​

ICI'​s latest "Trends in Mutual Fund Investing, October 2013" shows that money fund assets decreased by $​11.​5 billion in October, after increasing for 3 straight months (​up $​46.​7 billion in September, $​20.​4 billion in August and $​26.​8 billion in July). (​Money funds assets fell in each of the first four months of 2013, rose in May then fell in June.) YTD through 10/​31, ICI shows money fund assets down by $​24.​4 billion, or 1.​0%. The Institute'​s October asset totals show a continued rebound in bond fund assets (​outflows continued, but principal gains drove overall totals higher), up by $​18.​2 billion after increasing $​29.​9 billion in Sept. and falling by $​61.​0 billon in August, $​6.​4 billion in July and a record $​143.​1 billion in June. (​Note that assets include gains and losses and differ from "​flows".) Money fund assets rebounded in the latest week after two weeks of modest outflows and assets are up by about $​9.​0 billion November-​to-​date. Finally, ICI also released its latest "Month-​End Portfolio Holdings of Taxable Money Funds," which show a drop in Treasuries and Repo, and an increase in CP. (​See Crane Data'​s November 14 News, "Nov. MF Portfolio Holdings Show CP and TD Jump; Repo, Treasury.")

ICI'​s October "​Trends" says, "The combined assets of the nation'​s mutual funds increased by $​332.​3 billion, or 2.​3 percent, to $​14.​632 trillion in October, according to the Investment Company Institute'​s official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI.... Bond funds had an outflow of $​15.​58 billion in October, compared with an outflow of $​11.​58 billion in September."

It adds, "Money market funds had an outflow of $​12.​12 billion in October, compared with an inflow of $​45.​71 billion in September. Funds offered primarily to institutions had an outflow of $​1.​85 billion. Funds offered primarily to individuals had an outflow of $​10.​26 billion." ICI'​s "Liquid Assets of Stock Mutual Funds" inched up to 3.​8% from 3.​7% as stock funds continue to hold razor thin reserves of cash.

ICI'​s latest weekly "Money Market Mutual Fund Assets," says, "Total money market mutual fund assets increased by $​15.​10 billion to $​2.​678 trillion for the six-​day period ended Tuesday, November 26, the Investment Company Institute reported today. Taxable government funds increased by $​4.​97 billion, taxable non-​government funds increased by $​10.​99 billion, and tax-​exempt funds decreased by $​860 million." Over the past 4 weeks, ICI shows money fund assets rising by $​9.​0 billion; MMF assets are now up by $​13.​0 billion, or 0.​5%, YTD through Nov. 27. YTD, Institutional MMFs are up by $​25 billion, or 1.​4%, while Retail MMFs are down by $​12 billion, or 1.​3%.

ICI'​s Portfolio Holdings for Oct. 2013 show that Repos declined by $​15.​1 billion, or 3.​0% (​after a sharp drop in August and strong rebound in Sept.) to $​482.​9 billion (​20.​1% of assets). Repos remains the second largest segment of taxable money fund portfolio holdings behind CDs. Holdings of Certificates of Deposits, still the largest position, rose by $​3.​2 billion to $​535.​5 billion (​22.​3%). Treasury Bills & Securities, the third largest segment, decreased by $​14.​3 billion to $​460.​7 billion (​19.​1%).

Commercial Paper, which jumped by $​12.​0 billion, or 3.​3%, remained the fourth largest segment ahead of U.​S. Government Agency Securities. CP holdings totaled $​376.​4 billion (​15.​6% of assets). Agencies fell by $​5.​1 billion to $​355.​4 billion (​14.​8% of taxable assets). Notes (​including Corporate and Bank) rose by $​3.​4 billion to $​94.​1 billion (​3.​9% of assets), and Other holdings rose by $​0.​9 billion to $​85.​6 billion (​3.​6%).

The Number of Accounts Outstanding in ICI'​s Holdings series for taxable money funds decreased by 83,​467 to 24.​123 million, while the Number of Funds fell by 1 to 387. The Average Maturity of Portfolios lengthened by one day to 49 days in Oct. Over the past year, WAMs of Taxable money funds have remained flat.

Note that Crane Data publishes daily asset totals via our Money Fund Intelligence Daily and monthly asset totals via our Money Fund Intelligence XLS. ICI publishes its weekly "​Money Market Mutual Fund Assets" summary (​referenced above), as well as the monthly asset totals. Each data set and time series contains slight differences among the tracked universes of money market mutual funds. Crane also publishes monthly Money Fund Portfolio Holdings and calculates a monthly Portfolio Composition totals from these (​we recently updated our October MFI XLS to reflect the 10/​31 composition data and maturity breakouts), while ICI collects a separate monthly Composition series.

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The Securities & Exchange Commission issues a press release yesterday entitled, "SEC Announces Fraud Charges Against Detroit-​Based Money Market Fund Manager," which says, "The Securities and Exchange Commission today announced fraud charges against a Detroit-​based investment advisory firm and a portfolio manager for deceiving the trustees of a money market fund and failing to comply with rules that limit risk in a money market fund'​s portfolio. Money market funds seek to maintain a stable share price by investing in highly safe securities. Under the federal securities laws, a money market fund may only invest in securities determined by the fund'​s board of trustees to present minimal credit risk." (See the full SEC order here.) This is the only SEC action we'​re aware of involving a money market fund, other than ones related to the now infamous Reserve Primary Fund (​which "​broke the buck" in 2008).

The release explains, "The SEC'​s Enforcement Division alleges that Ambassador Capital Management and Derek Oglesby repeatedly made false statements to trustees of the Ambassador Money Market Fund about the credit risk in the securities they purchased for its portfolio. Trustees also were misled about the fund'​s exposure to the Eurozone credit crisis of 2011 and the diversification of the fund'​s portfolio." The $​184 million Ambassador Money Market Fund (​AMFXX) was liquidated in June 2012, according to our Money Fund Intelligence XLS. (​See our July 2012 MFI News, "​Consolidation Escalates: Federated To Acquire Trustmark; Ambassador, Bishop St. and TCW Disappear".)

George Canellos, co-​director of the SEC'​s Enforcement Division, says, "Money market fund managers must not hide the ball from a fund'​s board. Ambassador Capital Management and Oglesby weren'​t truthful about whether securities in the portfolio threatened to destabilize the fund, and they failed to operate under the strict conditions designed for money market fund managers to limit risk exposure and maintain a stable price."

The SEC statement continues, "The enforcement action stems from an ongoing analysis of money market fund data by the SEC'​s Division of Investment Management, in this case a review of the gross yield of funds as a marker of risk. The performance of the Ambassador Money Market Fund was identified as consistently different from the rest of the market. Upon further examination by the SEC'​s Office of Compliance Inspections and Examinations, the matter was referred to the Enforcement Division'​s Asset Management Unit for investigation."

It continues, "The Enforcement Division'​s investigation found that Ambassador Capital Management and Oglesby misrepresented or withheld critical facts from the fund'​s trustees: The firm'​s self-​imposed holding period restrictions were frequently exceeded for securities in the fund'​s portfolio. The fund regularly purchased securities that had greater than minimal credit risk under the firm'​s own guidelines. Throughout the Eurozone credit crisis in 2011, the fund continually purchased securities issued by Italian-​affiliated entities despite Oglesby'​s claim that Ambassador Capital Management was trying to stay away from Italian exposure and would unload even secondhand exposure to the Italian market. The fund'​s portfolio was not sufficiently diversified and thus had not reduced risk exposure as portrayed to trustees."

The release adds, "According to the SEC'​s order instituting administrative proceedings, Ambassador Capital Management also caused the fund to deviate from the risk-​limiting provisions of Rule 2a-​7 under the Investment Company Act of 1940. The firm also failed to conduct an appropriate stress test of the fund'​s portfolio. Since the Ambassador Money Market Fund failed to follow the risk-​limiting provisions of Rule 2a-​7, it was not permitted to use the amortized cost method of valuing securities under which it priced its securities at $​1 per share. It also shouldn'​t have been represented to investors as a money market fund."

Marshall Sprung, co-​chief of the SEC Enforcement Division'​s Asset Management Unit, tells us, "Compliance with the risk-​limiting provisions is critically important for a money market fund. Deviations can have serious consequences for pricing of fund shares and how the fund markets itself to investors."

The release also says, "The SEC'​s order alleges that Ambassador Capital Management violated the antifraud provisions of the Investment Advisers Act of 1940 and Oglesby aided and abetted the firm'​s violations. They allegedly caused violations of the pricing, naming, and recordkeeping provisions of the Investment Company Act, and the firm caused violations of the compliance provision. The SEC'​s investigation was conducted by Amy Stahl Cotter and John J. Sikora Jr. of the Asset Management Unit in the Chicago Regional Office with assistance from Marita Bartolini of the Office of Compliance Inspections and Examinations. The SEC'​s litigation will be led by Jonathan S. Polish, Robert Moye, and Timothy S. Leiman."

It adds, "The Division of Investment Management'​s Risk and Examinations Office monitors trends in the asset management industry and utilizes the data to inform policy and evaluate potential rulemaking. The office interacts with registrants through an inspection and examination program. Its ongoing quantitative and qualitative analysis of the asset management industry played a vital role in this enforcement action."

Norm Champ, director of the SEC Division of Investment Management, comments, "This is an excellent example of how our investment in data analysis leads directly to investor protection. With a team of specialists who understand these products working alongside financial analysts, we can produce solid information for examination and enforcement use."

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Today, we excerpt from another of the post-​deadline Comments on the SEC'​s Proposed Money Market Fund Reforms. A recent letter from John McGonigle, Vice Chairman, Federated Investors, entitled, "Comments Regarding Penny Rounding Alternative," says, "This letter supplements our comment letters regarding the Securities and Exchange Commission'​s release proposing Money Market Fund Reform [​and] Amendments to Form PF (​the "​Release"), and relates to a money market fund reform alternative that we discussed with the staff of the Securities and Exchange Commission (​the "​Commission") on October 29, 2013. During our meeting, we provided an overview regarding the following proposal made in a previous comment letter: "The Commission could address [​problems inherent in the penny rounding method] by permitting stable NAV MMFs to rely on the prior day'​s share price, derived using market-​based factors and penny rounding, to transact throughout the subsequent business day, absent action by the board." At the meeting, we undertook to file a comment letter discussing our proposal."

The comment explains, "Federated Investors, Inc. ("​Federated") was among the first MMF managers to obtain an exemptive order permitting use of the amortized cost method to maintain a stable net asset value per share (​a stable "​NAV"). As noted in the Amortized Cost Comment Letter, Federated continues to believe that the amortized cost method of valuation is a fair, accurate and efficient means of valuing money market fund portfolio securities. We have never used the penny rounding method for our MMFs, and are not aware of any MMF that currently uses this method of maintaining a stable share price. We are aware that there are some in the regulatory community that oppose continued use of amortized cost in connection with money market fund; therefore, we have analyzed the steps required to convert our MMFs' operations to the penny rounding method. This letter develops an alternative means of penny rounding that preserves the benefits of the amortized cost method for MMF shareholders while addressing the concerns (​which we still consider unsubstantiated) of those who insist that MMFs must base their share price on a current estimate of their portfolios' market values. We would reassert that all MMFs, not just government or so-​called "​retail" funds, should be permitted to attempt to maintain a stable NAV using this penny rounding method, if the amortized cost method were no longer permitted."

McGonigle'​s summary says, "Federated'​s proposal is similar to the "​stability band" recommended by Capital Advisors Group. MMFs would calculate their NAV each day in the same manner as other mutual funds, except that the NAV would be calculated to the nearest basis point (​an "​unrounded NAV"). MMFs would disclose their unrounded NAV on their websites, as currently proposed. The NAV would be rounded to the nearest cent per share, however, for purposes of shareholder transactions. Thus, a $​1 share price would remain stable so long as the unrounded NAV remained between $​0.​9950 and $​1.​0049."

It continues, "Capital Advisors Group did not address the operational aspects of the penny rounding method in its comments. Operationally, Federated believes that it is critical that the penny rounding method not require repeated attempts to estimate whether a MMF'​s portfolio has experienced minute fluctuations in value during the course of a day. We believe it should be sufficient for a MMF to calculate an unrounded NAV once each business day, and that a MMF should be permitted to continue to use the resulting portfolio valuation for any interim NAV calculations. For example, if a MMF calculates its unrounded shadow NAV as of 3 p.​m. each business day, and also calculates its NAV as of noon of each business day for purposes of paying same-​day redemptions, the MMF should be permitted to use the estimated portfolio value determined as of 3 p.​m. on the prior day for the noon calculation."

Federated explains, "A MMF should not be permitted to rely on an earlier portfolio valuation if there was an intervening significant market event that materially affected the portfolio'​s estimated value. As Rule 2a-​7 already requires MMFs to monitor general market conditions for purposes of determining an appropriate weighted average maturity and to monitor the minimum credit risk of all portfolio holdings, MMFs should already have procedures for identifying such significant events. To return to the example of a MMF with a noon valuation, if the issuer of securities held in the portfolio unexpectedly filed for bankruptcy after 3 p.​m. the previous day, the MMF would have to update its estimates of the fair values of portfolio securities issued by that company for purposes of its noon calculation."

They add, "Finally, to protect shareholders from material dilution or other unfair results that might occur even though an unrounded NAV has not fallen below $​0.​9950, Federated recommends the Commission incorporate into the penny rounding method certain responsibilities for a MMF'​s board of directors or trustees (​a fund'​s "​Board") currently only required under the amortized cost method. These would include the responsibilities to (​a) adopt written supervisory procedures, which should include procedures for responding to significant events, (​b) monitor the deviation between the unrounded NAV and the stable $​1 share price and (​c) take action if necessary to prevent such a deviation from resulting in material dilution or other unfair results to investors and existing shareholders."

The letter tells us, "Some critics of MMFs find it difficult to understand how a money market instrument'​s amortized cost closely approximates its current market value or how quickly occasional fluctuations from the amortized costs are rectified. Such people may also erroneously believe that estimates provided by pricing services represent the "​marked-​to-​market" value of a MMF’​s portfolio. While Federated does not accept either of these views, we do not object to using daily price estimates for portfolio securities to calculate a MMF'​s penny-​rounded NAV, so long as this does not impair the benefits of a MMF to its shareholders."

Federated writes, "Our Amortized Cost Comment Letter explains how the penny rounding method, as currently employed, would impair the benefits of MMFs by forcing shareholders to wait (​possibly until the next business day) for redemption proceeds. Unless modified, use of the penny rounding method would also make MMFs less reliable and create significant risks to the payment system. The costs of additional price data feeds would also make MMFs more expensive and reduce their returns to shareholders."

They state, "To preserve the benefits of MMFs under the penny rounding method, it is necessary to reduce the number of price data feeds required to calculate the MMF'​s unrounded NAV throughout the day. If the Commission required a MMF using the penny rounding method to update its price estimates only (​1) once each business day and (​2) following a significant market event occurring after the time as of which the previous price estimates were determined, then a penny rounding MMF could operate on much the same basis as an amortized cost MMF. A MMF should need to update the estimated prices only for securities affected by the significant event. This use of earlier valuations would be entirely consistent with existing precedent -- specifically, the valuation of securities traded primarily in foreign markets."

Federated explains, "This approach would fully disclose to shareholders and the market a MMF'​s estimated market-​based NAV calculated to the nearest basis point, without requiring shareholders to transact at that estimated price. It would make the settlement of shareholder transaction less dependent on the availability of estimated price data feeds from pricing services and would permit multiple settlement times with little incremental cost or operational risk."

The letter adds, "Finally, if the Commission requires MMFs to use the penny rounding method in any form, it should amend Rule 2a-​7 to require Boards to exercise the same degree of supervision as they do under the amortized cost method. Nothing in the nature of the penny rounding method reduces the need for oversight of deviations of the unrounded NAV from $​1."

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We'​ve gotten used to outrageous statements on money market funds from the Financial Times over the past several years, but the latest one takes the cake. Their article from late last week, "Money funds at risk of big drop in assets," reaches new heights of ridiculousness with the claim that money funds could lose one-​third of their assets in the next year. The FT, which sources a Moody'​s report that groups U.​S. money funds in with the totally different "​European" variety, writes, "Global money market funds are projected to lose around a third of their assets under management next year as the combined forces of record low interest rates and new regulations batter the multi-​trillion dollar industry. Incoming rules from regulators in the US and Europe could trigger outflows of at least 30 per cent, according to Moody'​s, the credit rating agency, with medium and small funds hit worst as spooked investors pull their money."

The article explains, "Under US and European regulators' proposals money market funds are set to change their approach to pricing, potentially moving from a stable $​1 or E1 net asset value to one that will fluctuate according to the market value of the underlying investments.... EU authorities have also proposed that money market funds should hold capital buffers equal to 3 per cent of their investments." (​The European Union regulatory proposal gives the option of a buffer for stable NAV funds or a floating NAV, but it isn'​t expected to become law for well over a year.)

The FT adds, "In the US, the Securities and Exchange Commission has also proposed limiting investors' ability to withdraw their cash from money market funds during times of market stress, and is currently weighing whether this idea is better than a floating NAV, or whether it can combine the two. The changes would only affect part of the industry. The SEC plans to exempt funds that invest only in super-​safe government securities, and those targeted at retail investors, who are seen as less likely to start a run on a fund. The gloomy Moody'​s prognosis comes as low interest rates, which squeeze funds' already wafer-​thin margins, has led to declines in assets under management for many funds."

The quote Moody'​s Yaron Ernst, "If the regulation comes in as proposed we expect a 30 per cent or higher decline of AUM because of the likely switch to '​variable net asset values' by most managers. The AUM decline will especially affect small and medium-​sized fund complexes that will be taking the hardest hit."

Crane Data believes Moody'​s and the FT'​s estimates to be ridiculous. There are currently approximately $​4.​5 trillion in global money fund assets (​according to ICI); they have decreased by a mere $​89 billion, or 1.​9% over the past year (​already well into the zero rate and potential radical regulatory overhaul environment). A 30% decline would mean a drop of $​1.​35 trillion in the coming year and would be a rate of decline never seen in money funds' 40-​year history. U.​S. money funds, which have been effectively flat for 3 years straight, account for almost 58 percent of the worldwide total ($​2.​6 trillion); they would need to decline by over $​775 billion for a drop of this magnitude. Thus, we think these bearish predictions have no chance of being right. We think even a drop of half of this magnitude is very unlikely even given drastic regulatory change (​and we don'​t think the more radical changes will become reality).

In other news, Joan Ohlbaum Swirsky of Stradley Ronon wrote recently about "U.​S. Debt Ceiling – Lessons Learned for Money Market Funds. She says, "​A unique event may display issues in a new light. The U.​S. debt ceiling uncertainty during October 2013 illustrates that effect. Congress delayed increasing the cap on the amount the U.​S. government is permitted to borrow to meet its existing obligations. The resulting events – such as the decline in value of certain short-​dated Treasury bills and the increased redemptions in some money market funds – provided a new prism through which to view disclosure and other issues for money market funds. Below are a few of the issues that took on a changed complexion for some money market funds as the debt ceiling deadline approached. Money market fund professionals now have the luxury to consider these points, free of a looming deadline to avoid a U.​S. Treasury credit default."

Swirsky continues, "Consider disclosing ability to delay payment of redemption proceeds. During the October debt ceiling debate, some money market funds may have contemplated using the flexibility that the Investment Company Act provides regarding payment of redemption proceeds: A fund may postpone the right of payment upon redemption for up to seven days. However, some money market funds do not include prospectus disclosure that reflects the permitted flexibility.... Consider disclosure of cash investments. Some money market funds may have held more cash than usual during October in order to ensure sufficient liquidity in the event redemptions accelerated. If so, prospectus disclosure that permits a temporary defensive strategy would be appropriate.... Review requirements to dispose of securities – rule, procedures and disclosure.... [​and] Consider ability to convene the board"

Finally, she adds, "These are a few of the host of issues that may arise for money market funds during challenging markets. To address some of the issues, funds or advisers may consider having in place escalation procedures or negative event protocols. By considering these issues during tranquil circumstances, funds may help themselves weather the more turbulent circumstances that are sure to arise from time to time."

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Yet another late entry on the SEC'​s "​Comments on Proposed Rule: Money Market Fund Reform; Amendments to Form PF" has been posted, this one from Jeffrey N. Gordon, Professor of Law, Columbia Law School. Gordon, a long-​time opponent of money funds, writes, "​This letter is submitted by me personally in connection with the request for comments by the Securities Exchange Commission in response to its Money Market Fund Reform Proposals of June 5, 2013. I am the Richard Paul Richman Professor at Columbia Law School and co-​director of the Millstein Center for Global Markets and Corporate Ownership. I have submitted two comments in response to prior SEC releases, an invited written submission in connection with the June 2012 hearings on money market fund reform held by the Committee on Banking, Housing, and Urban Affairs of the U.​S. Senate, and a comment on the Financial Stability Oversight Council Proposed Recommendations on November 2012, which is attached hereto and made part of this comment. I have recently written a paper on money market fund policy questions entitled Money Market Funds Run Risk: Will Floating Net Asset Value Fix the Problem? (​with Christopher M. Gandia), which is attached hereto and made part of this comment. My comments on the particular SEC proposals draw on analysis and findings in that paper. I am not retained by any party with a potential interest in these reform proposals nor have I received support for my research on money market funds from any such party."

He explains, "My summary responses to the proposed alternatives are as follows: 1. Floating NAV/ Proposal One. I do not favor the current floating NAV proposal, because it does not address the systemic run-​risk problem of money market funds ("​MMFs") and worse, will give the appearance of addressing those problems. 2. Gates/​Redemption Fees/ Proposal Two. I do not favor Proposal Two, which will exacerbate the present run risks of MMFs by injecting a new source of uncertainty and instability without substantially changing the run risks of the present fixed NAV funds."

Gordon continues, "​3. The SEC proposals fail to come to grips with the core problem of MMFs as presently constituted: they perform bank-​like functions of liquidity and maturity transformation and they bear credit risk, all without any independent capacity to bear loss. Under either of the SEC proposals, the stability of the MMF sector will continue to depend upon implicit sponsor support, the same kind off-​balance guarantees that proved to be insufficient in the 2007-​09 financial crisis. Such conditional guarantees are an unacceptable safeguard for a multi-​trillion dollar financial intermediary. Otherwise put, the SEC proposal relies on a future Federal Reserve bailout to protect the stability of the MMF sector."

He tells us, "4. The SEC should reconsider alternative proposals that provide for capital or other mechanisms of loss absorbency, such as Proposals Two and Three in the FSOC'​s Proposed Recommendations. Alternatively, in a prior submission, I have proposed a bundled Class A/​Class B structure that provides a mechanism for loss absorbency and disincentives for runs."

On the Floating NAV proposal, Gordon comments, "The chief driver of MMF run risk is the response of safety-​seeking MMF users in circumstances that threaten full payment of principal, not the desire to capture the small permitted spread between $​1 reported NAV and $​0.​995 actual NAV. In a floating NAV structure, the incentive to run remains: In conditions of financial distress, today'​s exit price is almost certain to be higher than tomorrow'​s exit price. Money market instruments rarely trade and so today'​s apparent price does not reflect the likely future path of price changes in a distressed market. Sophisticated parties are well aware of this dynamic and will act accordingly. In short, the adoption of the floating NAV alternative would leave MMFs still highly exposed to run risk."

He adds, "​For example, assume that Reserve Primary Fund had been a floating NAV fund in 2008. The default of Lehman Brothers would certainly have reduced the NAV of Reserve Primary Fund and every other fund that held Lehman paper, perhaps by the full amount of the fund'​s Lehman holdings. But the Lehman default also would have reduced the "​true" NAV of virtually every MMF. This is because claims on financial institutions constituted the overwhelming share (> 85 percent) of the non-​US government holdings of most MMFs, and the value of those claims were highly correlated because of the interlocks, contagion mechanisms, and parallel behavior in the financial sector. But because money market instruments rarely trade, their carrying value on the books of a MMF would have been "​stale." A sophisticated party would have known that as more trading occurred, values would fall, thus today'​s NAV would be higher than tomorrow'​s NAV. In short, floating NAV would not have eliminated the first mover advantage."

Gordon writes, "​The argument that floating NAV makes MMFs just like other mutual funds ignores the particular function of MMFs on both the liability side and the asset side. For many investors, particularly institutional MMF users, MMFs are a non-​bank substitute for a bank transaction account. MMF users are generally seeking safety and liquidity. MMFs may improve on the safety of a bank transaction account because they assemble diversified portfolios of short term claims. But when safety and liquidity are at risk, MMF users can be expected to exit en masse, not exhibiting the pattern of holding or "​slow" exits in other mutual funds."

He says, "Similarly, floating NAV as means to desensitize investors to fluctuating MMF valuations seems to misperceive what drives a systemic MMF run: It is not the breaking of the buck at any particular fund, but a high-​enough probability that the underlying portfolio event(​s) that produced a break will correlate across MMFs generally. The prior instance of buck-​breaking, the Community Bankers Fund in 1994, provides an instructive example. The fund broke the buck because of valuation changes in a portfolio "​unsuitably" concentrated (​27 percent) in interest-​rate sensitive structured notes. The fund was small (​only $​150 million), its portfolio concentration violated the SEC rule, and the securities did not default. The fund'​s idiosyncratic investment strategy (​and small size) meant that the industry did not suffer a run. By contrast, the Reserve Primary Fund ($​60 billion) held defaulted-​upon securities of a large financial firm (​Lehman) at a time of (​i) high concentration of MMF assets in the financial sector and (​ii) increasing and correlated instability among financial firms. In other words, it appears that the correlation of possible portfolio losses rather than the "​focal point" effect of a buck-​breaking was the main driver of the MMF run. A floating NAV fund is susceptible to these correlation concerns no less than a fixed NAV fund."

Gordon explains, "In a research paper that is included with this submission, Money Market Funds Run Risk: Will Floating Net Asset Value Fix the Problem?, a co-​author and I take advantage of a natural experiment presented by European money market funds to provide empirical evidence on the run risk of floating NAV funds. Although all US MMFs are fixed NAV funds, money market funds offered in Europe come in both "​stable NAV" and "​accumulating NAV" varieties. A "​stable NAV" fund is equivalent to the "​fixed" US counterpart. An "​accumulating" fund does not maintain fixed NAV, and while it does not fully "​float," it does offer a useful proxy for the effects of a "​floating NAV" fund."

He continues, "​We examined the performance of these European MMFs during "​Lehman Week" to test the factors that contributed to run propensity. Although virtually all funds experienced a significant run, the only internal factor that consistently predicted extra run propensity in our various models was ex ante risk, proxied by reported yield before Lehman Week. By contrast, the difference in run propensity between stable and accumulating NAV funds was not economically or statistically significant, indicating that NAV "​fixedness" did not contribute to the run. In short, the best empirical evidence we have suggests that floating NAV will not reduce MMF run-​risk during periods of financial distress."

Finally, Gordon writes, "There is perhaps $​6 trillion in short term funds in the global financial system looking for safety and liquidity outside of the banking system. It is important to devise financial institutions that can manage such cash flows in a systemically robust way and that does not depend on a taxpayer subsidy for its rescue. The prior design of MMF was an experiment that produced a bad outcome. So we must experiment again, learning from experience and being willing to revise our institutions in light of new economic challenges. My apologies for the late submission of this comment. I respectfully ask that it be added to the record of these proceedings."

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We were recently sent a brief comment entitled, "For Money Funds, Rule Proposal Comments Offer Few Clues to Industry Future," written by Larry Locke, Assistant Professor of Management at the University of Mary Hardin-​Baylor McLane College of Business. Locke and research partner Blake Mariage write, "Last June the SEC released its long-​awaited proposal for reforming the money market mutual fund industry. Money funds have been identified as a source of weakness in the financial markets and held partly responsible for the market break of September, 2008. This proposed rules release followed a failed effort from former Chairman Schapiro who worked on a previous set of proposals but was unable to secure the necessary three votes on the Commission to issue them."

The comment explains, "The proposal that was finally published under the leadership of Chairman White had little resemblance to Schapiro'​s. The almost 700 page current proposal puts forward two major options for revising the market, which might be promulgated independently or in tandem. The first is to force prime money market funds to adopt a floating NAV (​net asset value). These funds would no longer be offered and redeemed for $​1 per share but would instead be priced to the 4th decimal place so as to reflect very small changes in the value of the securities underlying the fund. Government and retail funds would be exempt from the new pricing requirements. The second alternative is to permit a fund'​s board of directors to place a temporary moratorium on redemptions (​referred to as a "​gate") when the fund finds itself to be illiquid, and to require the imposition of a 2% fee on shareholders who redeem during a period of illiquidity."

Locke tells us, "Comments on the proposal are still trickling in but one of my research partners here at the University of Mary Hardin-​Baylor, Blake Mariage, and I have already run some numbers on the comments received. As of this writing, the proposal has drawn 1,​428 comments, 1,​219 of which were on six different form letters. Of the 209 non-​form letter comments, approximately 169, or 81% of the letters were from institutions (​based on an analysis of both the writer and the content of the letter). The remaining 40, or 19%, were from individuals."

He continues, "The overwhelming message of the commenters was a rejection of the first alternative and, perhaps, a grudging acceptance of the second. Again, not counting the form letter comments, 139 commenters (​67%) addressed the floating NAV alternative in an unfavorable way. Commenters favoring the floating NAV alternative were 17 (​8%) and 53 (​25%) were neutral or silent on the proposal. The second alternative was received favorably, or more favorably than the first alternative, in 48 (​23%) of the total comments, 54 (​26%) commenters were unfavorable on the fees and gates alternative and 107 (​51%) were silent or neutral."

Locke adds, "​Under normal conditions, this kind of reaction to a regulatory proposal should provide strong evidence of the future direction of the rules. One would expect the SEC, if it were to move forward with either alternative, to adopt some version of the liquidity fees and gates proposal and shelve, at least for now, the floating NAV idea. But there are a couple of reasons why the expected outcome may not occur in this case. One is that at the same time that the SEC was collecting comment letters, SEC commissioners, including Chairman White, and SEC staffers engaged in a total of 38 private meetings on money market reform, exclusively with institutional or governmental players. The exact content of these meetings is not part of the public comment record and it is unknown whether the meetings were tilted more towards either of the SEC'​s alternatives."

The professor writes, "​Commissioners and SEC staff meeting with institutional players in the money market industry is not the problem. Comments and discussions can be much more nuanced in face-​to-​face meetings than is possible in a comment letter. I would commend the Chairman for participating in 11 of those meetings -- providing leadership on this important issue. The problem is that because the content of the meetings is not readily available to the public, the SEC'​s reaction to those meetings and their content are unpredictable. While they may make for better, more informed rulemaking, private meetings make for a more opaque process and ultimately a less accountable Commission."

He continues, "The second reason the future of money fund reform remains unpredictable is that the comments of investors and issuers in this market may have little bearing on its future, no matter whether they were rendered in public comment letters or in private meetings. From the early calls for rule changes in October 2010 by the President'​s Working Group, money fund reform has been driven by governmental and regulatory bodies seeking to control systemic risk, not by participants in the market. In the world of money fund reform, the Financial Stability Oversight Council'​s view may be the only one that counts."

Finally, Locke tells us, "Money market participants, including large numbers of average Americans, now find themselves dependent upon Chairman White and the remainder of the Commission to chart a course reflective of their needs. While the public has had a chance to speak on the issue, its voice may be muted by private conversations and political pressure. Both industry participants and investors would like to begin the long task of preparing for a reformed money market product but they will probably be reluctant to head too far down that road until they know the final destination. Given the unpredictability of the SEC'​s ultimate decision at this point, all the industry and the rest of America can do is wait."

​

Below, we excerpt from this month'​s November MFI fund "​profile," a piece entitled, "​Going Global w/​Liquidity: JPMAM'​s John Donohue." The article says: In the latest Money Fund Intelligence, we speak with John Donohue, J.​P. Morgan Asset Management'​s Head of Global Liquidity and Chief Investment Officer. Donohue shares his thoughts on market trends, portfolio strategies and the pending proposals for new money fund regulation. Our Q&​A follows.

MFI: Tell us about JPMAM'​s history in money funds. Donohue: J.​P. Morgan has been a provider of money market funds since 1987, which covers quite a few market cycles. In 2003, we decided to globalize the business and significantly bolster our investment platform, client service and fund management infrastructure. Back then, we had funds in just three currencies (​USD, EUR, GBP). Now we have 30 different money market funds in eight currencies (​including JPY, AUD, RMB, SGD, CNH) across 28 countries. J.​P. Morgan is the leading global liquidity manager, managing more than $​450 billion in assets, with a 15% share of the institutional funds market. Just 15 years ago, the business had only $​5 billion in assets, less than a 1% market share.

In times of market stress -- including the financial crisis of 2008-​09 -- investors in a '​flight to quality' have widely seen our funds as a safe haven. Our U.​S. institutional market share saw 5% growth during this time period. In just 2008, our 100% Treasury Securities Money Market Fund and U.​S. Treasury Plus Money Market Fund collectively had net inflows of over $​25 billion.

MFI: What about your personal history and recent changes? Donohue: I joined J.​P. Morgan as a vice president in 1997. I was hired from Goldman Sachs to help build out and expand the short term portfolio management team at J.​P. Morgan Asset Management. In early 2013, Bob Deutsch, the former head of Global Liquidity distribution, took on a new role leading the build-​out of our ETF strategy and platform. Bob and I had been the two key architects of our global liquidity businesses, so it was only natural that, following Bob'​s appointment, we decided to bring together both the Global Liquidity investment and client teams. We encourage continued partnership and leverage the best insights and ideas from across the group. I lead this integrated team and oversee all aspects of the business, including product development, portfolio management, sales and marketing.

MFI: How Bob'​s new role going? Donohue: As you know, ETFs are one of the fastest growing areas of asset management. ETFs present an exciting growth opportunity for us to leverage our strong active investment management platform. J.​P. Morgan Asset Management has built a dedicated team of experienced professionals who are working to develop and launch ETFs. We took a big first step in that direction on Oct. 21 when J.​P. Morgan filed a registration statement with the SEC to launch a Global Equity ETF.

MFI: What about the recent SEC proposals for new money fund regulation? Donohue: J.​P. Morgan Asset Management supports regulatory change that works to achieve the optimal balance of reducing systemic risk and preserving money market funds as an efficient and viable tool for investors. Recent reforms by the SEC, along with voluntary disclosures of certain fund-​specific data by J.​P. Morgan Asset Management as well as other money market fund sponsors, have worked to reduce risk, improve liquidity and disclosure and ensure the continued stability for short-​term fixed income markets.

That being said, more can be done. We believe that the best option for achieving the SEC'​s objectives is a variation of the fees and gates alternative, "​Alternative Two". Under this proposal a board, in its discretion, may impose a gate, and potentially thereafter a liquidity fee, among other options. We believe that a gate is the only way to effectively stop mass redemptions ("​runs"). In our judgment a fund'​s board should determine the appropriate threshold for imposing a gate.

MFI: What about the floating NAV? Donohue: If the SEC pursues "​Alternative One," the floating NAV proposal, we believe that the Commission should not distinguish between retail and institutional investors. In addition, we have identified a number of significant operational and transitional challenges that a transition to a floating NAV would pose to investors, the industry and the financial markets.

MFI: Your offshore platform is extensive. What markets do you serve? Donohue: JPMorgan Global Liquidity Funds are sold in 19 countries across Europe, with 11 specialist sales people dedicated to the platform. We also have investors from South America, the Middle East and Asia. As of Oct. 25, the assets in the offshore platform stood at $​121 billion. In 2004, we expanded our business into Asia. Since then, we have pioneered the development of a consistent platform of domestic currency money market funds across key markets in the region. Most of these funds were the first or only AAA-​rated money market funds in their respective markets (​which includes China, Japan, Singapore and Australia). [​Look for more excerpts next week, or see the November MFI for the full interview.]

​

The latest addition to the SEC'​s "​Comments on Proposed Rule: Money Market Fund Reform" is a paper entitled, "Meddling in money market funds," written by former Federal Reserve counsel Melanie Fein. She writes, "This paper questions why twelve Federal Reserve Bank presidents have interposed themselves in a rulemaking by the Securities and Exchange Commission concerning money market funds. The Reserve Bank presidents recently submitted a joint letter urging the SEC to prohibit MMFs from pricing their shares at $​1.​00 per share and to require them to reflect infinitesimal fluctuations in net asset value in their share price. Numerous other letters to the SEC argue that such action would destroy the utility of MMFs and unnecessarily deprive investors of an efficient investment product while potentially increasing financial instability and systemic risk."

Fein explains, "The Reserve Banks have no jurisdiction over money market funds, no collective expertise in their operations, and no experience regulating them. The Reserve Banks have done seemingly little to advance the outstanding agenda of bank regulatory reforms mandated by the Dodd-​Frank Act to address the causes of the 2008 financial crisis. It thus is curious why they have made money market funds a cause celebre when so many critical areas of banking supervision require their attention. Equally curious is why they have advocated changes in MMFs that are greatly at odds with informed views of investors, industry experts, and academic economists."

She continues, "This paper examines the substance of the Reserve Bank letter and concludes that it reflects a flawed view of the causes of financial crisis and current threats to financial stability. This paper also suggests that the Reserve Bank presidents may have ulterior motives unrelated to legitimate financial stability concerns. Among other things, they may be seeking to invent a new role for themselves as their relevance in the financial system declines when they should instead be focusing their joint advocacy efforts on bank compliance and supervisory issues. As far as the public record shows, the Reserve Banks have not submitted any written recommendations to the Federal Reserve Board of Governors for action in critical bank regulatory reform areas, either singly or as a group. Their reticence is striking compared to their highly publicized demands that the SEC adopt radical changes to MMFs."

Fein adds, "​The Reserve Banks have an important role to play in their designated sphere within the financial system. Whether twelve of them are needed for that role is unclear. What is clear is that their sphere is not MMFs and that twelve of them are not needed to advise the SEC on how it should regulate MMFs. Rather than lobby the SEC to resolve what in reality are bank financial stability issues, the Reserve Bank presidents should focus their collaborative efforts on encouraging the Board of Governors to complete its unfinished agenda of bank supervisory reforms mandated by the Dodd-​Frank Act."

She writes in her Introduction, "Among the many letters submitted to the Securities and Exchange Commission in response to its invitation for comment on potential regulatory changes for money market funds, only a handful supported eliminating the stable net asset value of $​1.​00 per share. Among these was a letter from the presidents of the twelve Federal Reserve Banks. In addition to supporting a "​floating" NAV for all MMFs, which the vast majority of other commenters said would destroy the utility of MMFs and not prevent runs, the Reserve Bank presidents opposed the SEC'​s proposal to allow MMFs to temporarily suspend redemptions in a crisis, which many commenters said is the only way to stop a run in the rare event one should occur."

Her Conclusion states, "The core duties of the Federal Reserve Banks in check clearing, banking supervision, and monetary policy have diminished in recent years. The Reserve Banks appear to be looking for other areas to take up the slack. The regulation of money market funds is not an area they should be looking at. The Dodd-​Frank Act sought to limit their role in financial regulatory policy matters. The floating NAV idea they advocate would worsen the problem they say they seek to solve. MMFs did not cause the financial crisis and do not pose a risk to U.​S. financial stability. The Reserve Bank focus on MMFs is misplaced."

Finally, Fein tells us, "The floating NAV idea is not a substitute for regulations that curb inappropriate reliance on short-​term credit by banks and strengthen bank liquidity and capital. Destroying MMFs will not solve the problem of too-​big-​to-​fail banking organizations but will result in them becoming bigger. Eliminating the $​1.​00 NAV would deprive investors of a safe and efficient cash management tool not available from banks. It would diminish MMFs as efficient suppliers of short-​term credit for banking organizations as well as other borrowers, including municipalities that rely on MMFs for short-​term credit to fund a wide range of public projects."

​

J.​P. Morgan Asset Management released a survey of global liquidity investors last week which showed that worldwide money fund usage remains strong and should continue to do so even with potential regulatory changes. Their press release comments, "Research from J.​P. Morgan Asset Management shows that treasurers are concerned about a possible move to floating NAV, but they are still committed to money market funds. The inaugural J.​P. Morgan Global Liquidity Investment PeerView has been established to be able to provide respondents with customised scorecards so they can see where they sit in line with their peers in the same region, cash balances and industry. The first survey has focused on corporate treasurers' investment decisions. The findings of the survey showed that of those treasurers who would reduce or eliminate their use of money market funds as a result of a move to floating NAV MMFs, most would reallocate assets to bank deposits or other assets that are less diversified and still have credit risk. The respondents noted that two of the biggest barriers preventing companies from using floating NAV are the uncertainty of realised or unrealised gains or losses and the existing structure of their investment policies."

Jim Fuell, Head of Global Liquidity, EMEA, tells us, "Uncertainty around regulation is prevalent amongst investors, as is risk and yield. These competing factors are increasing in intensity and the result of this is that some investors are looking to recalibrate their cash investment decision-​making. However, the fact that more than two thirds of respondents continue to be committed to money market funds shows how integral investors consider this sector to be in their cash assets.... We have experienced growing interest from investors for customised portfolios and we put this down to a clear demonstration of the need for yield. The benefit to investors is that they are defining their own risk, return and liquidity objectives, which can obviously lead to a higher yield."

JPMAM adds, "The survey of 201 cash investors [​clients of JPM] highlighted that close to a third of their cash assets are allocated to money market investments, the highest usage being in Europe, and that one in every five dollars is in separately managed accounts." The geographical breakdown of respondents was Asia (​41%), North America (​31%) and Europe (​28%).

The "Executive Summary" explains that investors are "Searching for yield, managing risk," saying, "​This year'​s survey took place against a backdrop of an improving global economy, as central bank monetary stimulus kept rates and yields at historical lows and risk assets attracted strong investor demand. Amid widespread expectation of an eventual end to monetary stimulus, treasurers looked to prepare for a rising rate environment. They also contemplated potential regulatory change, including a floating net asset value (​NAV) for some money market funds (​MMF), which could recalibrate cash management decision-​making. As always, treasurers must grapple with competing forces -- a need for yield on the one hand, and a mandate to control risk on the other. In the current low-​rate environment, these competing forces have been more intense than usual."

Its Key findings include: Liquidity is still key - Liquidity is a central concern of survey respondents, as reflected in their choice of investments. Half of cash assets are placed in bank deposits, with usage most prevalent in Asia. Close to a third of cash assets are allocated to MMF, with usage highest in Europe. Regulatory change is a concern – Treasurers voiced concern about a possible move to a floating NAV. If funds are required to transact at a floating NAV, 71% of respondents would continue to use MMF, with some of them reducing their allocations. Respondents who said they would reduce or eliminate their use of MMF would reallocate assets mainly to bank deposits or other assets that have both credit and term risk. Our survey finds that the biggest barriers preventing companies from using floating NAV MMF is the uncertainty of realized or unrealized gains or losses and the limitations of their investment policies."

Other key findings include: Lack of diversification - Companies with larger cash balances are permitted to invest in a range of securities, including riskier investments. But companies with relatively smaller balances may be restricted to a smaller, less diversified pool of securities. Risk remains a focus - In an effort to control risk, the majority of respondent investment policy statements limit the use of shorter duration debt securities and require minimum credit ratings for both longer and shorter term securities. Search for Yield - Approximately one in every five dollars is invested in separately managed accounts, customized portfolios that allow investors to define their own return, security and liquidity parameters. Investor demand for separately managed accounts can be seen as a clear demonstration of the need for yield."

The survey comments on Liquidity and Money Market Funds, "Close to a third of all cash assets are allocated to MMF. Usage of MMF is highest in Europe and in companies with smaller cash balances. Money Market Funds can be a viable solution to the challenges of a rising rate environment, but treasurers should be cognizant of the weighted average maturity (​WAM) of the securities held in a fund.... The yield in MMF will generally rise in line with prevailing interest rates, presenting no unrealized losses. But the increase in yield will lag rising rates to a greater or lesser extent, depending on a fund'​s WAM."

It adds, "While treasurers express widespread concern about an impending push toward a floating NAV, close to 71% of respondents said they would continue to invest in MMF even with a floating NAV. However, some of the respondents that would continue to invest in MMF would reduce their allocations.... In assessing the likelihood that they would use floating NAV MMF, most respondents cited either the impact to realized and unrealized gains or losses, or investment policy limitations, as the main factors driving their decision. Tax and accounting requirements were also cited, but they were seen as secondary concerns."

On "Separately Managed Accounts," the survey says, "​Diversified solutions (​MMF and separately managed accounts) are a critical tool for navigating a shifting rate environment because they provide a range of securities and strategies with varying risk, return and liquidity characteristics. Close to one in five dollars in cash balances are allocated to separately managed accounts, a leading diversified solution."

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Crane Data is preparing to host its fourth annual Money Fund University conference, which will be held at The Renaissance Hotel in Providence, R.​I., January 23-​24, 2014. This year'​s event will focus heavily on regulations and the pending Money Market Fund Reform Proposals, featuring a faculty of the money fund industry'​s top lawyers and former regulators. Money Fund University offers attendees an affordable ($​500) and comprehensive one and a half day, "​basic training" course on money market mutual funds, educating attendees on the basics and history of money funds, the Fed, interest rates, ratings, rankings, money market instruments such as commercial paper, CDs and repo, plus portfolio construction and credit analysis. At our Providence event, we will take a deep dive into Rule 2a-​7 and current and potential future money fund regulations, with a full half-​day and four sessions on the topic.

The morning of Day One of the 2014 MFU agenda includes: History & Current State of Money Market Mutual Funds with Peter Crane, President & Publisher, Crane Data and Sean Collins, Senior Economist, Investment Company Institute; The Federal Reserve & Money Markets with Joseph Abate, Director F-​I Strategy, Barclays Capital and Brian Smedley, U.​S. Rates, Bank of America Merrill Lynch; Interest Rate Basics & Money Fund Math with Phil Giles, Adjunct Professor, Columbia University; and, Ratings, Monitoring & Performance with Ian Rasmussen, Senior Director, Fitch Ratings and Joel Friedman, Senior Director, Standard & Poor'​s.

Day One'​s afternoon agenda includes: Instruments of the Money Markets Intro with Alex Roever, Managing Director, J.​P. Morgan Securities; Repurchase Agreements with Teresa Ho, J.​P. Morgan Securities; Treasuries & Govt Agencies with Sue Hill, Senior Portfolio Manager, Federated Investors and Michael Duke, V.​P., G.​X. Clarke & Co.; Commercial Paper & ABCP with Garret Sloan, F-​I Strategist, Wells Fargo Securities; CDs, TDs & Bank Debt with Ted Byrne, Money Market Specialist, J.​M. Lummis & Co.; Instruments of the Money Markets: Tax-​Exempt Securities, VRDNs, TOBs & Muni Bonds with Colleen Meehan, Senior PM, and Rebecca Glen, Senior Research Analyst, The Dreyfus Corp.; and, Credit Analysis & Portfolio Management with Adam Ackerman, VP & Portfolio Manager, J.​P. Morgan Asset Management.

Day Two'​s agenda includes: Money Fund Regulations: 2a-​7 Basics & History with John Hunt, Partner, Nutter, McClennan & Fish LLP and Joan Swirsky, Of Counsel, Stradley Ronon; Regulations II: Recent & Future Rule Changes with Stephen Keen, Partner, Reed Smith and Jack Murphy, Partner, Dechert LLP; Regulations III: Hot Topics in MF Regulation, with Robert Plaze, Partner, Stoock, Stroock & Lavan LLP; and New Disclosure Requirements & MMF Data, with Peter Crane and John Hunt.

New portfolio managers, analysts, investors, issuers, service providers, and anyone interested in expanding their knowledge of "​cash" investing should benefit from our comprehensive program. Even experienced professionals may enjoy a refresher course and the opportunity to interact with peers in an informal setting. Attendee registration for Crane'​s Money Fund University is just $​500, exhibit space is $​2,​000, and sponsorship opportunities are $​3K, $​4K, and $​5K. A block of rooms has been reserved at the Renaissance Providence Downtown. The conference negotiated rate of $​159 plus tax is available through December 20th.

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

Crane Data is also preparing to publish the preliminary agenda and is already accepting registrations for its big show, Money Fund Symposium, which will be held June 23-​25, 2014, at the Renaissance Boston Waterfront in Boston, Mass. (​See www.​moneyfundsymposium.​com for details.) Finally, we'​re also making preparations for our 2nd European Money Fund Symposium; our "​offshore" money fund event is tentatively scheduled for London on Sept. 23-​24, 2014. Let us know if you'​d like more information on any of our upcoming conferences, and watch for more information in coming weeks.

​

Crane Data released its November Money Fund Portfolio Holdings data earlier this week, and our latest collection of taxable money market securities, with data as of Oct. 31, 2013, shows a jump Commercial Paper and Other securities (​mainly Time Deposits), but drops in Repurchase Agreement (​Repo) and Treasuries. Money market securities held by Taxable U.​S. money funds overall (​those tracked by Crane Data) decreased by $​9.​4 billion in October to $​2.​462 trillion. (​Assets also shifted from Government and Treasury funds into Prime funds on concerns over the Treasury debt ceiling.) Portfolio assets had risen by $​55.​3 billion in Sept., $​1.​1 billion in August and $​68.​9 billion in July, but they’​d fallen by $​30.​1 billion in June. CDs remain the largest holding among taxable money funds, followed by Repos, Treasuries, CP, Agencies, Other, and VRDNs. Money funds' European-​affiliated holdings (​including repo) jumped to 30.​4% on the shift from Government funds to Prime funds. Below, we review our latest portfolio holdings statistics.

Among all taxable money funds, Certificates of Deposit (​CD) holdings decreased $​5.​6 billion to $​519.​2 billion, or 21.​1% of holdings. Repurchase agreement (​repo) holdings dropped $​14.​2 billion to $​474.​8 billion, or 19.​3% of fund assets. Treasury holdings decreased by $​20.​0 billion to $​463.​0 billion (​18.​8% of holdings) as debt ceiling concerns scared money out of Treasury and Government Institutional funds (​much of this returned, but made its way into Prime funds). Commercial Paper (​CP), the fourth largest segment, jumped $​25.​6 billion to $​417.​4 billion (​17.​0% of holdings). Government Agency Debt fell by $​4.​7 billion; it now totals $​358.​0 billion (​14.​5% of assets). Other holdings, which includes Time Deposits, jumped $​18.​8 billion to $​181.​7 billion (​7.​4% of assets). VRDNs held by taxable funds dropped by $​9.​3 billion to $​48.​2 billion (​2.​0% of assets). (​Crane Data'​s Tax Exempt fund data will be released in a separate series Thursday.)

Among Prime money funds, CDs still represent about one-​third of holdings, or 33.​0%, followed by Commercial Paper (​26.​5%). The CP totals are primarily Financial Company CP (​15.​0% of holdings) with Asset-​Backed CP making up 6.​3% and Other CP (​non-​financial) making up 5.​2%. Prime funds also hold 7.​5% in Agencies, 6.​4% in Treasury Debt, 2.​2% in Other Instruments, 6.​0% in Other Notes, and 3.​1% in Other (​including Time Deposits). Prime money fund holdings tracked by Crane Data total $​1.​554 trillion, or 64.​0%, of taxable money fund holdings' total of $​2.​462 trillion. (​This is up from $​1.​544 trillion, or 62.​5% of taxable assets, last month.) Government fund portfolio assets totaled $​445.​9 billion, down from $​458.​3 billion last month, while Treasury money fund assets totaled $​441.​5 billion, down from $​468.​9 billion in Sept.

European-​affiliated holdings increased by $​70.​5 billion in September to $​749.​3 billion (​among all taxable funds and including repos); their share of holdings grew to 30.​4%. Eurozone-​affiliated holdings jumped too (​up $​53.​1 billion) to $​429.​0 billion in Oct.; they now account for 17.​4% of overall taxable money fund holdings. Asia & Pacific related holdings grew by $​13.​0 billion to $​304.​8 billion (​12.​4% of the total), while Americas related holdings dropped by $​92.​9 billion to $​1.​407 trillion (​57.​2% of holdings).

The Repo totals were made up of: Government Agency Repurchase Agreements (​down $​4.​5 billion to $​219.​2 billion, or 8.​9% of total holdings), Treasury Repurchase Agreements (down $​15.​7 billion to $​182.​2 billion, or 7.​4% of assets and Other Repurchase Agreements (​up $​5.​9 billion to $​73.​3 billion, or 3.​0% of holdings). The Commercial Paper totals were comprised of Financial Company Commercial Paper (up $​21.​5 billion to $​236.​4 billion, or 9.​6% of assets), Asset Backed Commercial Paper (​up $​3.​5 billion to $​98.​7 billion, or 4.​0%), and Other Commercial Paper (​up $​613 million to $​82.​2 billion, or 3.​3%).

The 20 largest Issuers to taxable money market funds as of Oct. 31, 2013, include: the US Treasury ($​463.​6 billion, or 18.​8%), Federal Home Loan Bank ($​211.​7B, 8.​6%), BNP Paribas ($​78.​6B, 3.​2%), Deutsche Bank AG ($​68.​2B, 2.​8%), Bank of Tokyo-​Mitsubishi UFJ Ltd ($​64.​1B, 2.​6%), Federal Home Loan Mortgage Co ($​60.​3B, 2.​5%), Sumitomo Mitsui Banking Co ($​58.​5B, 2.​4%), Bank of Nova Scotia ($​57.​9B, 2.​4%), JP Morgan ($​57.​3B, 2.​3%), Barclays Bank ($​55.​0B, 2.​2%), Bank of America ($​53.​3B, 2.​2%), Societe Generale ($​52.​0B, 2.​1%), Federal National Mortgage Association ($​50.​8B, 2.​1%), Citi ($​48.​4B, 2.​0%), RBC ($​47.​0B, 1.​9%), Credit Suisse ($​43.​9B, 1.​8%), Credit Agricole ($​41.​7B, 1.​7%), Goldman Sachs ($​40.​2B, 1.​6%), Toronto-​Dominion Bank ($​36.​1B, 1.​5%), and Wells Fargo ($​35.​4, 1.​4%).

The 10 largest Repo issuers (​dealers) (​with the amount of repo outstanding and market share among the money funds we track) include: BNP Paribas ($​53.​5B, 11.​3%), Deutsche Bank ($​47.​7B, 10.​1%), Bank of America ($​42.​6B, 9.​0%), Goldman Sachs ($​40.​0B, 8.​4%), Barclays ($​35.​0B, 7.​4%), Societe Generale ($​32.​2B, 6.​8%), Citi ($​23.​2B, 4.​9%), Credit Suisse ($​22.​2B, 4.​7%), and Credit Agricole ($​18.​9B, 4.​0%).

The 10 largest CD issuers include: Sumitomo Mitsui Banking Co ($​50.​9B, 9.​9%), Bank of Tokyo-​Mitsubishi UFJ Ltd ($​42.​3B, 8.​2%), Bank of Nova Scotia ($​33.​8B, 6.​5%), Toronto-​Dominion Bank ($​30.​9B, 6.​0%), Bank of Montreal ($​28.​4B, 5.​5%), Mizuho Corporate Bank Ltd ($​22.​9B, 4.​4%), Rabobank ($​20.​8B, 4.​0%), National Australia Bank Ltd ($​17.​2B, 3.​3%), RBC ($​15.​0B, 3.​0%), and Natixis ($​15.​0B, 2.​9%). The 10 largest CP issuers include: JP Morgan ($​25.​5B, 7.​2%), Commonwealth Bank of Australia ($​17.​4B, 4.​9%), Westpac Banking Co ($​15.​0B, 4.​2%), NRW.​Bank ($​14.​2B, 4.​0%), General Electric ($​13.​6B, 3.​8%), FMS Wertmanagement ($​12.​8B, 3.​6%), BNP Paribas ($​12.​0B, 3.​4%), RBC ($​11.​3B, 3.​2%), DnB NOR Bank ASA ($​10.​9B, 3.​0%), and Toyota ($​10.​5B, 2.​9%).

The largest increases among Issuers of money market securities (​including Repo) in October were shown by: Deutsche Bank AG (​up $​24.​4B to $​68.​2B), Societe Generale (​up $​20.​8B to $​52.​0B), BNP Paribas (​up $​13.​6B to $​78.​6B), Goldman Sachs (​up $​9.​9B to $​40.​2B), Barclays PLC (​up $​9.​4B to $​55.​0B), and DnB NOR Bank ASA (​up $​8.​9B to $​32.​5B). The largest decreases among Issuers included: Federal Reserve Bank of New York (​down $​35.​9B to $​8.​8B), US Treasury (​down $​19.​7B to $​463.​6B), Credit Agricole (​down $​12.​2B to $​41.​7B), Bank of Montreal (​down $​6.​2B to $​31.​3B), RBC (​down $​6.​1B to $​47.​0B), and Federal National Mortgage Association (​down $​5.​8B to $​50.​8B).

The United States is still by far the largest segment of country-​affiliations with 48.​7%, or $​1.​200 trillion. France remained in second place (​9.​5%, $​234.​8B) ahead of Canada (​8.​4%, $​205.​6B). Japan was again fourth (​7.​6%, $​186.​9B) and the UK (​5.​3%, $​129.​2B) remained fifth. Germany (​4.​5%, $​110.​3B), remained in sixth ahead of Sweden (​4.​1%, $​99.​8B) and Australia (​3.​8%, $​94.​1B). The Netherlands (​3.​0%, $​72.​8B) and Switzerland (​2.​4%, $​58.​3B) continued to round out the top 10. (​Note: Crane Data attributes Treasury and Government repo to the dealer'​s parent country of origin, though money funds themselves "​look-​through" and consider these U.​S. government securities. All money market securities must be U.​S. dollar-​denominated.)

As of Oct. 31, 2013, Taxable money funds held 22.​1% of their assets in securities maturing Overnight, and another 13.​0% maturing in 2-​7 days (​35.​1% total in 1-​7 days). Another 21.​5% matures in 8-​30 days, while 23.​5% matures in the 31-​90 day period. The next bucket, 91-​180 days, holds 15.​4% of taxable securities, and just 4.​5% matures beyond 180 days.

Crane Data'​s Taxable MF Portfolio Holdings (​and Money Fund Portfolio Laboratory) were updated earlier this week, and our MFI International "​offshore" Portfolio Holdings will be updated Friday (​the Tax Exempt MF Holdings will be released later today). Visit our Content center to download files or visit our Portfolio Laboratory to access our "​transparency" module and contact us if you'​d like to see a sample of our latest Portfolio Holdings Reports or our new Weekly Money Fund Portfolio Holdings collection.

​

Fitch Ratings published brief entitled, "Fed Reverse Repo Facility Offsets Low Quarter-​End Supply. It says, "The Federal Reserve'​s new reverse repo program (​RRP) was well received by money market funds (​MMFs) as a potential source of supply at the end of the third quarter, according to Fitch Ratings. Banks typically reduce repo and other borrowings at the end of each quarter, limiting the availability of investment options for MMFs. The July Fed minutes discussed establishing a fixed-​rate, overnight repo facility wherein market participants, including certain MMFs, would be eligible to lend cash to the Fed on an overnight basis, collateralized by securities held by the Fed. The repo facility is an additional tool for the Fed to manage a reversal of its quantitative easing program and money market interest rates by lending securities for a set period of time to withdraw cash from the banking system. The Fed began testing the RRP in late September."

Fitch writes, "Many money fund managers indicated to Fitch that they intend to participate in the RRP, and indeed, bids submitted to the Fed spiked at the end of the third quarter, reaching $​58 billion from 87 bidders. However, the total dropped in the beginning of the fourth quarter, as investors opted for higher repo rates elsewhere. The total of bids submitted was as low as $​1 billion on Nov. 7, with 6 counterparties participating."

Finally, they add, "Fitch believes lower market repo rates or a higher rate paid by the Fed may lead to more participation. To encourage greater participation, the Fed recently increased the maximum allotment per counterparty from $​500 million to $​1 billion and hiked the interest rate paid on the overnight facility from 1 basis point to 2 basis points, and then to 3 basis points. The program would expand MMFs' investment opportunities in light of constrained asset supply and offer a high quality, liquid investment option. However, participation in the RRP is limited to MMFs with at least $​5 billion in assets. There are 139 approved counterparties for the program, including 94 MMFs."

Fitch also released a brief entitled, "Money Funds Face Pressure in Navigating Changes in Bank Support." It comments, "Money market fund managers will be under pressure to proactively manage exposures to financial institutions if changes to bank support assumptions lead to downgrades of banks that are active issuers to money market funds, according to Fitch Ratings. Given rated money funds' sizable exposures to banks, Fitch Ratings examined exposures to entities whose Support Rating Floors underpin their '​F1' short-​term rating. Overall, the magnitude and duration of the exposures appear to be manageable -- on average at 13.​9% of funds' assets and with an average maturity of 31 days. For certain funds, though, the exposures to some '​at risk' institutions are relatively high and/​or long-​dated -- as high as 31% of a fund'​s assets and certain individual exposures as long as 360 days."

It adds, "Under the agency'​s criteria, rated money funds would not necessarily be forced sellers of any bank exposures downgraded below '​F1', provided the risks to shareholders were judged to be low and a credible, near-​term remediation plan was in place. However, managers' contingency plans for proactively managing their exposures and exiting positions would be critical."

In other news, Wells Fargo Advantage Funds' most recent Portfolio Manager Commentary comments, "​To many, October will be remembered as the month Congress narrowly averted a U.​S. Treasury default by temporarily suspending the cap on the amount of debt the government could issue. Now that several weeks have passed, we hope to look back at this episode and try to answer the question: Was a default on Treasury securities ever a real threat? In our view, it was not. Clearly this is not a unanimous opinion, and some major investors were quite vocal at the time about selling Treasury holdings that matured in the latter part of October. Our view is different for several reasons."

Wells writes, "First, we do not subscribe to the belief that the partial government shutdown and near collision with the debt ceiling were symptomatic of a dysfunctional government. We acknowledge a wide range of legitimate views on this topic, and there are differences on our own investment team, but no matter what your view on government spending and debt, a substantial portion of the American people disagree with you -- so is it any wonder Congress is also split on this topic? Rather than a symptom of dysfunctional polarization, we see this as a healthy sign that Congress is reflecting the views of the people, albeit in a rather messy fashion in terms of process."

They add, "​Second, it is correct that on October 17, the so-​called drop dead date, the Treasury was forecast to run out of headroom under the debt ceiling, but this only curtailed its ability to issue incrementally more debt; it did not prevent them from rolling over maturing debt issues by selling new debt to replace maturing issues, as long as the total outstanding remained under the debt ceiling. October 17 was the date on which the Treasury expected it would be unable to use additional extraordinary measures to remain under the debt ceiling, but there was never any danger that the Treasury bills (​T-​bills) maturing that day would not be paid once sufficient new issues had been sold to refund them."

​

We finally found the SEC website with "​Comments on OFR Study on Asset Management Issues" (​thanks to a kind reader!), so today we quote from another major submission, this one from Scott C. Goebel, General Counsel, Fidelity Management and Research Co.. Fidelity, the largest manager of money funds and one of the largest mutual fund managers, writes, "Fidelity Management & Research Company ("​Fidelity") appreciates the invitation from the Securities and Exchange Commission ("​SEC") to comment on the report entitled "​Asset Management and Financial Stability," which the Office of Financial Research ("​OFR") published on September 30, 2013 (​the "​Report"). As we describe in greater detail in this letter, the Report presents an incomplete, inaccurate and misleading view of the asset management industry and, thus, cannot serve as the basis for meaningful policy discussions or regulatory recommendations. In the absence of a far more accurate picture and credible analysis of this diverse industry, the Financial Stability Oversight Council ("​FSOC") will be unable to conclude whether threats to financial stability actually arise from asset management, let alone whether any such threats are significant enough to warrant a regulatory response or what the appropriate response might be. We applaud the SEC'​s invitation to comment, which in our view represents a healthy willingness to engage with the industry on these issues and an acknowledgement that the industry and others have expertise and perspectives that regulators should consider when they make significant policy decisions or, as with the Report, do work that is intended to inform those policy decisions. The SEC'​s model of engagement and transparency contrasts with the way in which the OFR produced the Report."

They explain, "The FSOC directed the OFR to study the asset management industry to help it consider some fundamental questions. These include: (​i) whether any threats to financial stability could arise from asset management; (​ii) whether they are significant enough to warrant a regulatory response; and (​iii) what form that response should take (​i.​e., would designation under Section 113 of the Dodd-​Frank Wall Street Reform and Consumer Protection Act ("​Dodd-​Frank Act") ever be appropriate or is asset management better regulated using a different regulatory regime). As we explain in Section I below, the OFR'​s description of the asset management business is incomplete and inaccurate. It excludes significant market participants and industry segments in its attempt to broadly outline the industry. It also fails to recognize many of the salient characteristics of asset management or to appreciate the policy implications of the distinctions among asset management entities, activities, and markets in which managers invest their clients' funds. Therefore, it fails to advance the discussion of whether threats to financial stability could arise from asset management. The OFR speculates about the existence of such threats without (​i) specifying the entities, activities, or markets from which they purportedly arise; (​ii) substantiating them with data, measurements, or models; and (​iii) considering appropriate policy alternatives to address them. This speculation does not become more compelling through repetition."

The letter continues, "The OFR fails to provide sufficient data or analysis to support any of the speculation included in the Report, which we find striking given that the OFR has described itself as "​focused purely on research, data, and analysis." In the Report, the OFR states that "​significant data gaps impede effective macroprudential analysis and oversight of asset management firms and activities," a sentiment that is echoed throughout the Report. While it may be the case that the OFR did not have all of the data it would have liked, the OFR acknowledges that a wide spectrum of data is available, particularly with regard to registered funds. It is unclear whether and how the OFR utilized any of the available data in its analysis, as none is mentioned or cited. Regardless, the alleged lack of data did not prevent the OFR from drawing conclusions and purporting to identify risks that may arise from asset management. It does so in many cases without distinguishing between registered and unregistered funds, between activities and products for which data is available and those for which it is not, or between risks that it believes asset management creates and market risks that may impact all participants in a given market."

It tells us, "The OFR confuses its discussion of these issues by conflating entities, markets, and concepts. In some cases, the OFR acknowledges risk mitigating characteristics of industry segments and their regulation but then proceeds to draw conclusions as if these factors have no effect. As we discuss in more detail below, these are only a few of the deficiencies in the Report, but they are representative. We believe these deficiencies are due to several factors that transcend any lack of data. We focus on two in this letter. First, the OFR employed a defective process to produce the Report. We describe this flawed process in Section II and demonstrate that it is characterized by a failure to engage appropriately with subject matter experts and a lack of rigor, transparency and accountability. Second, as we discuss in Section III, a bank-​centric perspective pervades much of the regulatory work on "​systemic risk." Given the central roles that banks and similar proprietary risk takers played in the 2008 financial crisis, past financial panics and other instability arising from banking, and the importance of banks in the financial system generally, it is understandable that a bank regulatory perspective would inform this work. It should not, however, be the lens through which nonbank industries are viewed. That approach leads to distorted descriptions of nonbank industries and speculative allegations of possible threats to financial stability. The Report suffers from that approach in that it overemphasizes the few similarities to banking that exist in asset management products, activities and entities, and it under-​appreciates or ignores the substantial differences, the effectiveness of existing regulation and other risk-​mitigating attributes."

Fidelity tells us, "As we have explained to the FSOC and others, certain characteristics of the asset management business and the required regulatory consequences of designation as a systemically important nonbank financial company under Section 113 of the Dodd-​Frank Act, which were intended for proprietary risk-​takers, make the Section 113 designation authority fundamentally incompatible with asset management entities. Any attempts to designate asset management entities to mitigate a perceived risk would not achieve the desired result; rather, they would likely be destructive and counterproductive. For example, in an industry as competitive as ours with the high degree of substitutability that mutual fund investors enjoy, FSOC designation of a fund out of concern about mass redemptions may itself trigger those redemptions and, in any event, would not prevent investors from seeking the same exposure in an undesignated fund."

They write, "If a threat to U.​S. financial stability that warrants a regulatory response were to arise from asset management, a targeted industry-​wide solution would be the most effective and efficient response. The SEC'​s regulatory regimes for registered mutual funds and their advisers are good examples of that approach. The SEC, as the primary regulator for registered mutual funds and their advisers, has used its framework successfully by focusing regulations on specified risks, on an industry-​wide basis, for over 70 years. Furthermore, although these regimes were designed to protect investors, and create efficient, robust markets, in doing just that they also addressed many of the topics that preoccupy macroprudential bodies like the FSOC and bank regulators today -- topics like leverage, liquidity, diversification, and transparency."

Finally, Fidelity'​s Goebel says, "While we continue to believe that asset managers and registered funds do not present threats to financial stability, if the FSOC or any of its member agencies believe the industry bears more consideration, any further steps should be carefully considered, keeping in mind the robust regulatory regime already in place. Further, the SEC is the FSOC member with the most expertise regarding asset management. As such, we believe that the SEC is best suited to advance this policy discussion and set a constructive agenda focused on: (​i) identifying and correcting the flaws in the Report; (​ii) increasing the general understanding of asset management, its regulation and its role in the financial system; (​iii) identifying any data or analysis necessary to accomplish these goals (​recognizing that extensive data is already available to regulators on funds, firms and the industry); (​iv) playing a leading role in any efforts undertaken to produce that data and analysis; and (​v) continuing to engage with industry, the public, and other stakeholders in a transparent manner, as the SEC has done by requesting comments on this Report. We are certainly willing to partner with the SEC in those efforts, just as we were willing to partner with the OFR. Although at times we have different views on particular matters, we are confident that the SEC is the FSOC member with the most knowledge of the asset management industry and should, therefore, design and lead these efforts. We are hopeful, based on the invitation to comment on the Report, that the SEC will continue to drive greater understanding of the asset management business within the OFR and the FSOC."

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While we'​ve yet to find many other comment letters to the SEC on the Treasury Department'​s Office of Financial Research recent controversial "​Asset Management and Financial Stability" study, we just noticed that one has been posted on the SEC'​s "​Comments on Proposed Rule: Money Market Fund Reform; Amendments to Form PF" website. The prolific John D. Hawke, Jr., Arnold and Porter, LLP on behalf of Federated Investors, Inc. writes, "Enclosed for filing in the above-​referenced docket [​Release No. S7-​03-​13] is a copy of comments submitted last week on behalf of our client, Federated Investors, Inc., in the comment docket for a recent report by the Treasury Department'​s Office of Financial Research ("​OFR") entitled "​Asset Management and Financial Stability." The OFR Report, which was prepared at the request of the Financial Stability Oversight Council, provides insights into the views of those advising FSOC on the need for structural changes to money market funds ("​MMFs")."

He tells us, "​The Commission has based its proposed "​Alternative 1" for MMF reform upon the FSOC position that MMFs which seek to maintain a stable NAV of $​1 per share are vulnerable to a so-​called "​first mover advantage" and destabilizing "​runs" by redeeming shareholders which can only be remedied by forcing all MMFs to move to a floating NAV. The OFR Report takes the position that variable NAV mutual funds are also vulnerable to the "​first mover advantage," and to destabilizing "​runs" that create systemic risks. The OFR Report assertion undermines the credibility of the OFR and FSOC on asset management issues, including MMF structure and regulation, as well as the purported intellectual underpinnings for the movement of MMFs to a variable NAV as proposed by the FSOC and included in the Commission'​s Alternative 1. The Report views investment funds and investment management activities through the lens of bank regulation, leading to serious analytic flaws that we have detailed in the enclosed letter. The OFR Report should give pause to those in the investment management industry and the Commission who believe that FSOC will be satisfied with changes only to MMFs."

Hawke'​s 38-​page submission explains in the inside cover letter, "We are writing on behalf of our client, Federated Investors, Inc. and its subsidiaries ("​Federated"), to provide comments in response to the Securities and Exchange Commission'​s (​the "​Commission'​s") request for public feedback on the September 2013 report of the Treasury Department'​s Office of Financial Research ("​OFR") entitled "​Asset Management and Financial Stability" (​the "​Report"). The Report was prepared at the request of the Financial Stability Oversight Council ("​FSOC")."

He says in the "Introduction," "​The Report contains a number of analytical flaws, as discussed further below. Taken as a whole, the Report views the securities markets through the lens of a bank regulator that shows an inability or unwillingness to understand the fundamentals of how markets work and the role of an investment manager as agent and fiduciary for its clients. Investors make investment decisions to further their interests and investment objectives. Investment managers act as agents seeking to take action for their clients to further their clients' interests and investment objectives. Investment managers do not act to further the policy objectives of the Federal Reserve System or the Treasury Department by making or staying in investments to further the common good as determined by federal government officials. When there are more buyers than sellers at a price, prices go up. When there are more sellers than buyers at a price, prices go down. Not everyone makes the same decisions, or makes their decisions at the same time, or receives the same price."

Hawke continues, "The Report identifies these characteristics of markets and investment managers as flaws which create undefined "​systemic risks" that need to be corrected by structural changes. The reality is these attributes are the core strengths of a market-​based economy. A. The OFR Report fails to take fundamental structural differences between asset managers and banks into account. Investment management is an agency activity. Investment managers do not guarantee returns. The Investment Advisers Act prohibits investment advisers from guaranteeing results to their client-​investors. The value of a client'​s investments managed by an investment manager are not tied to the financial health of the investment manager. Investment managers do not act as principals in managing the investments of their clients. If the clients' investments decrease in value, the investment manager does not lose money and is not liable to the client for the loss in value."

He writes, "In contrast, banks intermediate financing primarily by accepting deposits from their customers and making loans or investments. In each case the bank acts as principal for its own account. The deposit is a debt obligation owed by the bank to the depositor. The loan or investment is a debt obligation owed to the bank by the borrower or issuer. If the loan or investment declines in value, the bank still owes the depositor 100 cents on the dollar plus interest and must repay the depositor according to the timing specified in the deposit contract. Although the OFR Report acknowledges this key point in the introduction, it proceeds to ignore the distinction and analyze investment managers as if they were, and should be, acting as principals and guarantors of their client-​investors' investment positions."

Hawke adds, "​B. The failure to understand the differences between asset managers and banks led OFR to exaggerate the risks associated with asset management. The "​vulnerabilities" identified in the Report are in fact (​1) ordinary investment risks that are not specific to asset management (​e.​g., "​reaching for yield"), (​2) risks controlled primarily by clients of assets managers (​e.​g., use of leverage, which is a decision that investors make, through either financing for their investments or selection of investment funds that pursue leverage strategies), (​3) incentives for asset managers to limit risk taking (​e.​g., avoiding redemptions by shareholders in order to preserve size of funds and asset-​based fees) or (​4) the reflection of a misunderstanding of the operations of asset managers (​e.​g., consequences of the failure of an asset manager, which are in fact much more limited for customers and counterparties because of the agency role of the manager than consequences of the failure of a bank)."

He tells us, "​C. The failure to understand the fundamental differences between asset managers and banks led OFR to make misguided policy recommendations. The Report inappropriately takes a bank regulatory framework -- which is premised on the use of a large capital base to support principal positions and a supervisory structure designed to dictate most aspects of asset allocation and risk tolerance to protect that balance sheet and meet Federal economic policy objectives of making credit available to certain uses -- and applies it to other, very different types of firms, including investment managers and mutual funds whose role is to make investments for the benefit of client-​investors to meet client directions and investment objectives. While its ultimate purposes remain vague, the Report appears designed to support a set of policy recommendations that would force asset management firms to be structured and operated like banks, hold capital against the investment positions of client investors, and make and maintain investments in times of economic uncertainty. These changes would not be made to meet client investment directions and objectives, but instead to support a Federal policymaker'​s objectives of attempting to regulate financial markets based upon its determination of the common good that it calls financial stability."

Hawke also comments, "​D. The Report should be a wake-​up call for anyone who did not see where the FSOC, Federal Reserve, and Treasury were headed. If the mind-​set and intent of the FSOC, Federal Reserve and Treasury were not already clear by now, the Report, and the opinions issued in the FSOC'​s recent designation of the first group of non-​bank systemically important financial institutions ("​SIFIs"), should make clear the intent of these agencies is to break the long-​standing structural models of non-​bank financial firms and force them into bank-​like capital structures. The Dodd-​Frank Act does not grant any authority to the FSOC to regulate entire industries or to require the primary regulator to change the structure or regulations applicable to an industry. Section 113 of the Dodd-​Frank Act provides authority for the FSOC (​by a two-​thirds vote) to designate only a few of the largest and most significant non-​bank financial firms as SIFIs and subject them to supervision and regulation by the Federal Reserve under Title I and liquidation by the FDIC under Title II of the Act. Section 120 of the Dodd-​Frank Act authorizes the FSOC only to make recommendations to other financial regulators on systemic risk issues, but not to force those regulators to make changes."

Finally, Hawke'​s letter concludes, "The OFR Report is lacking in both substance and depth of analysis. It appears designed to justify an FSOC and Federal Reserve role in fundamentally changing the structure and operation not only of investment managers, but also investors and markets. It is badly reasoned and poorly thought through. We appreciate and understand the concern of the Federal Reserve that federal financing policies and programs designed to stimulate economic activity may have unintended consequences in the markets. After all, that is a large part of what caused the 2007-​2009 Financial Crisis. The appropriate response, however, is not to make securities markets less efficient, limit investor choice or seek to slow down capital mobility through regulations imposed on the investment management industry. A simpler and less intrusive fix is tightening the regulation of loans to finance risky investments. One hopes that the other regulators represented on the FSOC -- the Commission, CFTC and insurance regulators -- will begin to recognize a pattern to the lack of understanding at the bank regulators of non-​bank financial services and their structure and regulation, a lack of concern for price discovery and efficiency in capital markets, and a movement towards regulating all nonbank firms and markets like banks. If the FSOC continues down this path, it will damage our economic system, capital markets, investors, and the public, with no offsetting benefits. We appreciate the opportunity to provide comments on the OFR Report."

​

The November issue of Crane Data'​s Money Fund Intelligence was sent out to subscribers Thursday morning. The latest edition of our flagship monthly newsletter features the articles: "MMFs Dodge Debt Ceiling Bullet, Back to Battling Regs," which reviews the mini crisis over the Treasury debt ceiling and threat of technical default; "Going Global w/​Liquidity: JPMAM'​s John Donohue," which interviews the leader of the largest money fund manager worldwide; and, "MMF Portals Continue Transparency, Direct Push," which discusses the flurry of enhancements announced by online trading platforms last month. We'​ve also updated our Money Fund Wisdom database query system with Oct. 31, 2013, performance statistics and rankings, and will be sending out our MFI XLS shortly. (MFI, MFI XLS and our Crane Index products are available to subscribers at our Content center.) Our October 31 Money Fund Portfolio Holdings are scheduled to go out on Tuesday, Nov. 12.

Our Debt Ceiling piece says, "In what seemed almost like a welcome relief from the seemingly permanent ultra-​low yield and regulatory reform threats, money funds saw the threat of a Treasury debt ceiling default come and go, all within a matter of weeks in October. Assets fled and attention focused on what to do in the event of a Treasury default, and events unfolded just as they did the last time this overblown scare occurred late in the summer of 2011."

The November issue'​s lead story continues, "Money market mutual fund asset levels looked like a rollercoaster. (​See the chart on page 2.) They had climbed slowly for 3 months straight through the end of September, then plunged by $​70 billion in the first half of the month before rebounding strongly (​up $​60 billion) in the second half of the month. Treasury Institutional and Government Institutional funds drove the outflows, though Prime Institutional funds caught some of the rebound."

Our "​profile" on JPMAM'​s John Donohue says, "In the latest Money Fund Intelligence, we speak with John Donohue, J.​P. Morgan Asset Management'​s Head of Global Liquidity and Chief Investment Officer. Donohue shares his thoughts on market trends, portfolio strategies and the pending proposals for new money fund regulation. Our Q&​A follows."

We write: "MFI: Tell us about JPMAM'​s history in money funds. Donohue: J.​P. Morgan has been a provider of money market funds since 1987, which covers quite a few market cycles. In 2003, we decided to globalize the business and significantly bolster our investment platform, client service and fund management infrastructure. Back then, we had funds in just three currencies (​USD, EUR, GBP). Now we have 30 different money market funds in eight currencies (​including JPY, AUD, RMB, SGD, CNH) across 28 countries."

The article on the Portal Improvements explains, "As has been the case the last several years, the AFP'​s (​Association for Financial Professionals') annual corporate treasury conference (​most recently in Las Vegas) triggered a flurry of press releases, many from online money fund trading "​portals". Among the most recent announcements -- Goldman Sachs' portal finally joined the "​transparency" bandwagon, offering various look-​through options on money fund portfolio holdings, SunGard released a survey on portal usage, BNY Mellon revealed enhancements to its Liquidity Direct portal, Cachematrix debuted a new module, ICD added functionality, and MyTreasury added funds to its portal."

Finally, registration is now open and the agenda is ready for Crane'​s Money Fund University, our "​basic training" event, which will be held Jan. 23-​24, 2014 in Providence, Rhode Island. Our 4th annual MFU will contain a heavy focus on money fund regulations, as well as the basics on money funds, interest rates, and overviews of various money markets. Our next big show, Crane'​s Money Fund Symposium, will take place June 23-​25, 2014, in Boston. Registrations and sponsorships are now being accepted for this too, and the preliminary agenda is being finalized. (​Watch for the agenda later this month.)

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The London-​based Institutional Money Market Funds Association, or IMMFA, which is the "trade association representing the European triple-​A rated, constant net asset value (​CNAV) money market funds industry," published a press release late yesterday, which says, "As the debate about the EC'​s proposed Money Market Fund Regulation enters a new phase, IMMFA has released a collection of papers which explain the background to their position on the key issues. The European Commission made its proposal for a Regulation on Money Market Funds in September 2013. The MEPs in the European Parliament had their first exchange of views on this topic in the ECON Committee yesterday (​4th November 2013)."

"Money market funds are an important tool for everyday businesses in the broader economy, helping them to safely manage their surplus cash and diversify their risk," said Susan Hindle Barone, Secretary General of IMMFA. "​Decisions will be taken in Europe which will profoundly impact the benefits MMFs provide to a very wide range of investors, such as corporates, pensions providers and local governments. We want to be sure that those decisions are as well-​informed. These documents are designed to explain the fundamental issues presented by the European Commission'​s proposal as simply as possible."

IMMFA'​s release explains, "The documents address the following points: IMMFA Fact Sheet on Money Market Funds; The Problem with Capital Buffers; The Use of Amortised Cost Accounting; Definition of Liquidity Requirements; Fund Level Ratings; Credit Process and Internal Rating Scale; Reverse Repurchase Agreements; Eligible Securitisations -- Asset-​Backed Commercial Paper; As well as providing an overall summary of IMMFA'​s views on MMF."

The release includes links to two papers -- IMMFA Summary Views on MMF Reform - October 2013 and IMMFA Position Papers on MMF Reform - October 2013. It also includes links to documents which "​provide more extensive background on many of the points made above: IMMFA Position on Capital Buffers - May 2013; IMMFA Summary Paper on Money Market Funds - February 2013; The Use of Amortised Cost Accounting in Money Market Funds – January 2013; and, Bank Runs, Money Market Funds and the First Mover Advantage - January 2013."

The IMMFA Summary, entitled, "The Institutional Money Market Funds Association'​s (​IMMFA) Views on The European Commission'​s Proposed Regulation on Money Market Funds (​MMFR)," explains, "European domiciled money market funds (​MMFs) provide a valuable service to investors, issuers and the '​real economy'. Investors: Corporations, pension funds and other institutional investors have vast liquid portfolios. They are not protected by government guarantee schemes and are very risk sensitive. They value MMFs for their credit diversification, access to professional credit management, transparency and the efficiencies they provide their day-​to-​day operations....`​Issuers <​b:>`​_: CNAV MMFs provide a small but relatively stable source of cross-​border funding for European banks and, to a lesser extent, companies.... European companies: MMFs represent approximately 50% of all investments in Asset Backed Commercial Paper (​ABCP) in Europe. ABCP improves the working capital of large companies such as Telecom Italia, Lafarge and Volkswagen."

It says, "Many regulators have concluded that MMFs did not cause the financial crisis in 2007/​2008. The November 2012 SEC staff report on MMF states that academic literature characterises redemptions from MMFs as a '​flight to quality' as many investors switched their bank credit exposure in prime MMFs into sovereign risk in Government Liquidity MMFs. Nervous investors reduced their exposure to bank credit during the 2008 credit crisis whether they were invested in MMFs, had money on deposit with banks or invested directly in bank debt instruments."

Finally, IMMFA writes, "​Nevertheless regulators remain concerned over the role MMFs played in transmitting the financial crisis via client redemptions and sponsor support. IMMFA recognizes these concerns and supports many of the provisions of the EC MMFR proposal, including that MMFs should have: Even greater transparency so investors have a full view of how a fund is performing; Minimum percentages of liquid assets ... Minimum asset diversification limits to minimise exposure to individual issuers [​and] Robust monitoring of the investor base and stress testing to ensure MMFs can anticipate redemption requests in adverse market conditions. IMMFA believes that redemption gates and fees will be more effective in mitigating client redemptions than capital requirements (​the European Commission'​s proposal)."

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The Investment Company Institute published a press release Monday entitled, "Study on Asset Management '​Falls Far Short,' Says ICI," and subtitled, "ICI Letter to SEC Calls for Withdrawal of Study by Office of Financial Research; Cautions FSOC Against Relying Upon Study." ICI'​s release says, "A recent report on the asset management industry by the U.​S. Treasury Department'​s Office of Financial Research (​OFR) "​falls far short" of providing an accurate and balanced view and should be withdrawn, the Investment Company Institute (​ICI) said. Regulators, including the Financial Stability Oversight Council (​FSOC), should not depend upon the OFR study, "Asset Management and Financial Stability," for policy decisions or regulatory action of any kind, ICI said in a comment letter submitted to the Securities and Exchange Commission (​SEC) on November 1."

ICI President and CEO Paul Schott Stevens comments, "The OFR study of the asset management industry reflects an inaccurate understanding of this industry, particularly registered funds. For that reason, the study does not provide any basis whatsoever for FSOC to make any policy decisions."

The release explains, "The study speculates about potential "​vulnerabilities" for asset managers that it claims could pose a threat to financial stability, but fails to provide data or historical experience to support its claims, ICI notes in its letter. The ICI letter, which focuses primarily on registered funds and their advisers, offers detailed analysis of mutual fund and investor behavior during periods of market stress, from 1945 through 2008, showing that, contrary to the OFR study'​s suggestions, investors in mutual funds do not redeem precipitously during financial market shocks."

It continues, "​The OFR study also misuses or misinterprets data. For example, through double-​counting and inclusion of overseas assets, the study exaggerates the size of the U.​S. asset management industry by as much as $​25 trillion, an error of almost 90 percent. It also misstates the experience of bond funds in 2008: While the OFR study says that government bond funds experienced outflows of $​31 billion, ICI'​s data shows such funds had net inflows of $​7.​4 billion. Such flaws "​call into question the credibility of the analysis set forth in the OFR Study," ICI'​s letter states."

ICI adds, "The OFR study is intended to inform FSOC'​s consideration of what threats to financial stability, if any, arise from asset management companies, and whether it would be appropriate to designate asset managers as "​systemically important financial institutions" (​SIFIs) and subject them to "​enhanced" prudential regulation and supervision by the Federal Reserve Board."

It comments, "The OFR Study "​appears to be '​results-​driven'," assuming from the outset that asset managers pose systemic risks, ICI says. "​The OFR Study appears to conclude a priori that asset managers pose risks to the financial system at large and then hypothesizes circumstances to support that conclusion," the ICI letter says. "Further study should take a more objective approach.""

ICI also writes, "​The OFR study initially recognizes that asset managers invest in financial markets as agents -- managing assets on behalf of clients -- not as principals investing for their own accounts. But the study loses sight of this key difference and the way in which this factor distinguishes asset managers from banks and other market participants. An asset manager, such as a mutual fund adviser, does not bear any risk of investment gains or losses from the securities or other assets held by the fund. This business model makes it highly unlikely that an asset management firm would create or transmit risk to the financial system. Each registered fund and adviser is a separate legal entity, which limits the spillover of risks from one fund to another or to the adviser."

Finally, ICI adds, "The OFR study also fails to recognize that the structure, operation, and regulation of registered funds and their managers not only protect investors but also serve to mitigate risk to the financial system. Such requirements as daily valuation, standards for liquidity, limits on leverage, and strict custody arrangements, among others, tend to limit risk to the broader financial system."

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On Friday, Thomas Vartanian, Chair of Dechert LLP'​s Financial Institutions practice, submitted a comment letter "respond[​ing] to the SEC'​s request for comments on behalf of certain clients by comprehensively criticizing the methodology, operating predicates and lack of factual or legal support for the Office of Financial Research'​s Report on Asset Management and Financial Stability (​Report)." Vartanian says, "On behalf of certain clients of our Firm, we appreciate the opportunity the Securities and Exchange Commission ("​Commission" or the "​SEC") has provided for public comment on the report issued by the U.​S. Office of Financial Research ("​OFR") entitled "​Asset Management and Financial Stability" ("​Report"). We sincerely appreciate the efforts of the SEC to invite public participation in this process, which has so many important ramifications. The leadership demonstrated by the SEC will be essential to increasing the understanding of asset management in the regulatory community and analyzing any potential regulatory policies in a rigorous, objective and transparent manner."

He writes, "We submit for the SEC'​s consideration that the Report is fundamentally flawed in many respects and analytically unreliable. In this comment letter, we focus on the flaws in the Report regarding its assessment of risks that may be applicable to U.​S. registered, floating net asset value ("​NAV"), open-​end investment companies ("​Funds") and their investment advisers."

The Dechert comment explains, "The analysis in this comment may be summarized as follows: 1. Neither the Financial Stability Oversight Council ("​FSOC") nor the OFR have laid the proper legal foundation to use the Report for its intended purpose to help the FSOC better understand asset management, any threats that may arise from it, any need for additional regulation, and whether any such regulation should involve the designation authority under Section 113 of the Dodd-​Frank Act ("​DFA") or an alternative response. 2. Reliance on the Report will taint the administrative record and provides a basis for companies to challenge designation and other regulatory actions that attempt to rely on the Report, including any recommendation for regulatory action such as any final FSOC proposed recommendations to the SEC regarding the regulation of money market funds ("​MMFs")."

It continues, "3. The Report has significant and substantive factual, analytical, and methodological defects that render it completely unreliable and insufficient to form the basis of any policy determinations. 4. It paints the widely diverse asset management industry with the same brush, and draws conclusions about risks as if the industry were a monolith, failing to differentiate adequately between different investment vehicles, structures, strategies, and entities, which is essential to measuring, modeling and drawing any meaningful conclusions regarding individual vulnerabilities and systemic risks. 5. It ignores that: a. Investors purchase shares of a Fund with the understanding that the potential for poor investment performance, including the loss of principal, is a natural and well-​understood risk; b. Investors do not rely on the financial strength of the investment adviser of a Fund; and c. Volatility and fluctuation of a Fund'​s NAV are normal market features, and not inappropriate risks that require extraordinary regulation and supervision."

Vartanian adds, "6. The Report'​s concerns regarding asset management risks are based on unsupported arguments, speculation or theories that investors will conclude that Funds are engaged in undisclosed "​reaching for yield" or "​herding" behavior, which will trigger rapid redemptions by the shareholders who learn of such behavior. 7. It fails to provide any substantiation or sufficient data to support its speculation that Funds are subject to significant redemption risk, or that "​runs" on Funds would cause or amplify systemic risk. 8. By only acknowledging limited aspects of the SEC'​s comprehensive and well-​tested legal and regulatory regime governing Funds, contractual limitations and basic economic realities and then proceeding with speculative discussions of risks as if none of these factors would have any impact, the Report, does not adequately take into account the myriad inherent structural safeguards that significantly mitigate the risks about which it speculates."

He tells the SEC, "9. It fails to consider the stability and resiliency Funds demonstrated during the very economic crisis that led to the creation of the OFR and the FSOC, which shows that they are viewed by investors as long-​term investment vehicles and strongly suggests that the risk mitigating factors described in the preceding point are effective. 10. The Report views the asset management industry unrealistically and improperly through a prudential regulatory lens that is calibrated to the proprietary risk-​taking activities of banks or insurance companies, rather than the activities and purposes of the asset management industry, and ignores the fundamental difference between the role played by asset managers acting as agents for investors, as opposed to principals."

Dechert writes, "​11. The Report suffers from a range of administrative defects and attempts to identify and measure risks before establishing basic definitions and metrics that the public can evaluate and use. 12. The SEC should act to ensure that its extensive understanding and regulatory perspective in regard to the asset management industry is utilized to (​a) correct the fundamental defects in the Report and (​b) help the FSOC better understand asset management, any threats that may arise from it, any need for additional regulation, and the appropriate form of any such regulation."

Finally, the comment says, "​The Report'​s stated purpose is to respond to the request of the FSOC for the OFR to provide data and analysis that would inform the FSOC'​s analysis of whether and how to consider asset management firms for enhanced prudential standards and supervision under Section 113 of the DFA. The Report does not achieve its stated purpose. In fact, it seriously misstates the risks it discusses, or simply fails to provide adequate empirical support or analysis to substantiate those which it purports to identify. Reliance on the Report by the FSOC will taint the administrative record and provide a basis for challenging any designation actions by the FSOC that rely upon it."

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After almost a full month of no after-​the-​deadline comment letters being posted (​the last had been Oct. 4), an additional submission to the SEC'​s "​Comments on Proposed Rule: Money Market Fund Reform; Amendments to Form PF web page appeared yesterday. (​Though the deadline was Sept. 17, the SEC continues to post submissions.) The latest letter comes from eight large fund complexes, who propose a refinement on the definition of "​retail" investor. (​Many fund companies suggested the SEC use a social security number instead of a $​1 million redemption limit in prior letters and this new letter is a variation on that theme.) The latest submission, written by BlackRock, Inc., Fidelity Investments, Invesco Ltd., Legg Mason & Co, LLC and Western Asset Management Company, Northern Trust Corporation, T. Rowe Price Associates, Inc., Vanguard and Wells Fargo Funds Management, LLC, says, "​We are pleased to have the opportunity to provide comments to the Securities and Exchange Commission on the proposals for money market mutual fund reform. Each of us has previously submitted comments on the Proposed Rule. We are writing jointly today to discuss the exemption for retail money market mutual funds in the Proposed Rule and in particular to collectively propose an alternative definition for retail money market mutual funds. The firms signing this letter manage approximately $​1.​19 trillion of U.​S. money market mutual funds, which represents approximately 45% of the total U.​S. money market mutual fund industry assets as of September 30, 2013."

The letter explains, "​The Chair of the Commission has stated a policy objective of preserving money market mutual funds "​for those retail investors who have found it to be convenient and beneficial." We support that goal. Consistent with this approach, the Proposed Rule creates an exemption for retail money market funds from the floating NAV requirement. The Commission has proposed to define a retail fund as a fund that "​does not permit any shareholder of record to redeem more than $​1,​000,​000 of redeemable securities on any one business day." As previously stated in our comment letters, this proposed daily redemption limit would be burdensome to implement for both funds and third party intermediaries, resulting in significant costs and operational complexity. More importantly, investors do not want a continuous limitation on their ability to redeem shares. Based on our collective experience and technical expertise managing money market mutual funds, we believe that there is a simpler and more cost effective way to achieve the Commission'​s goal of providing an exemption for retail investors."

It says, "We propose an alternative approach in which a retail money market mutual fund is defined under Rule 2a-​7 under the Investment Company Act of 1940, as amended, as follows: Retail Fund means a fund that limits beneficial ownership interest to natural persons. This definition would include individuals investing in money market mutual funds through individual accounts, retirement accounts, college savings plans, health savings plans and ordinary trusts. After reviewing the available information that we have on the types of investors holding shares of our money market mutual funds, we believe that including individual accounts, retirement accounts, college savings plans, health savings plans and ordinary trusts would be consistent with our existing "​retail" investor base as well as other types of accounts for the benefit of natural persons which may arise in the future. Our proposed definition would not permit investments by accounts established by businesses, including small businesses, defined benefit plans, endowments or similar accounts where natural persons do not represent the beneficial ownership interest of those accounts."

The letter continues, "​As a means of ensuring compliance with this rule, each retail fund would be required to disclose in its prospectus that it limits investments to accounts where natural persons have the beneficial ownership interest. Fund advisers would adopt policies and procedures reasonably designed to ensure compliance with that limitation. Funds could comply by: directly confirming the individual'​s ownership, such as when the customer provides a social security number to the fund adviser, when opening a taxable or tax-​deferred account through the adviser'​s transfer agent or brokerage division; indirectly confirming the individual'​s ownership interest, such as when a social security number is provided to the fund adviser in connection with recordkeeping for a retirement plan or a trust account is opened with information regarding the individual beneficiaries; or relying on periodic representations of a third party intermediary to confirm the individual'​s ownership interest, such as when a fund is providing investment only services to a retirement plan or an omnibus provider is unable or unwilling to share information that would identify the individual. With respect to third party intermediaries, fund advisers could rely upon contractual arrangements that require such intermediaries to abide by all fund policies. Other advisers may choose to require periodic certifications from intermediaries that they have policies in place that are reasonably designed to ensure that only natural persons invest in a retail fund."

It adds, "​Defining retail funds in this way offers several advantages. First, we believe this definition achieves the goal of preserving the money market mutual fund product for those individuals whose redemption activity does not threaten a fund'​s liquidity or stability. We think this definition encompasses the large majority of individual investors who use retail accounts today. Often, in each of these accounts, individuals would be responsible for making the decision to leave a fund during a time of crisis rather than an institutional decision maker. Our experience has shown that in times of crisis, these individuals are less likely to redeem en masse. Additionally, shares of such a retail fund would be more widely dispersed among a greater number of shareholders than the institutional funds that experienced large outflows during the financial crisis in 2008."

The letter states, "The graph [​not pictured here] illustrates how a retail fund under this proposed definition is likely to perform during a time of market stress. Starting on the last business day before Lehman Brothers filed for bankruptcy, the graph shows the cumulative percentage change in assets for three Fidelity retail prime funds and one Fidelity institutional prime fund. Listed next to each fund is the percentage of assets that were held by natural persons. Retail Fund A was offered exclusively as an investment option in retirement plans. Note that this fund experienced inflows, not outflows, during the financial crisis as investors reallocated out of equity funds and into money market mutual funds. Retail Fund B had a much broader base of shareholder types because it served as a core (​or sweep) cash option for individual retirement accounts and brokerage customers settling trades. Retail Fund C was offered exclusively as a non-​core (​or non-​sweep position) investment option for retail customers, retirement plans and individuals who invested primarily through financial advisers or banks. Institutional Fund D had primarily corporate and other institutional shareholders. Despite the extreme market stress at the time, all three retail fund types showed minimal shareholder redemption activity, especially as compared to many institutional prime funds."

Finally, the letter tells us, "Second, this definition provides a front-​end qualifying test and eliminates the need for costly programming and ongoing monitoring by a fund adviser or an intermediary. Under our proposed definition, intermediaries and/​or fund advisers would need to verify the nature of the investor only once. This would reduce the operational complexity associated with the proposed definition requiring ongoing monitoring of redemptions. Third, this definition uses data that fund advisers and intermediaries already generally collect from their clients under the "​know your customer" practices and anti-​money laundering laws. During the account opening process, fund sponsors and intermediaries should be able to easily identify if a client satisfies the definition. This definition will require some refinements to existing systems, which are significantly less costly than building a new system for tracking and aggregating daily shareholder redemption activity. Consequently, fund advisers and intermediaries should not incur significant additional costs that might ultimately be passed along to money market mutual fund investors. We thank the Commission for giving us the opportunity to address this important proposed exemption. We welcome the opportunity to further discuss with you the proposed retail definition contained in this letter."

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