis in the Euro zone or a natural disaster across the globe. A 2010 Moody'​s study identified nine financial incidents that kicked off multiple sponsor interventions in the U.​S. and Europe, not including the financial crisis. These range from the Orange County default in the mid-​90s to the collapse of individual insurance companies, to the California energy crisis of the early 2000'​s. In addition, as recently as November 2011, the sponsor of some money market funds bought out securities of a Norwegian bank that was downgraded to non-​investment grade status."

She said, "Whenever there is an unexpected shock to the financial system, or a natural disaster with market moving implications, the staff knows that the first thing I will ask is: "​what is the related money market fund exposure?" Money market fund investors are historically very risk averse and are motivated to pull their money -- and get their dollar -- in advance of any deterioration of value. To avoid the likelihood of another money market fund run, there are two serious options I am hoping that the SEC will propose: either float the net asset value, so that a money market fund'​s value goes up and down like any other mutual fund, or impose capital requirements, combined with limitations or fees on redemptions."

Finally, Schapiro commented, "These proposals are designed to, respectively, desensitize investors to the occasional drop in value or make it less likely that the funds will not be able to absorb a loss and cause a run. In the post-​mortem of the financial crisis many have argued that regulators sat silent on the sidelines rather than raising alarm bells. As a regulator who saw the damaging effects of the 2008 run on money market funds, I find it hard to remain on the sidelines despite calls to declare victory on this issue. While many say our 2010 reforms did the trick -- and no more reform is needed -- I disagree. The fact is that those reforms have not addressed the structural flaws in the product. Investors still have incentives to run from money market funds at the first sign of a problem."

​

The Investment Company Institute released a "Statement of ICI Executive Committee on Money Market Fund Regulation" Wednesday afternoon. It says, "In light of the ongoing debate over changes to money market fund regulation, the Executive Committee of ICI'​s Board of Governors is issuing the following statement: In 2010, the Securities and Exchange Commission approved far-​reaching rule amendments that enhanced an already strict regime of money market fund regulation. Those amendments have made money market funds more resilient by, among other things, imposing new credit quality, maturity, and minimum liquidity standards for these funds; increasing the transparency of their portfolios; and empowering money market fund boards to assure a fair and orderly liquidation of a money market fund, should that become necessary. These reforms were in keeping with the SEC'​s long record of crafting ever-​stronger rules for money market funds that have enabled these funds to meet the needs of investors and play an important role in the nation'​s economy, while protecting investors and the financial system."

The statement continues, "The 2010 reforms were tested during the summer of 2011, when money market funds faced three unprecedented challenges: Europe'​s ongoing sovereign debt crisis; the U.​S. debt ceiling impasse; and the historic downgrade of the United States' sovereign debt rating. During a period of significant market turmoil, money market funds met large volumes of shareholder redemptions without incident, without meaningful reductions in money market funds' mark-​to-​market portfolio values, and without any impact in the broader money market."

The Executive Committee explains, "​For more than two years, money market fund yields have been near zero. Funds have faced increased competition from banking products due to unlimited deposit insurance for non-​interest-​bearing checking accounts and the payment of interest on business checking for the first time in 80 years. Despite these factors, investors consistently have entrusted more than $​2.​6 trillion in assets to money market funds. We believe this is dramatic evidence of the value investors place on the stability, convenience, and liquidity of money market funds."

It adds, "The SEC has indicated that it is now considering fundamental changes to money market fund regulation. It appears that these changes either would require money market funds to abandon their stable per-​share net asset value or would impose capital requirements and restrict redemptions. We are concerned that these changes will eliminate the utility of money market funds for most investors. As a result, these funds no longer would serve, as they do today, as a critical source of financing for businesses, banks, state and local governments, and the federal government. For cash management purposes, many investors likely would resort to funds that are less regulated and transparent than money market funds, thereby increasing -- not decreasing -- risks to the financial system."

The statement concludes, "For all of these reasons, and particularly in light of the demonstrated effectiveness of the comprehensive money market fund reforms already adopted by the SEC in the aftermath of the financial crisis, we do not believe the further changes in money market fund regulation now under consideration are necessary or appropriate."

ICI'​s Executive Committee is "​responsible for evaluating policy alternatives and various business matters on behalf of the ICI Board of Governors". Its release adds, "For more information on money market funds, their role in the economy, ICI'​s efforts to make these funds more resilient in the face of adverse market conditions, and the significant risk of undermining money market funds' value to investors and the economy, please see www.​ici.​org/​mmfs or www.​PreserveMoneyMarketFunds.​org."

​

Crane Data'​s Money Fund Portfolio Holdings, with data as of February 29, 2012, were sent to Money Fund Wisdom subscribers yesterday. The latest disclosures again show a rebound in French names, though a dip in overall Europe, and a continued surge in Repo holdings. (​See previous coverage of the February holdings in Crane Data'​s March 12 News "​MMF Lending Continues to Ease, Eurozone Holdings Rising Say DB, JPM".) Repurchase Agreement (​Repo) holdings rose $​25.​7 billion in February to $​571.​4 billion (​24.​3% of taxable holdings) after rising $​69.​4 billion in January. Treasury Debt also rose (​by $​18.​8 billion) to $​498.​7 billion (​21.​2% of holdings), while Government Agency Debt fell by $​36.​5 billion to $​331.​7 billion (​14.​1%). Government Agencies and Repo dealers also continue to dominate the list of largest Issuers.

Repo holdings were comprised of $​275.​8 billion in Government Agency Repurchase Agreements (​11.​7%), $​169.​3 billion in Treasury Repo (​7.​2%) and $​126.​3 billion in Other Repo (​5.​4%). (​Note that Crane Data has found some funds that have been categorizing Treasury and Agency repos as "​Other" due to systems issues, so these numbers have been and may be inflated somewhat.) CDs and CP declined slightly (​down $​6.​4 and $​4.​7 billion, respectively) to $​393.​4 billion (​16.​7%) and $​358.​1 billion (​15.​2%), respectively. (​CP was comprised of $​192.​9 billion (​8.​2% of all holdings) in Financial Company CP, $​114.​6 billion (​4.​9%) in Asset Backed Commercial Paper, and $​50.​7 billion (​2.​2%) in Other CP. Other securities rose to $​134.​2 billion (​5.​7%) with Other Notes (​the largest subcategory of this segment) rising to $​78.​3 billion (​3.​3%). VRDNs accounted for $​65.​2 billion (​2.​8%) of the total securities held by taxable money funds as of Feb. 29, 2012.

Among all Taxable money funds, the U.​S. Treasury remains by far the largest issuer with 22.​7% of all investments ($​498.​7 billion). (​Treasuries are the largest segment of Prime money funds too at 8.​65%, or $​112.​4 billion of the total.) Federal Home Loan Bank again ranked second among money market issuers with $​139.​1 billion (​6.​3%) of the money held in taxable money funds tracked by Crane Data'​s MF Portfolio Holdings collection ($​46.​5 billion of this was held in Prime funds). Barclays Bank remained in third place with $​103.​0 billion (​4.​7%) of Taxable holdings and $​63.​6 billion (​4.​9%) of Prime holdings. Barclays is the second largest Issuer after the U.​S. Treasury among just Prime money funds.

Deutsche Bank moved ahead of Fannie Mae (​Federal National Mortgage Association) and Freddie Mac (​Federal Home Loan Mortgage Co) to take the 4th place spot in February. DB had $​95.​4 billion (​4.​3%) of outstandings vs. $​77.​9 billion (​3.​6%) for Fannie and $​74.​0 billion (​3.​4%) for Freddie among of taxable money fund holdings. The rest of the top 10 issuers include: `​Bank of America ($​61.​5B, 2.​8%), Credit Suisse ($​55.​5B, 2.​5%), JPMorgan ($​55.​2B, 2.​5%), and Citi ($​52.​8B, 2.​4%). French banks continued their recovery among the top 25 issuers this month. Numbers 11-​25 include: RBC ($​50.​7B), Societe Generale ($​47.​4B), Bank of Nova Scotia ($​44.​4B), RBS ($​41.​7B), Goldman Sachs ($​41.​5B), Bank of Tokyo-​Mitsubishi UFJ Ltd ($​41.​4B), National Australia Bank Ltd ($​38.​4B), Rabobank ($​38.​1B), BNP Paribas ($​37.​9B), Sumitomo Mitsui Banking Co ($​36.​5B), Westpac Banking Co ($​36.​2B), UBS AG ($​33.​4B), Mizuho ($​33.​3B), HSBC ($​33.​1B), and Credit Agricole ($​31.​6B).

Our new Maturity Distribution pie charts show funds added to Overnight (​securities maturing in 1 day) assets in February with 27.​7% vs. 25.​7% a month earlier. They also used their increases in repo to "​barbell" a little more. Securities maturing in 2-​7 days accounted for 11.​1% of assets, holdings maturiing in 8-​30 days accounted for 18.​95% of assets, holdings maturing in 31-​90 days accounted for 26.​2%, holdings maturing in 91-​180 days accounted for 11.​0%, holdings maturing in 181-​365 days accounted for 4.​8% and just 0.​2% matures in 366 or more days.

European related holdings accounted for 27.​0% of taxable money fund assets in February, or $​635.​8 billion. The U.​K. remained in second place ahead of Canada with 8.​6% ($​203.​3 billion) vs. 7.​2% ($​168.​8 billion). (​The U.​S. ranks first with $​1.​210 trillion, or 51.​4% of assets.) The rest of the top 10 include: France ($​132.​9 billion, or 5.​7%), Japan ($​130.​0 billion, or 5.​5%), Germany ($​119.​2 billion, or 5.​1%), Australia ($​118.​6 billion, or 5.​0%), Switzerland ($​93.​6 billion, or 4.​0%), Netherlands ($​79.​2 billion, or 3.​4%), and Sweden ($​48.​2 billion, or 2.​1%). Note that all securities purchased by money funds are U.​S. dollar-​denominated and that country refers to domicile of the issuer'​s parent company (​even in the case of Treasury or Government repo).

Note that there has been little discussion of whether the pending SEC Money Market Fund Reform Proposals will alter the monthly portfolio holdings disclosure mandates, but we do expect some minor categorization changes. We will alter our collections accordingly once these become required late this year or early next.... Crane Data has been collecting Money Fund Portfolio Holdings for over a year now, since the SEC mandated the monthly disclosure of portfolios starting in November 2010. We publish our month-​end Taxable money fund portfolio information on the 9th business day of the following month, and we publish our Tax Exempt and Offshore money fund portfolio holdings on the 13th business day. (​Look for these latter series on Friday.) Contact Pete to request the latest dataset or for more information.

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Investment Company Institute President Paul Stevens gave a speech Monday morning entitled, "Preserving the Value of Money Market Funds for Investors and the Economy at the Money Market Expo in Orlando, Fla. (​Note: MMX is a competitor to Crane'​s Money Fund Symposium.) Stevens says, "​Whether you represent a company or a city government, a university or an insurance company, a pension plan or a brokerage, you know how vital the role of cash management is in your operations. Cash is truly the lifeblood of our economy -- and the money market is the circulatory system. Indeed, America'​s economy today quickly would cease to function without a steady, efficient flow of liquid resources from investors to issuers and back again. Money market funds are a crucial component of this market. Cash managers who need to balance daily income and outflow tell us that money market funds offer greater flexibility, diversification, and liquidity than either bank products or direct investments in money market instruments."

He explains, "For 56 million individual investors, money market funds offer the only way to achieve a current money market yield and the safety of a diversified, professionally managed portfolio. Since 1990, retail investors have earned $​242 billion more in returns from money market funds than they would have earned in competing bank products. And the $​2.​7 trillion entrusted to money market funds is put to valuable uses throughout the economy -- financing commercial paper, short-​term municipal debt, asset-​backed commercial paper, bank CDs, Treasury bills. In short, money market funds help keep the lifeblood of the economy flowing. The question we face today is: Do we preserve the vital role that money market funds play? Will money market funds continue to serve investors and the economy?"

Stevens continues, "As you all know, the Securities and Exchange Commission [​SEC] has signaled its plans to unveil soon a set of structural changes to money market funds. These proposed changes may take one of two courses. In the first option, money market funds will lose their stable $​1.​00 per-​share value and will be forced to "​float." In the second, they will be subject to a complicated regime of capital buffers and redemption restrictions. In either case, investors tell us that regulators will have crippled the very features that make money market funds so valuable to users as cash management tools."

He adds, "​The result is predictable -- investors will reduce their use of money market funds, or abandon them altogether. And when that happens, the flow of finance through the money markets, that lifeblood for the economy, will be disrupted, creating a market with higher costs and more systemic risk -- at great cost to investors and the economy. Scores of organizations -- representing corporate treasurers, finance officials from state and local governments, nonprofits, financial advisers, and individual investors -- have written to the SEC warning of the consequences of misguided changes for their finances and for the economy. Many of you here may have weighed in --​and if you haven'​t, I hope you will."

Stevens also says, "In the fund industry, we have spent countless hours in recent years trying to help regulators find ways to make money market funds more resilient in the face of adverse markets. We are confident we achieved that goal in 2010. With the fund industry'​s strong support, the SEC adopted rule amendments that raised the credit quality, shortened the maturity, enhanced the transparency, and increased the liquidity of money market fund portfolios. These reforms were tested in the troubled markets of the last year -- and they passed with flying colors. Thanks to the 2010 amendments, money market funds are stronger today -- and today'​s money market fund is a very different product from its 2008 predecessor.... U.​S. financial regulators should take credit for this success. Few do."

He continues, "Instead, SEC Chairman Mary Schapiro pre-​judged the force of the 2010 amendments. Even before voting on them, she declared that regulators wanted a "​Round II" of "​structural changes" to money market funds. Two years later, as we see the SEC'​s trial balloons, we'​re discovering that "​structural change" means proposals that will undermine the core features of money market funds and their value to investors and the economy. The fact that the power of the 2010 reforms is not acknowledged -- that'​s disappointing."

Stevens explains, "​Even more troubling are the arguments that critics use to justify changes that clearly will undermine the value of money market funds to investors and the economy. The debate around money market funds is riddled with myths and misstatements. There are at least three big myths at the heart of the case for "​reforming" money market funds. First, there'​s the myth of 2008 -- the notion that money market funds somehow caused or accelerated the financial crisis. That'​s a false narrative, and it'​s the source of a great deal of mischief. The myth of 2008 feeds another misconception -- the myth that money market funds are "​susceptible to runs" and likely to trigger systemic risk. And in the hands of some commentators, these first two myths fuel a third. That'​s the notion that banks offer the superior model for all financial activities and that capital market institutions like money market funds are really "​shadow banks." This myth leads to proposals to impose bank-​style regulation on money market funds. Take these three myths together, and we end up where we are today -- rushing headlong into unnecessary, flawed, and harmful regulatory changes."

He explains, "In fact, while the eurozone and U.​S. debt crises certainly took their toll on equity and fixed income markets, the withdrawal from money market funds had no discernable effects at all -- either on the funds or on the markets. Consider this: from April through December, prime money market funds kept their daily liquidity at more than twice the required level, and weekly liquidity stayed one-​third to one-​half higher than the standard. Did the redemption pressure put any funds at risk of breaking the dollar? We'​ve examined the portfolio data that all money market funds now are required to file with the SEC for public release. Among the prime funds with the greatest exposure to European financial institutions, the average mark-​to-​market price of their portfolio fell by nine-​tenths of a basis point. Let me see ... on a $​1.​00 fund share, that'​s a dollar sign followed by 0-​point-​0-​0-​0-​0-​9. Right. Nine one-​thousands of a penny. Put it another way -- that change wouldn'​t move the value of a share priced at $​1.​00, and it wouldn'​t move the value of a $​10 share. It would move the value of a share priced at $​100 -- by one cent. We can'​t call that breaking the buck -- so I guess we'​d have to call it "​breaking the Benjamin." So -- have the 2010 amendments been tested? Yes."

Stevens tells us, "Nonetheless, the false narrative of 2008 fuels the second myth of this debate --​the idea that money market funds are "​susceptible to runs." I'​ll quote Chairman Schapiro again. She says: "​Funds remain vulnerable to the reality that a single money market fund breaking of the buck could trigger a broad and destabilizing run." I wanted to be on solid footing here, so I took out my dictionary. It says that the word "​vulnerable" means ... "​susceptible." So I looked up "​susceptible." That means "​easily influenced ... likely to be affected." That certainly doesn'​t describe money market funds. They are not "​easily" broken. Nor are they "​likely to be affected" in a significant way outside of extreme market conditions."

He explains, "We all know that, in the first 25 years after Rule 2a-​7 was adopted, exactly one money market fund broke the dollar, in 1994. This is a sophisticated audience, but I doubt that 10 people in this room could name that fund. Do I have any takers? It was the Community Bankers U.​S. Government Money Market Fund. The reason it'​s not famous is because it broke the dollar and did not trigger a broad and destabilizing run. In fact, money market fund assets grew the month after Community Bankers broke the dollar. The contrast between September 1994 and September 2008 is the fact that, in 1994, the banking system was not mired in crisis. There was no reason for investors in other funds to lose confidence in the assets their funds were holding. And so there were no aftershocks. When Reserve Primary failed in 2008, there were aftershocks -- caused, as I said, primarily by the financial crisis in which Reserve'​s failure was but one more of a seemingly endless series of events. And, as I noted, investors didn'​t lose confidence in the money market fund structure. So I would submit to you that money market funds have never been "​susceptible to runs.""

Stevens tells MMX, "And here in the United States, money market funds aren'​t just "​useful" -- they'​re essential. Any vehicle that funds more than one-​third of the commercial paper market and more than one-​half of short-​term municipal debt should not -- cannot -- be viewed as an afterthought. Finally, I hope you all know that money market funds are not banks, and that they don'​t need bank-​style regulation. Banks are highly leveraged: 80 to 90 percent of the liability side of their balance sheets is deposits, CDs, long-​term bonds, and other borrowings. They invest these borrowed funds in mortgages and other long-​term loans, for households, small businesses, and other borrowers who lack access to public credit markets.... By contrast, money market funds' use of leverage is tightly limited -- and these funds typically make very limited use of borrowed funds. Indeed, the liability side of a money market fund'​s balance sheet is essentially 100 percent capital. Money market fund shareholders are equity investors -- with all of the risks of ownership, fully disclosed."

Finally, he says, "It'​s frustrating that the public dialogue is so riddled with myths and misconceptions. It'​s disappointing that the success of the 2010 amendments is ignored in the pursuit of changes that will compromise core features of money market funds, their utility to investors, and ultimately their role in the economy. It seems clear that we are now approaching a critical juncture in this debate. We will muster all of our resources, in legal and economic analysis, in operational expertise and communications, to alert investors, issuers, businesses, state and local governments, and political leaders to the implications of any proposed structural changes. Why? Because this is a matter that is bigger than the fund industry alone. Earlier I mentioned that scores of organizations representing investors and issuers have already spoken out against ideas like the floating NAV. If you want to add your voice ... you can find us on the Internet at www.​PreserveMoneyMarketFunds.​org. Please add your voice to the chorus, and keep money market funds working for us all."

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Late last week, both Deutsche Bank'​s William Prophet and J.​P. Morgan Securities' Alex Roever released comments on the portfolio holdings of the largest money market funds, and both updates showed a continued return to French and Eurozone holdings. Deutsche Bank'​s William Prophet wrote Thursday in a piece entitled, "Do You See What I See?," "[​B]​y virtually all measures, money fund lending standards continued to ease during February. Last month we highlighted the fact that lending to French banks had bounced back to a non-​zero amount. And we'​re now happy to report that this trend continued into February."

Prophet explains, "The numbers are still rather small of course (​and the maturities rather short) but this is all part of the healing process. We show a regional breakdown of the European bank CD portfolio of large U.​S. money funds ... among our sample anyway the numbers for French banks nearly doubled between Jan and Feb. To be fair, growth in the total amount of the European bank CD'​s on U.​S. money fund balance sheets was virtually flat on the month—​and it'​s been flat for about five months now."

He continues, "But other forms of lending -- and risk metrics in general -- continue to go up. For example, we show the amount of repo'​s on money fund balance sheets where the counterparty is a European bank. These have been rising for quite some time now and the trend continued during February (​although just barely)."

Finally, Prophet adds, "More importantly however, there has been a significant increase in the amount of term unsecured lending to European banks. In other words, even though the numbers ... aren'​t going up just yet, the subset of 3- to 6-​mo loans has increased dramatically over the past two months.... Note that we are showing this data over rolling two month horizons because this process really started back in January. But what we show in this chart is the amount of monthly newly-​originated 3- to 6-​mo loans to European banks; notice the recent acceleration."

J.​P. Morgan Securities released an "Update on prime money fund holdings for February 2012 on Friday. The latest Portfolio Holdings analysis says, "With improving tone in the short-​term credit markets in February, prime MMFs increased total Eurozone bank exposures for the second consecutive month by $​30bn after increasing exposures by $​27bn in January. Unlike January when increased Eurozone bank exposures were driven by more investments in secured products (​ABCP and repo), February'​s increases were driven primarily by investments in unsecured products (​CP, CD, time deposits, and other notes), reflecting improving tone."

They write, "Globally, total bank exposures increased (+$​17bn), driven by increases in repo (+$​17bn), time deposits and other notes (+$​19bn). Unsecured CP/​CD and ABCP holdings declined by $​14bn and $​6bn, respectively (​Exhibit 2). Total non-​Eurozone European bank exposures declined (-$​31bn), driven by declines in unsecured CP/​CD (-$​38bn), ABCP (-$​3bn), and time deposits and other notes (-$​3bn). Some of these declines were offset by increases in repo (+$​14bn). Non-​European bank exposures resumed their rise in February (+$​18bn) after seeing a slight decline in January (-$​3bn). Since May 2011, non-​European bank exposures have increased by $​107bn, mostly in the form of unsecured CP/​CD (+$​82bn)."

JPM continues, "Prime MMF AUM increased by $​30bn in February, driven entirely by institutional funds. From the end of 2011 to the end of February 2012, institutional prime MMF AUM increased by $​42bn while retail prime MMF AUM declined by $​11bn according to iMoneyNet. February data indicate that investors felt more comfortable with French bank credit as prime MMFs placed more cash with unsecured French bank credit (+$​11bn) than in January (+$​8bn). But the fact that most of this increase was in overnight time deposits indicate that investors remained cautious about French banks. Furthermore, the French bank buying is still concentrated mostly in a few large funds in our sample."

They add, "​Notably, holdings of Swiss and Swedish bank unsecured CP/​CD declined by $​10bn and $​19bn, respectively in February. We believe this is attributed to a combination of improving sentiment regarding the Eurozone, the recent Moody'​s rating'​s review of banks, and rich levels as cash fled to these European "​safe haven" banks during last year'​s European peripheral debt crisis. We are now seeing rotation out of these banks into banks in France and Germany for yield and into banks in the Netherlands, Japan, and the US due to potential downgrades of banks by Moody'​s."

The Update also says, "According to our estimates, the top 5 banks whose unsecured CP/​CD holdings were cut by prime MMFs in February were Credit Suisse, UBS, RBS, Nordea, and Svenska.... The top 5 banks whose unsecured CP/​CD holdings by prime MMF rose in February were J.​P. Morgan, ING, Deutsche Bank, BNS, and Mizuho. All of these banks had their short term ratings of P-​1 affirmed by Moody'​s or were not put on review by Moody'​s.... Also notable is a decline of $​10bn in repo exposures to US banks."

Finally, the piece tells us, "Liquidity continues to be the priority for prime MMFs. Funds maintained short tenors for their bank holdings. Although French bank exposures have increased, more than 90% of these holdings remain under 1-​week in final maturity.... We think the larger prime MMFs will maintain or modestly increase core Eurozone bank exposures in the coming weeks. Smaller funds may not have the will to engage in Eurozone credits as they are likely more sensitive to investor sentiment." (​Note: Look for Crane Data'​s Money Fund Portfolio Holdings dataset, with information as of February 29, 2012, to be released to subscribers tomorrow morning.)

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Federated Investors CEO Chris Donahue presented yesterday at Citi'​s 2012 Financial Services Conference in New York. He said, "I'​ll bet nobody wanted to hear about money market funds. Well, it used to be that way. But now it is no longer that way. I'​m happy to talk about money market funds because when I go home nobody asks me about them. Despite the media, the regulators, low interest, lots of issues, the attractiveness of politicians, media, etc., this remains a resilient, strong business [​with] 30 million individuals in this country in these funds at $​2.​7 trillion."

Donahue continued, "​Now in terms of waivers, yes waivers are there. We talked about that on the [​earnings] call and we said that we expected the wavers to be about $​27 million dollars in operating income here in the first quarter. If you force me to go over under that at this point, I would be inclined to go under. The reason for that is that the repo rates is stayed in the 12, 14, 16 [​bps] area depending on the whether you'​re in government or other repo and so that'​s why it would tend to go under."

He explained, "​In terms of the overall situation that Bill addressed, what'​s going on in Washington and what'​s happening on the regulations with money funds. Well first of all, a couple of points. Money funds were not the cause of the crash in 08. In fact, the cause of the crash in '​08 could easily be said to have been a crack up in the asset back commercial paper market in '​07, which money funds came through quite smartly.... To me, money market funds are more like that beautiful yellow canary singing. And the canary sings as long as there'​s good fresh oxygen."

Donahue also commented, "​This business should be about competence, not about capital and not about insurance. In terms of the regulations coming from the SEC, here is the deal there. It requires 3 votes ... in order to get a rule proposal on the floor, and then, after commentary, to a rule proposal actually passed. We don'​t think the poor policies being discussed now are going to get 3 votes precisely because it is poor policy. Bill mentioned the three [​possible proposal options] -- a variable NAV, capital and restrictions on redemptions... To me, they'​re like 3 different types of poison."

He added, "First, they kill or seriously injure a 40-​year old great business that maybe committed one minor sin, 99 cents on one fund, over all that time -- $​345 trillion successfully moving through money funds, $​500 billion of higher pay to investors than they would have gotten in bank accounts. Next, what would happen if any of those go into effect? A lot of money would move over to the bigger banks ... a lot of disruption, a lot of higher cost for issuers, and an increase in systematic risk. Remember, the whole idea of Dodd-​Frank was to eliminate '​too-​big to fail'. And here is a system the effect of which would be to make the banks even too bigger to fail. Some of the money wouldn'​t go to banks. It would go somewhere else, probably into less-​regulated, less-​transparent vehicles, which I don'​t think is the goal of regulators."

Finally, the Federated CEO stated, "​Then there was a question that Senator Schumer asked of the Chairman of the Fed last week, '​What are the risks to the economy and our financial system if we were to fundamentally alter the nature of a money market fund?' Nowhere is there a discussion of studies or a direct answer to the question, but the Chairman concludes by saying, '​But, you know, Europe doesn'​t have any money market funds, and they have a financial system. There are many ways of structuring your financial system. But again I envision that money market mutual funds will be a part of the future of the U.​S. financial system.' The point here is that there have been no studies of the unintended consequences.... These things are working well, and we don'​t believe any more is necessary." Look for excerpts from the Q&​A section of the call in coming days (​if we have room). (​Note too that Donahue is scheduled to speak at Crane'​s Money Fund Symposium in Pittsburgh on June 20.)

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The March issue of Crane Data'​s Money Fund Intelligence was e-​mailed to subscribers yesterday and our February 29, 2012 monthly performance data and rankings were distributed via our Money Fund Intelligence XLS monthly spreadsheet, our Money Fund Wisdom database query website and our Crane Index money fund averages series. (​Our monthly Money Fund Portfolio Holdings with 2/​29/​12 data will be distributed on the 9th business day, March 13.) The new edition of MFI features the articles: "Battle Is Joined Over Pending 2a-​7 Proposals," which discusses the war over the SEC'​s pending Money Market Fund Reforms; "Invesco Thinks Long-​Term With Short-​Term Investing," our monthly fund "​profile" which interviews Invesco'​s Greg McGreevey, Lyman Missimer, and Tony Wong; and, "Insured Deposits Continue Soaring, But Is Party Over?," which reviews the status and pending expiration in 2012 of unlimited FDIC insurance on noninterest bearing accounts.

Our lead piece says, "Since the S.​E.​C. leaked details of its pending Money Market Fund Reform Proposals to The Wall Street Journal in early February, a frenzy of activity and lobbying has commenced. Money funds and the broader public have been deluged with comment letters, editorials, articles and studies, all discussing an imminent 2a-​7 proposal expected to include a capital buffer, '​holdback' or minimum provisions, and/​or a floating NAV option."

The Invesco Profile, which we'​ll excerpt later this month, tell us, "This month, Money Fund Intelligence speaks with Invesco’​s Greg McGreevey, CEO of Fixed Income; Lyman Missimer, head of global cash management; and Tony Wong, head of global cash management research. We ask the three about recent initiatives, pending regulatory proposals, and a number of other money fund-​related issues. Our interview follows."

The third feature piece in our monthly says, "​The FDIC'​s latest statistics show bank deposits continue raking in huge amounts of cash. But the expiration of the unlimited FDIC insurance coverage at the end of 2012 has the potential to bring hundreds of billions back into money funds." The March issue also contains monthly News, Indexes, top rankings and extensive performance tables. E-​mail info@​cranedata.​us to request the latest issue.

In other news, a press release entitled, "Federated Investors, Inc.'​s President and CEO J. Christopher Donahue to Present at Citi Financial Services Conference" says, "Federated Investors, Inc., one of the nation'​s largest investment managers, announced today that President and CEO J. Christopher Donahue is scheduled to present the company'​s strategy for growth at the Citi 2012 Financial Services Conference at 10:​25 a.​m. Eastern on Thursday, March 8, 2012. Investors and other interested parties can listen to a live webcast of the presentation via FederatedInvestors.​com. To listen to the live presentation, go to the About Us section of FederatedInvestors.​com at least 15 minutes prior to register, download and install any necessary audio software. A replay will be available on this site for seven days."

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A new "Viewpoint" article entitled, "Money Market Funds: Let'​s Stick to the Facts" was published yesterday by the Investment Company Institute'​s Chief Economist Brian Reid. Reid writes, "​As a banking regulator who was in office during the worst banking crisis since the Great Depression, Sheila Bair knows that banks and money market funds are not the same. Yet in her recent Huffington Post piece, Bair blurs vital distinctions in an effort to convince the reader that money market funds are in fact extremely risky banks--​and thus need a stiff dose of banking regulation."

He explains, "For example, the former chair of the Federal Deposit Insurance Corporation (​FDIC) knows that money market funds are required by law to invest in assets that pose minimal credit risk. That'​s a standard that no other retail investment product--​and certainly no bank--​is required to meet. Only money market funds are required to invest solely in a diversified portfolio of high-​quality, short-​term, liquid securities. This doesn'​t mean that these funds never experience losses--​but their low-​risk portfolios minimize the chances of loss."

Reid says, "Bair also knows that money market funds achieve their $​1.​00 share price not by acting like insured bank accounts but by managing very high quality, diversified, and liquid portfolios. As I discussed in a recent ICI Viewpoints, "​Money market funds invest in very short-​term securities, and many of these securities have interest rates that reset frequently. That makes the value of these securities--​and hence the funds' per-​share portfolio value--​extremely stable."

He continues, "​Bair also asserts that outflows from prime money market funds in September 2008 were the result of Reserve Primary Fund being unable to maintain its $​1.​00 net asset value. Although this is the conventional story line, it ignores the sweeping financial crisis that had overtaken the U.​S. and European banking and financial sectors at the time. At least 13 major institutions went bankrupt, were taken over, or were rescued in the 12 months before Lehman Brothers failed. Institutions continued to fail after Lehman--​indeed, AIG was rescued on the same day that Reserve Primary broke the dollar."

Reid tells us, "Events of that week are often portrayed as a run from money market funds. Yet for almost every dollar that came out of prime money market funds, a dollar went into Treasury and government funds. In the week of the Lehman collapse, the assets of taxable money market funds (​prime, Treasury, and government funds combined) declined by only 4 percent. So investors weren'​t fleeing money market funds. An equally plausible explanation for prime fund outflows and government money market fund inflows is that investors were reacting to their concerns about the financial wherewithal of U.​S. banks, the U.​S. government'​s unpredictable response to financial institutions' collapse, and concerns about whether prime funds could continue to sell assets in the frozen commercial paper market."

He states, "Yes, the government stepped in to restore liquidity to the markets and shore up investor confidence, and the Treasury Department provided a one-​year guarantee to money market funds that purchased the insurance. But this was part of an overall set of actions to help return investor confidence to the entire financial system here and in Europe. Aside from that one-​year program, money market funds have never carried a guarantee from the government or from fund sponsors. Bair claims that investors don'​t understand that fact--​notwithstanding that it'​s clearly disclosed to investors and that research shows retail and institutional investors alike understand that these funds entail risk.... [​I]​n recent surveys of retail investors by Fidelity Investments, 81 percent of respondents said they understood that the securities held by money market funds had some small daily price fluctuations."

Reid concludes, "Finally, Bair admonishes readers not to believe industry arguments that the SEC proposals will cause onerous tax consequences, lower returns, and potentially widespread investor flight from these funds. That'​s fine--​readers don'​t have to take our word for it. After all, the users of money market funds, and the issuers of commercial paper and municipal securities who depend on these funds for financing, have been vociferous in making the same points. Corporate and municipal treasurers nationwide have raised their voices against the reform proposals being contemplated by the SEC. An honest debate on money market funds and the role they play in serving investors and the economy is healthy and welcome. But myths, errors, and hyperbole will not advance the discussion."

​

The FDIC'​s latest Quarterly Banking Profile shows that "Money Continues to Flow into Fully Insured Deposit Accounts." The report says, "Deposit balances registered strong growth for a sixth consecutive quarter, as large-​denomination transaction accounts that offer unlimited insurance coverage through the end of 2012 continue to attract new depositors. Total deposits at insured institutions increased by $​183.​2 billion (​1.​8 percent). Over the last six quarters, deposits at FDIC-​insured institutions have risen by more than $​1 trillion. Most of the growth has consisted of large-​denomination noninterest-​bearing transaction deposits that are fully insured until the end of 2012. Balances in these accounts increased by $​191.​2 billion (​13.​7 percent) during the fourth quarter, and totaled $​1.​58 trillion at the end of the year. In contrast, nondeposit liabilities declined by $​99.​5 billion (​4.​5 percent), while deposits in foreign offices fell by $​66.​6 billion (​4.​5 percent)."

The FDIC'​s Quarterly explains, "​Total assets of the nation'​s 7,​357 FDIC-​insured commercial banks and savings institutions increased by 0.​6 percent ($​76.​1 billion) in the fourth quarter of 2011. Total deposits increased by 1.​8 percent ($​183.​2 billion), domestic office deposits increased by 2.​9 percent ($​249.​7 billion), and foreign office deposits decreased by 4.​5 percent ($​66.​6 billion). Domestic noninterest-​bearing deposits increased by 8.​3 percent ($​173.​2 billion) and savings deposits and interest bearing checking accounts increased by 2.​3 percent ($​103.​8 billion), while domestic time deposits decreased by 1.​5 percent ($​27.​3 billion). For all of 2011, total domestic deposits grew by 11.​2 percent ($​881.​9 billion), with domestic noninterest-​bearing deposits rising by 34.​2 percent ($​578.​1 billion) and domestic interest-​bearing deposits increasing by 4.​9 percent ($​303.​7 billion)."

The FDIC adds, "​At the end of the fourth quarter, domestic deposits funded 63.​1 percent of industry assets, the largest share of assets funded by domestic deposits since the fourth quarter of 1994 when the share was 63.​3 percent. Insured institutions had $​2.​3 trillion in domestic noninterest-​bearing deposits on December 31, 2011, 70 percent of which ($​1.​6 trillion) were in noninterest-​bearing transaction accounts larger than $​250,​000. Of this total, $​1.​4 trillion exceeded the basic coverage limit of $​250,​000 per account, but is fully insured until the end of 2012. Deposits receiving the temporary coverage funded 4.​2 percent of assets at banks with less than $​10 billion in total assets and 11.​6 percent of assets at banks with more than $​10 billion in assets. The total amount receiving temporary coverage increased by 15.​2 percent ($​185.​1 billion) during the fourth quarter. For all of 2011, deposits receiving the temporary coverage increased by 63.​2 percent. The following table shows the distribution of accounts receiving unlimited coverage on noninterest-​bearing transaction accounts by institution asset size."

A footnote explains, "The Dodd-​Frank Wall Street Reform and Consumer Protection Act (​Dodd-​Frank), enacted on July 21, 2010, provides temporary unlimited deposit insurance coverage for noninterest-​bearing transaction accounts from December 31, 2010, through December 31, 2012, regardless of the balance in the account and the ownership capacity of the funds. The unlimited coverage is available to all depositors, including consumers, businesses and government entities. The coverage is separate from, and in addition to, the insurance coverage provided for a depositor'​s other accounts held at an FDIC-​insured bank."

Analysts have begun speculating whether the unlimited FDIC insurance will be extended. J.​P. Morgan'​s Alex Roever wrote in his most recent "Short Term Market Outlook and Strategy," "The extension of the TAG program has clearly benefited both cash investors and banks alike. But with the program set to expire at the end of this year, it also has the potential to instigate a large shift in liquidity, reversing the benefits that have been set in place. For one, investors who previously parked their cash at banks for the unlimited insurance may no longer view those deposits as an attractive investment. They may in the coming months determine that it'​s best to redeploy their money, presumably into other cash-​like alternatives, such as money market funds. The rationale behind the move is that if the government insurance were to go away, the credit quality of uninsured deposits at isolated banks (​currently facing sovereign, economic, and downgrade risks) may be riskier than money funds that diversify their portfolios across a full spectrum of credit products. All else equal, money funds may seem to be the best alternative investment."

He adds, "Ultimately, the simplest thing for policymakers to do may be just to extend the guarantee program and avoid any type of market disruptions. But that'​s much easier said than done. The extended coverage was introduced in the Dodd-​Frank Act, and the law would need to be reopened and amended, something Congress has been reluctant to undertake. Given that it'​s also an election year, we place a low probability of this happening."

Barclays Capital'​s Joseph Abate wrote recently, "Our sense is that Congress and the FDIC will agree to extend unlimited insurance -- but along the lines of past extensions. The program could be temporarily extended but at an explicit fee -- say 10bp and banks would have the option of participating. Recall that effective last April, the assessment base on which deposit insurance premiums are calculated was expanded to equal average total assets less tier one capital. Although the FDIC does not publish the average assessment rate for the largest 19 banks, we can infer based on the distribution of the average assessment base that these banks are paying between 10 and 15bp. So a 10bp opt-​in charge might be competitively unattractive. Given the strength of interest-​bearing deposit flows (​that is accounts not covered by the unlimited insurance guarantee and whose behavior is therefore independent of the FDIC'​s decisions), we expect most of the largest banks would opt out of the program if the cost of participation is increased."

He adds, "Assuming that the 19 largest banks, which hold a preponderance of the insured deposits, decide not to participate in 2013, it is not entirely clear that the $​500-​600bn in balances that left money funds since the end of 2010 would return.... [​W]​hile some of the $​500-$​600bn will likely return to money funds, we suspect a sizeable portion could remain at the largest money center banks. The proportion that stays will be higher if, the SEC moves money funds to floating NAVs (​which we consider to be unlikely) or if, the SEC imposes daily redemption limits (​far, more likely)."

​

On Friday, BlackRock published a "​ViewPoints" paper entitled, "​Money Market Funds: The Debate Continues, Exploring Redemption Restrictions, Revisiting the Floating NAV. The 7-​page comment says, "Money market funds (​MMFs) have been a topic of discussion -- and often vehement disagreement -- among regulators and market participants since the 2008 financial crisis and historic "​breaking of the buck" by the Reserve Primary Fund. This single event cast scrutiny upon an industry that for the prior 40 years had successfully provided liquidity to the financial markets -- and market yields to investors -- without requiring government intervention. The result is the implementation of reforms that tightened standards and enhanced protections for MMF investors." (​See also Bloomberg'​s "​BlackRock Says Money Funds Would Survive Floating NAV".)

The paper explains, "Many in the industry believe that these reforms are sufficient. Regulators disagree and continue to explore ways to further strengthen the regulatory structure of MMFs. As an active participant in this dialogue, BlackRock has worked with others to formulate one or more capital solutions for MMFs. These are described in detail in a separate ViewPoint paper titled "Money Market Funds: Potential Capital Solutions," published in August 2011. To date, industry consensus on capital proposals has been elusive. This paper will focus on a model for MMF reform recently highlighted by the Securities and Exchange Commission (​SEC) and currently under consideration. The SEC proposed model would give money fund providers a choice of a stable-​value MMF that incorporates capital buffers plus redemption restrictions or a MMF with a floating net asset value (​NAV). Given that this plan is likely to be proposed by the SEC in the near future, it is important to fully evaluate its likely impact on MMFs and for market participants to identify features that may mitigate the potential negative impacts of these proposals."

On "Where Are We Now?," BlackRock writes, "Fund sponsors, issuers and regulators agree on one key point: MMFs are essential as a source of short-​term financing for businesses, institutions and governments and, as such, are critical to the financial system and the broader economy. Regulators' interest in fortifying the industry is derived from a constructive place and, indeed, the regulatory response in the wake of the 2008 financial crisis was both swift and effective. That said, many fund sponsors argue that additional regulation would bring costs in excess of incremental benefits and believe that the 2010 reforms are sufficient. They contend that the measures imposed to date have met the goal of shielding MMFs and their investors from both idiosyncratic (​fund-​specific) and most systemic (​industry-​wide) shocks. They fear that further reform could do more harm than good. They point out that even in the case of the Reserve Primary Fund, institutional investors lost only 1%, and the government intervention that followed cost taxpayers nothing (​in fact, taxpayers made a profit on the money market-​related programs)."

It continues, "Regulators, however, point out that the improvised steps taken to stem the run on the money markets in 20081 are no longer permitted under the Dodd-​Frank Wall Street Reform and Consumer Protection Act (​Dodd-​Frank Act). As a result, they believe further steps are needed to protect the industry and the broader economy from a potential run on money market funds. SEC Chairman Mary Schapiro is prepared to move quickly on MMF reform and is seeking to issue a notice of proposed rulemaking (​NPR) in the first quarter of 2012, with the goal of having a final rule in place this year. The final position of the SEC remains uncertain given mixed public comments from various commissioners. Opposition to the SEC'​s proposals from the industry and other market participants has also been strong and vocal. Some industry participants have indicated a willingness to pursue legal action if the Commission moves forward with plans that fundamentally alter the structure of MMFs."

BlackRock adds, "In seeking reform, the stated goals of regulators are: i) to reduce the risk of a run on MMFs and ii) to provide a cushion against losses, with a focus on the first issue. Over the past three years, many ideas have been proposed and discussed at great length; none has met with consensus. Various capital solutions have merit in their potential to meet regulators' stated objectives. However, different firms' legal structures make it impossible to find a single solution that works for everyone. At this juncture, given regulators' stated intention to move forward with structural reform, it is important to identify a proposal that preserves MMFs and is acceptable to as many industry participants as possible. The model expected to be put forth by the SEC provides the option of either: i) a stable-​NAV MMF with capital buffers plus redemption restrictions or ii) a floating-​NAV MMF. The latter is not a new proposal, but one that continues to resurface as a potential option. In the following pages, we consider the merits and implications of these ideas. We also consider the case for whether regulators have already done enough."

They comment, "​In July 2010, we published a ViewPoint titled "Money Market Mutual Funds: The Case Against Floating the Net Asset Value." We continue to believe that a floating NAV will not eliminate the risk of runs in money market funds and will substantially contract the industry. However, given the choice between a floating NAV and the redemption restrictions described above, we believe many of our clients will choose the floating NAV. As a result, more thought should be given to how a floating NAV might be structured to meet the needs of investors, regulators and fund sponsors. The discussion that follows is meant to start this dialogue."

BlackRock explains, "We recommend that the following be included in a floating-​NAV proposal: Prime and municipal funds must use the 2a-​7 portfolio rules to use the name "​money market fund." This requirement would maintain a level playing field and would mandate conservative portfolios. Assets with less than 60 days to maturity should be allowed to use amortized cost accounting. A policy package should include an IRS de minimis rule for gains and losses given very small fluctuations in the NAV historically. This would be revenue neutral and would simplify administrative concerns of investors. The goal should be to eliminate the need for tax-​lot accounting of money market shares. The transition strategy and timeframe are critical and must be carefully considered in terms of client education, mapping of assets and operational challenges. Government funds should remain constant-​NAV products. These funds do not present the same credit issues as prime funds. For investors who must have constant NAV, we believe this would be a reasonable (​albeit lower-​yielding) investment option."

They also write, "No discussion of MMF reform would be complete without consideration of the question: Have we done enough already? Some in the industry have argued that sufficient action has been taken and that the $​2.​66 trillion MMF industry is in a place of strength and stability today. On February 7, 2012, Paul Schott Stevens, President and CEO of the ICI, wrote that the SEC proposals that remain on the table today, "​are not necessary, particularly in light of the SEC'​s own success in reforming money market funds." Federated Investors has been outspoken in its view that enough has been done and recently published a paper titled "Leave Money Market Funds Alone!" in which it described the "​bashing" to which MMFs have been subject since 2008 and the SEC'​s "​conscientious and effective job" of overseeing the industry. The paper contrasts the SEC'​s ability to regulate MMFs with the Fed'​s oversight of banks."

BlackRock tells us, "In addition to the changes to MMF standards under Rule 2a-​7 (​outlined on page 2), numerous efforts have been undertaken worldwide to strengthen the broader financial system. In the US, these include the establishment of the Financial Stability Oversight Council (​FSOC), which has the ability to provide proactive and more comprehensive monitoring of the financial markets, including money market instruments; and the implementation of the Dodd-​Frank Act, which further bolsters the safety of MMFs by reducing risk in the instruments issued by financial institutions and held by MMFs. A frequently overlooked point is that in addition to changes to MMFs themselves, regulators have substantially limited the ability of financial institutions to rely on short-​term funding in their capital structures.... We believe the reduced reliance on short-​term funding by financial institutions reduces the systemic importance of the money fund industry. It appears that, in aggregate, these measures have been effective. MMFs have been functioning efficiently, with no systemic or idiosyncratic events recorded since the September 2008 breaking of the buck."

It adds, "Despite the success of the 2010 reforms and the resilience of MMFs during periods of market stress over the past several months, Chairman Schapiro confirmed her intention to take action soon in remarks to the Practicing Law Institute on February 24, 2012. She stated that, "​investors have been given a false sense of security by money fund sponsor support and a one-​time Treasury guarantee" and "funds remain vulnerable to the reality that a single money market fund breaking the buck could trigger a broad and destabilizing run." Chairman Schapiro further noted that, "we need to move forward with some concrete ideas to address these structural risks.""

Finally, the paper states, "BlackRock, as one of the world'​s largest cash management providers, fully supports the goal of strengthening the MMF industry while reducing systemic risk. Throughout the 2008 financial crisis and its aftermath, the swift, decisive and concerted actions taken by regulators were essential in restoring confidence and order to the markets in a time of uncertainty. Many would contend that the new protections have met their goals. However, it appears that more change is imminent for the MMF industry. Faced with this very real possibility, it is important that all interested parties -- policymakers, fund sponsors, industry organizations and corporate and municipal issuers of commercial paper -- are part of the discussions to ensure the best outcome for investors, the MMF industry, the broader financial system and our economy. Ultimately, when contemplating additional change, it is critical to ensure that the reforms, both those implemented and those currently proposed, achieve the objective of protecting MMFs and the shareholders who invest in them without inadvertently destabilizing financial markets or increasing systemic risk."

​

Three new comment letters opposing additional radical regulatory reforms have been added to the SEC'​s "​President'​s Working Group Report on Money Market Fund Reform" Comment Page in the past few days. These include submissions from: Scott Goebel, Senior Vice President and General Counsel, Fidelity Management & Research Company; Joseph L. (​Jay) Hooley, Chairman, President and Chief Executive Officer, State Street Corporation; and, John D. Hawke, Jr., Arnold & Porter LLP, on behalf of Federated Investors. The Fidelity letter features a white paper entitled, "A Look at Regulatory Reform for Money Market Mutual Funds: Studying the Impact of the 2010 Changes," while the `​Federated submission takes aim at a possible new "​holdback" and capital requirements.

The latest addition to the SEC'​s PWG Comment letters says, "Fidelity Investments would like to take the opportunity to provide the Commission with data and commentary regarding the effectiveness of the Commission'​s 2010 amendments to Rule 2a-​7 on money market mutual funds. Currently, money market mutual funds are subject to a comprehensive regulatory framework and to oversight by the Commission. This existing structure includes the recent enhancements to Rule 2a-​7, which were designed to strengthen further money market mutual funds. Fidelity has been working with regulators, including Commission staff, to evaluate the need for additional money market reforms. To inform our viewpoint, we have gathered data that illustrate the impact that the 2010 amendments have had on money market mutual funds, particularly during the turbulent market conditions of the past year."

It continues, "The materials we submit today demonstrate that the amended version of Rule 2a-​7 reduced risk in money market funds by imposing more stringent constraints on portfolio liquidity, maturity, and quality, and through new requirements relating to disclosure, operations, and oversight. In the wake of these SEC actions in 2010, money market funds now hold investment portfolios with lower risk and greater transparency, characteristics that reduce the incentive of shareholders to redeem. Contrary to recent comments by some that mutual funds are living on borrowed time, we strongly believe that additional regulation of money market funds is neither necessary nor desirable.

State Street'​s letter comments, "On behalf of State Street Corporation, I am writing to convey our strong concern with the direction the Securities and Exchange Commission (​SEC) is reportedly heading in connection to money market mutual fund reform. State Street is a major global provider of asset management and servicing to money market mutual funds and similar collective investment vehicles. We believe these funds play an important role in today'​s financial markets, and that the SEC should proceed very cautiously in adopting reform proposals which may unnecessarily limit investors' access to these types of investment products."

They explain, "We understand the systemic risk-​related concerns that have prompted both the Commission'​s current review of money market mutual fund regulation and the higher level reviews of such products at the FSOC and FSB level. However, we are concerned that the proposals under consideration --- including the "floating NAV", "redemption holdback" and "capital buffer" proposals -- will greatly reduce the usefulness of money market mutual funds to investors. By driving investors to less well-​regulated products, these proposals could increase, rather than decrease, systemic risk."

State Street continues, "​We are aware of the liquidity challenges faced by some money market mutual funds during the recent financial crisis. We believe, however, that the 2010 changes the Commission adopted to Rule 2a-​7 significantly reduced the risks such funds present to the financial system and that any additional changes should be very carefully considered, with full consideration given to the needs of investors, and their likely alternative options for investing the $​2.​7 trillion currently held in money market mutual funds."

They add, "The proposals apparently under consideration at the Commission -- including the "​floating NAV", "​redemption holdback" and "​capital buffer" proposals --- appear likely to severely reduce the usefulness of money market mutual funds for investors, who use such funds primarily for cash management, and who rely on having full, liquid, and predictable access to their investments on a daily basis. Adoption of these proposals by the Commission would fundamentally change the characteristics of money market mutual funds, essentially eliminating a substantial portion of the market. We do not believe such a fundamental restructuring of global financial markets will reduce systemic risk, or benefit investors."

Finally, Federated'​s latest comment by John Hawke states, "​We understand that the Commission continues to evaluate additional structural reforms to its regulation ofmoney market mutual funds, including a capital requirement and a 30-​day holdback of a portion of an investor'​s redemption proceeds.... We believe that such requirements would seriously undermine the utility ofMMFs to businesses, governments, investors, and other private and public sector participants in a range of industries. As explained in greater detail below, a holdback requirement (​or minimum balance requirement variant of the same) would eliminate the very liquidity of MMFs that has been central to their widespread use in a variety ofapplications, including corporate payroll processing, storing corporate and institutional operating cash balances, 401(​k) and 403(​b) employee benefit plan processing, and holding broker-​dealer customer cash balances. A capital requirement, which we understand is also being contemplated, would depress already low yields on MMFs, reducing their attractiveness to corporate and retail investors. Finally, we understand that moving MMFs to a floating net asset value is also being considered by the Commission. Please refer to our previous submission dated December 15, 2011 on that subject, which discusses the impact of a floating NAV on a range of business systems."

Hawke adds, "We strongly caution the Commission to appreciate the far-​reaching consequences of these changes before proposing fundamental reforms that would threaten the ability of countless economic participants to use MMFs in conducting basic, everyday business transactions. This dramatic reduction in the size of MMFs would also have a potentially devastating impact on the short-​term markets and raise the cost of capital for countless corporate and municipal issuers. Respectfully, we urge the Commission to refrain from implementing fundamental changes to the regulation of MMFs at this time and to instead conduct a careful analysis of the effectiveness of the 2010 amendments to Rule 2a-​7 and recent enhancements to its oversight of MMFs in order to determine whether any further changes to MMF regulation are warranted. We urge the Commission to also consider the serious potential market ramifications that even the proposal of a rule could have, particularly when coupled with improvident statements intended to justify the adoption of the proposal."

​

TCW Money Market Fund, an $​88 million fund which at one point had grown to over $​2 billion (​in mid-​2008), is the latest money market fund to withdraw from the money fund space. The letter to shareholders announcing the exit says, "Given the current yield environment, the Board of Directors of the TCW Funds, Inc., has decided to liquidate the TCW Money Market Fund (​cusip: 87234N864, Ticker: TCWXX) on or about May 31, 2012. Effective May 25, 2012, in preparation for the termination of the TCW MMF, the TCW MMF will no longer accept new purchases, contributions, or exchanges."

It explains, "In the event that you hold shares in the TCW MMF as of May 31, 2012, and you have not requested a redemption of those shares, an involuntary redemption of your account will occur on or about that date. In the event of an involuntary redemption, TCW will mail a check to you in early June 2012 in the amount of your liquidating account balance. For inquiries regarding the liquidation of the Fund, you may contact your broker or TCW’​s shareholder services unit at 800-​FUND TCW (​800-​386-​3829). Of course, you may liquidate your shares in the TCW MMF on any trading day through the termination date of the TCW MMF, and your redemption will be handled in the customary manner."

TCW is the 74th largest manager of money market mutual funds (​out of 77 total) tracked by Crane Data'​s Money Fund Intelligence XLS. TCW'​s money fund assets have declined by since peaking at $​2.​3 trillion in April 2008. The fund had shrunk to $​733 million by the end of 2008 and to $​121 million by the end of 2010.

In other consolidation news, Dreyfus Basic US Govt MMF (​DBGXX) also recently filed to liquidate. The Prospectus supplement says, "The Board of Trustees of Dreyfus BASIC U.​S. Government Money Market Fund has approved the liquidation of the Fund, effective on or about April 11, 2012. Accordingly, effective on or about February 22, 2012, no new or subsequent investments in the Fund will be permitted, except that subsequent investments will be permitted until the Liquidation Date when made (​i) in any Fund accounts that are in existence as of February 22, 2012 and that serve as "​sweep accounts", (​ii) by participants in group retirement plans (​and their successor plans) if the Fund was established as an investment option under the plans before February 22, 2012, or (​iii) pursuant to the Fund'​s automatic investment plans and dividend reinvestment."

The filing explains, "​In addition, effective on or about February 22, 2012, the Fund'​s transaction fees that are applicable to redemptions and exchanges of Fund shares held in accounts with balances below $​50,​000 will be waived on any redemption or exchange of Fund shares. Please note that checks presented for payment to the Fund'​s transfer agent pursuant to the Fund'​s Checkwriting Privilege after the Fund’​s liquidation will not be honored. Fund shares held on the Liquidation Date in Dreyfus-​sponsored Individual Retirement Accounts and Dreyfus-​sponsored retirement plans will be exchanged for shares of Dreyfus Worldwide Dollar Money Market Fund, Inc., except that Fund shares held on the Liquidation Date in Dreyfus-​sponsored 403(​b)(​7) plans will be exchanged for Class 1 shares of Dreyfus Liquid Assets, Inc., to avoid penalties that may be imposed on holders of IRAs and retirement plans under the Internal Revenue Code if their Fund shares were redeemed in cash. Investors may obtain a copy of the Prospectus of DWWD or DLA by calling 1-​800-​DREYFUS."

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