ICI's latest "Trends in Mutual Fund Investing, February 2013" shows that money fund assets dropped by $31.7 billion, or 1.2%, in February after dropping $9.1 billion in January. ICI also released its latest "Month-End Portfolio Holdings of Taxable Money Funds," which shows declines in holdings of Repurchase Agreements, U.S. Government Agency securities and Certificates of Deposit during February. (See Crane Data's March 14 News, "February Portfolio Holdings Update; Europe Highest Since Nov. 2011.") Though money fund assets have risen in the past week (through 3/26) by $9.8 billion, they remain down by $15.5 billion month-to-date through Tuesday, according to Crane Data's Money Fund Intelligence Daily.
ICI's February "Trends" says, "The combined assets of the nation's mutual funds increased by $61.1 billion, or 0.5 percent, to $13.485 trillion in February, according to the Investment Company Institute's official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI.... Bond funds had an inflow of $20.17 billion in February, compared with an inflow of $32.74 billion in January.... Money market funds had an outflow of $31.60 billion in February, compared with an outflow of $11.10 billion in January. Funds offered primarily to institutions had an outflow of $27.09 billion. Funds offered primarily to individuals had an outflow of $4.50 billion."
Year-to-date through 3/26, money fund assets tracked by our MFI Daily have declined by $55.6 billion (after rising $149 billion in November and December 2012). Retail (taxable) assets have risen by $2.5 billion in March and have fallen by $24.2 billion YTD, while Institutional (taxable) assets have declined by $15.6 billion in March and by $22.1 billion YTD. Prime Institutional assets have fallen by $9.1 billion in March MTD and by $5.9 billion YTD. Prime Retail assets have risen by $1.5 billion in March and have fallen by $16.3 billion YTD.
ICI's Portfolio Holdings for February 2013 show that Repos fell by $15.5 billion to $554.5 billion (23.3% of assets); they remain the largest holding in taxable money funds. Holdings of Certificates of Deposits remained the second largest position, though they dropped by $10.1 billion to $468.5 billion (19.7%). Treasury Bills & Securities, the third largest segment, increased by $11.4 billion to $456.0 billion (19.2%).
Commercial Paper remained the fourth largest segment behind U.S. Government Agency Securities; CP holdings dipped by $3.8 billion to $382.5 billion (16.1% of assets) and Agencies fell by $10.2 billion to $321.9 billion (13.6% of taxable assets). Notes (including Corporate and Bank) rose fractionally (up $3.1 billion) to $107.5 billion (4.5% of assets), and Other holdings dipped by $3.8 billion to $70.2 billion (3.0%).
The Number of Accounts Outstanding in ICI's Holdings series for taxable money funds increased by 9,738 to 24.856 million, while the Number of Funds remained flat at 401. The Average Maturity of Portfolios lengthened by 1 day to 49 days in February. Over the past year, WAMs of Taxable money funds have lengthened by 4 days.
Finally, note that the archived version of our Money Fund Intelligence XLS monthly spreadsheet -- see our Content Page to download -- now has Portfolio Composition and Maturity Distribution totals and final data corrections updated as of Feb. 28, 2013. We revise these following the monthly publication of our final Money Fund Portfolio Holdings data. Our revised March MFI shows the Crane Money Fund Average with the following Portfolio Composition: Treas 21%, Govt 16%, Repo 28%, CD 12%, CP 10%, ABCP 6%, FRN 3%, MTN 0%, FA 1%, and Other 4%. Our simple average of Taxable funds shows the % Maturing in 7 Day or less at 43% with 29% maturing overnight.
The March issue of Crane Data's Money Fund Intelligence newsletter features a profile entitled, "HSBC's Jonathan Curry Talks Global Liquidity." The following is an excerpt of the first half of this article.... This month, MFI interviews Jonathan Curry, Global CIO for Liquidity at HSBC Global Asset Management. The London-based Curry is also the current Chairman of the Institutional Money Market Funds Association (IMMFA), which represents AAA-rated money funds regulated in Europe. HSBC Global Asset Management manages approximately $65 billion in money fund assets globally in 12 different currencies. Below, we ask Curry about European, U.S. and global regulatory and investment issues impacting money market funds.
MFI: How long have you been running money funds? Curry: HSBC has been in the money funds business for over 20 years. Our largest suite of funds are our international money market funds offered in USD, EUR, GBP and CAD, which are domiciled in Dublin, and are sold to clients around the world excluding the U.S. We also have a suite of 2a-7, U.S. money market funds; and a suite of French domestic money market funds. Plus, we manage in 8 other currencies. We believe we are one of the only managers with reasonable scale in the three major markets of the U.S., "offshore" European, and France.
MFI: What have you been focusing on? Curry: We continue to be focused on working closely with our clients to help them navigate the constantly changing global liquidity landscape. And certainly writing comment letters is one of the things we've been spending time on! We've been involved in the money market fund reform debate in the U.S. market, and in the European market, so that's kept us busy. More recently we've been looking at contingency planning around a potential drop into negative yield territory and what that means for constant net asset value money market funds. We've put some changes in place in terms of our international funds that will allow them to manage through a negative yield scenario, allowing us to treat all our shareholders fairly and transparently. We've received regulatory approval and we've been through a client voting process ... so we're in a position now that we can manage through negative yields.
MFI: What are the main challenges in running a money fund? Curry: There has always been the need to avoid 'torpedo' credit events in portfolios, and similarly liquidity events. Our investment process and credit process have always been designed to manage [around these]. However, historically there was a lot more focus on relative and absolute performance that drove some yield-chasing behavior. But I think there have been some fundamental changes that have taken place as a consequence of the credit crisis. At HSBC Global Asset Management, we are very clear on what we are looking to deliver and what our objectives are -- to deliver preservation of capital and liquidity.
I think from a broader money market perspective there has been a change in the supply and demand dynamics within the marketplace. There has been a reduction in supply of assets available to money market investors ... with a similar level of demand chasing a reducing level of supply.... In some of the local markets that we operate in, it's been less of a phenomenon. But certainly in the developed markets that we operate in, it's been a clear issue that we've needed to manage and address.
MFI: So what are the funds buying? Curry: We've increased our usage of repo post crisis. We're doing a greater volume of our very short dated liquidity in repo and reduced our use of the overnight deposit market. We've also increased the allocation to government securities in our prime funds. We rarely had an allocation to government credits in our prime funds prior to the crisis.... It fluctuates in terms of its weighting within the fund, but there is a constant allocation to this asset class, which is a change. There has been a reduction in asset-backed commercial paper as an asset class. It is an asset class where we have credit expertise and we have a number of ABCP programs approved, but clearly the ... market, in terms of supply, has shrunk significantly.... I think the other change that we've seen post-crisis, particularly in our Euro and sterling funds, is a reduction in the usage of floating rate note product. That is less driven by concerns about that asset class, [than from] a credit spread duration and liquidity perspective.
MFI: What are your clients concerned with these days? Curry: I think clearly a theme post-crisis has been an increased appetite from investors for data and information about the funds that they are invested in. That has led to us, and the industry, providing more information and transparency to investors about the funds. Holdings reports are commonplace now.... People want more information about the underlying assets within the fund. I think other concerns ebb and flow. Concerns around the Eurozone sovereign sector and the Eurozone banking sector were key concerns particularly in the second half 2011 and throughout 2012. I'm not suggesting those concerns have gone away, but certainly the magnitude of these concerns has reduced over that period.
Obviously the level of yields available in the major developed market economies is certainly something that clients are focused on. I think the drivers and the priorities are still preservation of capital and liquidity for the majority of our clients. I think concerns around money market fund reform are not broad based across our client base; it is far more specific to a small percentage of the client base at this stage. But, as we and our clients get more clarity about what exactly that reform is going to look like, I'm sure this will increase the focus of our clients on the impacts and what it means for them.
Standard & Poor's Ratings Services issued a press release entitled, "S&P: Money Market Funds Have Remained Stable Despite Greater Disclosure Of Shadow Net Asset Values," which says, "When the SEC began to require that money market funds disclose their "shadow" net asset values (NAVs), in December 2010, fund sponsors were concerned about shareholders' reaction to viewing these NAVs. In Standard & Poor's Ratings Services' view, the impact of the requirement has been relatively benign over the past two years, said an article published today, titled "Money Market Funds' "Shadow" Net Asset Values Are In The Spotlight Again."" (Note that Crane Data publishes these monthly shadow NAVs in our Money Fund Intelligence XLS.)
S&P's release continues, "Based on the revision that the SEC made to Rule 2a-7, which governs registered money market funds under the Investment Company Act of 1940, fund companies have to submit their shadow NAVs monthly, and then the postings are made available on the SEC's Web site with a 60–day delay. A fund's marked-to-market NAV is the total value of all the investments in its portfolio (minus any liabilities), divided by the number of fund shares outstanding. The shadow NAV is the true (nonrounded) marked-to-market NAV per share out to four decimals."
It adds, "As investors continue to gain access to more frequent shadow NAV data for their stable NAV investments, we're updating how our rated stable NAV funds have behaved over the past two years." "Generally, money market funds and other similar investment pools have remained stable," said Standard & Poor's credit analyst Madeleine Parish. "Recall, prior to the implementation of the SEC's revision to Rule 2a-7, we had noted only small incremental NAV deviations."
S&P tells us, "In early 2013, money fund managers (including some of the largest assets managers in the U.S.) began reporting shadow NAVs out to four decimal places on a daily basis by posting them to their Web sites. The impact of disclosing NAVs on a daily basis can lead to more conservative portfolios that are managed to minimize the impact of changes in interest rates." (Note too that we now publish daily "MNAVs" in our Money Fund Intelligence Daily product.)
Parish also comments, "The prolonged period of low interest rates and new liquidity rules for 2a-7 funds have established a general basis for lower portfolio average maturities over the past few years. Average portfolio maturity and liquidity positions are significant factors contributing to the stability of observed marked-to-market NAVs. However, the NAV data we have observed over the past two years are in line with the stable values we have seen in the nearly 30 years that we have been assigning principal stability fund ratings, with the exception of a few more volatile periods in 1994 and 2007."
S&P's full report comments, "The money market fund industry has received increased attention as a result of the FSOC and SEC's continued work deciding on appropriate reforms to the industry following the financial crisis. Notably, one of the recommendations the FSOC outlined is a requirement for the stable NAV to become a variable NAV. If a variable NAV requirement becomes part of Rule 2a-7 and is applied to prime money market funds based on the $100.00-per-share NAV proposal the FSOC outlined, the range of share prices we would have witnessed for our rated prime funds over the past two years using this anchor point would have been $99.790 to $100.148."
Finally, the report says, "In addition, the question that remains regarding the shadow NAV disclosures is at what point will increased transparency from posting daily NAVs cause shareholders to redeem their investments? Although there is no definitive answer to this, increased transparency will provide investors with more factors on which to base their investment decisions. Once daily NAVs become available to portals (institutional online trading platforms), investors will be able to sort funds by their NAVs, among other factors."
Today, we excerpt from a panel from last week's ICI & FBA Mutual Funds & Investment Management Conference in Palm Desert, Calif. The "Money Market Funds" panel included ICI's Jane Heinrichs, Reed Smith's Stephen Keen, Goldman Sachs' David Fishman, Schwab's Rick Holland, and the SEC's Craig Lewis. Keen commented, "I agree that on a regulatory basis there is nothing that [would have helped] affect the Lehman situation or the Reserve Primary Fund. On the other hand, based on my conversation with portfolio managers ... I don't think anybody would buy an SIV anymore. They wouldn't buy a market liquidity based product, as opposed to something that had more of a liquidity back-up to it. They learned their lesson, and I would also suspect that most people would not rely on the government to come [in and support an] investment bank.... There may have been changes not [due to] regulations that have limited the risk."
Fishman told the MFIMC audience, "[With] the floating NAV proposal, we typically get three complaints, or three issues, that clients have brought up. The first [one is] accounting.... They are now treated [as] cash and cash equivalents, so now we have to treat them differently. The second would be operational. How do we actually trade them? We have systems trained to trade them at a $1 dollar per share. We now have to spend millions of dollars to rebuild our systems. And the third is on tax. If I use money funds as a bill-paying mechanism, I may create ... tax [issues].... These three issues tend to really [compromise] the utility of it [and it] is something that moves small amounts anyway."
Holland said, "An overwhelming majority of our shareholders have responded that they would not find any benefit to a fluctuating NAV money market fund, and it would be unnecessarily burdensome. Certainly, the registered investment advisor community, that I spend a lot of my time talking with and who represents the individual shareholder, has spoken loudly and clearly about the fact that they just don't see where the benefits would be, and there is a lot of imposed inconvenience."
When asked about the disclosure of daily market NAVs, Fishman responded, "We did what we think is a natural progression. We are very proud of the industry. We think there is a lot of utility and value that we offer our clients.... [O]ne of the purposes [of disclosing daily market NAVs] is to bring us out of the shadows, because, frankly, we don't think we have a whole lot to hide. These funds are very conservative. They are very transparent. Since 2008, we have been in a steady march towards transparency, and this is just one more natural step. Frankly, it is not the last step, and I think the more we share with regulators, with the industry as a whole, and with our clients, the more people will appreciate the product for what it is, which is a very conservative, safe vehicle that offers a lot of utility."
Holland answered, "I think Schwab had to take a slightly different perspective only because we have such a preponderance of retail shareholders, many of whom who would without simultaneous educational support about the mark-to-market disclosure would be confused about what that means. [See today's "Link of the Day too.] So we wanted to be very thoughtful and take our time about the way in which we will provide this information, and accompany it with the appropriate educational material so that there was no confusion about what that meant. I also do think that it was just a very good idea, the timing of which was hopefully designed to help the regulatory authorities to understand that there isn't anything to hide here.... We're very, very transparent about the true mark to market values are."
Heinrichs asked, "What does a floating NAV do that daily NAV does not? The SEC's Craig answered, "I personally think more disclosure is better. We like to see disclosure. I would like to think that as this evolves and becomes more common that there would be more archiving of the shadow NAVs as opposed to just daily NAV that you see today. Also, we claim that it would be helpful for investors if they could understand what the liquidity levels were in the fund too. Disclosures around weekly assets for example would be I think interesting additional pieces of information.... Disclosure of daily NAV tells you where of losses or gains in your portfolio relative to amortized cost are at any point in time. What a floating NAV product does though is that it actually forces the investor to realize those losses and gains on a daily basis. So you'd understand in the disclosure regime that those gains or losses exist relative to amortize cost, but in a floating NAV environment you actually bare the economic consequences of those gains and losses."
Finally, when asked "Can the Industry afford a capital buffer?," Fishman said, "I think it is very difficult, obviously in the interest rate environment that we are in. Ultimately, you are talking about a very high likelihood that the shareholder ends up paying for that. You really end up taking what is arguably an implicit [support] and making that explicit, and that might go back on what is an original argument of what some of the regulatory authorities have said they don't want.... So I think we have to step back to the very beginning and say what is it indeed we are trying to solve for and does a capital buffer address that.... If a money fund has capital that is provided by the sponsor it's likely that the sponsor would need to consolidate those assets, all the assets of the money funds, onto the balance sheet of the banks."
Standard & Poor's Ratings Service published a research piece yesterday entitled, "Lifting The Veil: Increasing Transparency And Resilience For Banks, Nonbanks, And Investors In The Triparty Repurchase Agreement Market." The press release says, "Reform in the $1.8 trillion triparty repurchase agreement (repo) market in the U.S. attempts to correct the deficiencies that the financial crisis exposed in an important funding market for banks and nonbanks, said an article published today, titled "Lifting The Veil: Increasing Transparency And Resilience For Banks, Nonbanks, And Investors In The Triparty Repurchase Agreement Market." It quotes author Devi Aurora, "Although the triparty repo market has functioned well as a key but largely invisible part of the financial architecture under normal conditions, the Lehman bankruptcy and ensuing financial crisis exposed significant deficiencies. And the resulting systemic contagion has put triparty repo reform near the top of the list of the regulatory reform agenda."
The paper explains, "The $1.8 trillion dollar U.S. triparty repurchase agreement (repo) market is a large and important short-term financing channel for most financial intermediaries. Although the triparty repo market has functioned well as a key but largely invisible part of the financial architecture under normal conditions, the Lehman bankruptcy and ensuing financial crisis exposed significant deficiencies. And the resulting systemic contagion has put triparty repo reform near the top of the list of the regulatory reform agenda."
It continues, "In order to minimize systemic funding and liquidity disruptions from future dealer distress, the Federal Reserve (Fed) has asked market participants to implement a plan for triparty repo market reform, prompting a series of corrective actions to date among participants. In our view, these operational reforms are designed to overturn the false sense of safety that existed before the crisis, leading to a system in which repo borrowers built up growing exposure to less-liquid collateral. Repo lenders failed to price risks accurately, instead relying implicitly on intraday credit extension from the two clearing banks, JPMorgan Chase and Bank of New York Mellon. The high level of financial distress following the Lehman failure also revealed significant risk-management flaws among financial market participants (regulated banks and others) who perhaps did not recognize the true extent of their interconnectedness and were, therefore, inadequately prepared to cope with dramatic fluctuations in collateral values stemming from a large dealer default. In our view, regulatory attempts to intensify oversight and transparency over the triparty repo market, as well as improved accounting disclosure requirements, will strengthen the risk-management practices for all financial market counterparties, including banks."
The paper's overview tells us, "Collateral composition changes toward agency and Treasury securities in the U.S. triparty repo market, combined with risk-aversion since the crisis, have, in our view, lowered the potential systemic risk of disorderly liquidation of collateral in the near term. Longer-term, we still see risks in the triparty repo market from a systemic shock or a large dealer default, and we believe this leaves open the possibility of a fire sale of repo collateral, which could significantly decrease market values. Clearing banks have made tangible operational improvements to reduce their intraday credit exposure and have articulated a timetable for further progress, and our ratings of the two clearing banks incorporate our expectation that they will meet their goals in reducing these intraday exposures."
It adds, "Regulations to bolster resilience among money market funds--key providers of funding in the triparty repo market--have been tightened and continue to be evaluated for additional enhancements, but the credit quality of the counterparty continues to play an integral role in the ability of a money market fund to maintain principal value. We do not foresee any near-term ratings impact on broker-dealers, although the risk remains that tighter requirements may, over time, create incentives for smaller independent broker-dealers to choose to diversify funding into adjacent markets."
S&P's report, authored by Aurora, Peter Rizzo and Jonathan Nus, continues, "As part of ongoing surveillance of our banking industry country risk assessment (BICRA) for the U.S., we monitor key initiatives that have the potential to affect the financial sector. Post triparty reform, how banks and nonbanks manage funding stress in the aftermath of a dealer default informs our systemwide view of industry risk. We believe governments have had--and will continue to have--an important role in containing systemic risk where failure to do so could jeopardize financial stability. In the U.S., the introduction of aggressive government backstops--such as the Federal Reserve's Primary Dealer Credit Facility (PDCF) program introduced after Bear Stearns experienced distress in March 2008 and closed in February 2010--was critical to directly providing securities dealers--for the first time in history--with a recourse to liquidity in exchange for a wide variety of collateral, thereby preventing the market deterioration in certain collateral types from infecting other market participants. We continue to view government support as important to our ratings for the two clearing banks."
S&P tells us, "A repurchase agreement is essentially a short-term collateralized loan (typically overnight, although term repos may extend as long as about two years), or an arrangement whereby financial institutions place their securities as collateral with cash-rich lenders, with a commitment to repurchase them at a specified future date at a fixed price. The cash lender receives a return (interest income) for this exchange, or has the right to sell the collateral (securities) if the repo counterparty defaults or otherwise becomes insolvent. The distinguishing feature of triparty repo is that a custodian or clearing bank acts as intermediary between the two parties."
Under "Link With Money Market Funds," the report says, "Because of their role as key intermediaries of short-term funding for financial institutions, we see an important link between money market fund reform and triparty repo reforms. In response to the 2008 financial crisis, the SEC amended regulations for money market funds in 2010 (Rule 2a-7 of the Investment Company Act of 1940) to decrease money market portfolios' average maturities, increase liquidity, enhance transparency, and improve credit quality. Additionally, the rules now require money market funds to evaluate the creditworthiness of the counterparty in order to limit exposure to less-creditworthy institutions. A fund adviser must determine if the counterparty is a creditworthy institution, separate from the value of the collateral supporting the counterparty's obligation under the repo agreement."
It explains, "In practice, most money market funds were already conducting these evaluations, so the new rules didn't have much of an impact on money market fund repo investments. The reduction to 5% from 10% of money market fund illiquid investments permitted under the new rule did have a meaningful effect on the industry, however. While most money market fund repo investments mature in one day, repos that mature in more than seven calendar days and do not have an unconditional put at par to the counterparty are considered illiquid, because they are not marketable securities, and no secondary market exists for such agreements. The reduction in allowable illiquid investments reduced the amount of term repo (repo maturing in more than one day) among money market funds, especially amounts exceeding seven days, in order to comply with the new rules and meet other liquidity metrics."
S&P adds, "Despite the work toward and discussion of triparty repo reform, we believe the collateralization policies of most money market funds have not materially changed. Daily collateral valuation and the overcollateralization levels (haircuts) have generally remained consistent with market averages, in our view. A key issue for money market funds is whether or not they can actually hold the collateral backing the repos in the event of dealer stress. Generally speaking, if a repo counterparty were to default, the collateral posted to support these agreements would not meet the eligibility requirements for investments under the new regulations (rule 2a-7). It would either have a longer maturity than the rules permit or could be of a quality or type of investment that is not eligible."
They write, "Given that, money market funds would have to immediately liquidate the collateral in order to maintain compliance with rule 2a-7. Because of this, and the potential for delay in the liquidation of collateral given the lack of precedent for dealing with a defaulted counterparty in 2a-7 money market funds, our criteria for rating money market funds calls for investments in counterparties with a short-term rating of at least 'A-1'. Additionally, money market funds facing a defaulted dealer and finding themselves in a fire sale of collateral may experience a decrease in its marked-to-market NAV--which could lead to the fund breaking the buck (when net asset value falls below $1)."
Finally, S&P states, "Triparty repo reform in the U.S. attempts to correct the deficiencies that the financial crisis exposed in an important funding market for banks and nonbanks. Since then, we have noted several favorable developments. First, a change in collateral composition toward high-quality securities lowers the near-term risk of disorderly liquidation of collateral in the event of a dealer default. We expect this preference to continue in the coming months. Second, clearing banks have made concrete progress in lowering intraday credit exposure and made a plan for further reduction. Our ratings analysis of the clearing banks incorporates our expectation that they will meet their goals in reducing these intraday exposures. Third, we expect improved accounting disclosure requirements and transparency to promote better risk-management practices and greater financial stability for all financial market counterparties, including banks. The rating impact for other financial market counterparties is limited for now, in our view. However, as the triparty repo reform agenda evolves further, we see some potential for smaller independent broker-dealers to choose to diversify funding away into adjacent markets. Nevertheless, even with these plans to reduce clearing banks' intraday credit, we see risks in the triparty repo market from a systemic shock or a large dealer default, and we believe this leaves open the possibility of a fire sale of repo collateral, which could significantly decrease market values. Additionally, money market funds facing a defaulted dealer and finding themselves in a fire sale of collateral may experience a decrease in their marked-to-market NAV, which could lead to the fund breaking the buck."
Advocacy website www.preservemoneymarketfunds.org, a venture from ICI and communications firm MWW, sent out a statement recently on, "Promising Remarks on Money Market Funds from Mary Jo White." They say, "President Obama has nominated attorney Mary Jo White to become SEC Chairman. What are her views on money market funds? Based on her recent testimony before the Senate Committee on Banking, those who use money market funds have reason to hope that under her leadership, regulators will take a more thoughtful and careful approach to these funds." They quote White (during Senate confirmation hearing to consider her nomination to head the SEC, March 12, 2013), "I'm also acutely aware of the value of the money market fund product. So whatever is done, we want to take care that that is not harmed by this."
The e-mail explains, "For one, White believes that the SEC, not the Financial Stability Oversight Council, should set the rules on money market funds. These funds, she said, "are in the heartland of the SEC's expertise." Second, White clearly recognizes the importance of money market funds to investors -- and the risks of bad policy choices. As noted above, she said she was "acutely aware of the value of the money market fund product.""
PreserveMoneyMarketFunds.org adds, "Although new SEC leadership may provide a welcome new direction on this issue, the need remains for consistent vigilance in preserving the value and benefits of money market funds. Regulators continue to consider ill-advised proposals, such as imposing floating net asset values. New proposals could come in the next few weeks. We will continue to update you on breaking issues and when your voice may again need to be heard."
In other news, a press release entitled, "Cachematrix Enters Asia and Pacific Market via Bank of Tokyo–Mitsubishi UFJ," says, "Cachematrix, the leading provider of money market fund and fixed income trading technology for banks and financial institutions, announced today that its partnership with Union Bank, N.A. has led to a direct relationship with parent company The Bank of Tokyo–Mitsubishi UFJ, Ltd. (BTMU) to provide trading technology for the bank's corporate clients."
It explains, "With growing demand for liquidity and cash management solutions from its corporate customers, BTMU had the vision to capitalize on Cachematrix's existing relationship with Union Bank. Treasurers at global, multi-national corporations are increasingly looking to implement automated short-term cash management systems via portal technology because corporations place a premium on the safety, convenience, and liquidity that Money Market Fund and Bank Product portals provide. As independent, non-bank portal providers continue to take market share (and revenue) from banks that do not offer portal technology, banks are quickly realizing the need to offer an internal proprietary solution."
Founder and CEO George Hagerman comments, "I am very excited about our new relationship with The Bank of Tokyo–Mitsubishi UFJ. This is an excellent growth opportunity for Cachematrix as we expand into the Asia and Pacific region. I can tell you that from our long standing and successful relationship with our partner Union Bank, I am not at all surprised to see their parent company leading the way in Asia with regard to technology solutions."
Hagerman adds, "With bank deposits at such immense levels, corporations are looking for other ways to advance their relationship with their banks through diversifying into other bank products, and that is what Cachematrix delivers."
Today, we excerpt from a supplement to an ICI conference panel in Palm Desert entitled, "Money Market Funds: The Regulatory Hot Potato." Panelist Stephen Keen of Reed Smith LLP included a 20-page summary of recent regulatory discussions, "Money Market Fund Reform from a Risk Management Perspective. His "Outline for 2013 Mutual Funds and Investment Management Conference" says, "Money market fund regulation is fundamentally an exercise in risk management. This may be due to the ease with which the objective of a money market fund -- provision of daily liquidity at a stable net asset value -- is translated into a simple risk: the possibility that the fund may fail to maintain a stable net asset value (known as "breaking a dollar"). Generally, two strategies may be employed to manage risk: first, to reduce the probability of a risk and, second, to limit the consequences of a risk. Another basic principle of risk management is that you cannot eliminate the intrinsic risks of an activity."
Keen writes, "When viewed from a risk management perspective, the history of money market fund regulation (from the original exemptive orders, to the adoption of Rule 2a-7 in 1983 and the subsequent amendments thereto) reflects a continual expansion and refinement of risk controls. Our firm takes this perspective when interpreting Rule 2a-7: consistently favoring the interpretation that reduces the probability or consequences of a fund breaking a dollar. We also believe that risk management provides a useful basis for evaluating proposed reforms to money market fund regulations. This approach promotes clarity by forcing identification of the risk(s) a reform is intended to manage, and whether the reform is intended to reduce the probability of the risk, reduce its potential consequences, or both."
He explains, "This outline systematically reviews the risk controls currently imposed by Rule 2a-7 and assesses whether proposed reforms might enhance these controls. Controls intended to limit the probability of risks are reviewed first, followed by a review of controls intended to limit the consequences of risks, both to a money market fund's shareholders and to other money market funds. Before reviewing possible enhancements, however, we begin by explaining why forcing funds to float their net asset values ("NAVs") should be a "non-starter" from a risk management perspective."
Keen continues, "From a risk management perspective, proposals to force money market funds to "float" their NAVs should not be regarded as "reforms." Floating the NAV would force money market funds to break a dollar, thus assuring the event regulations hitherto sought to prevent. This is particularly true of the first alternative proposed by FSOC, which would magnify trivial fluctuations in the portfolio's value to assure fluctuations in the fund's NAV. It was Orwellian for the former Chairman of the SEC to refer to this proposal to abandon the principle objective of 40 years of money market fund regulation as an effort to "shore-up" the funds. In reality, the floating NAV proposal would truncate the objective of a money market fund to the mere provision of daily liquidity."
He adds, "The Board of the International Organization of Securities Commissions' "Policy Recommendations for Money Market Funds" (FR07/12, Oct. 2012) illustrates the cognitive dissonance that results from treating a floating NAV as a "reform" proposal. Most of the substantive recommendations address standard risk controls already imposed by Rule 2a-7 on U.S. money market funds. E.g., Recommendation 2 ("Specific limitations should apply to the types of assets in which money market funds may invest and the risks they may take."); Recommendation 6 ("Money market funds should establish sound policies and procedures to know their investors."); Recommendation 7 ("Money market funds should hold a minimum amount of liquid assets to strengthen their ability to face redemptions and prevent fire sales."); Recommendation 8 ("Money market funds should periodically conduct appropriate stress testing."); and Recommendation 13 ("money market fund documentation should include a specific disclosure drawing investors' attention to the absence of a capital guarantee and the possibility of principal loss.")."
He continues, "Recommendation 10, in contrast, provides that: "Regulators should require, where workable, a conversion to floating/variable NAV." IOSCO believes that: "A conversion to floating NAV money market funds ... will allow fluctuations in share prices as it [sic] is the case for any other collective investment scheme, improving investors' understanding of the risks inherent to these funds and the difference with bank deposits, and will reduce the need and importance of sponsor support." IOSCO appears oblivious to the paradox that the more successful the implementation of the other Recommendations, the less fluctuation in share prices investors will experience upon implementation of Recommendation 10. To state it from the opposite perspective, if regulators convert money market funds to a floating NAV, regulators would no longer need to limit the volatility of their portfolios. If money market funds become like "any other collective investment scheme," they should no longer need greater risk controls than "any other collective investment scheme.""
Keen adds, "Any money market fund that complies with Rule 2a-7 seeks to maintain a stable NAV. Even if the fund does not use the amortized cost or penny rounding method, and calculates a $10 share price to the nearest penny, by complying with Rule 2a-7 the fund will necessarily tend to stabilize its NAV at $10. Proposing to force the NAVs of money market funds to fluctuate would thus subvert, rather than reform, Rule 2a-7."
He concludes, "Given the 30-year history of Rule 2a-7 and the extensive revisions to the rule during the intervening decades, we should not be surprised to find that many possible enhancements to the rule's risk controls have already been considered and rejected. Unless reformers are intent on subverting the essential nature of money market funds altogether, the avenues for further enhancements are limited. More significantly, the most promising enhancements relate primarily to controlling the consequences of breaking a dollar rather than to reducing the probability of breaking a dollar. This may explain why the industry continues to explore gating, redemption fees and similar reforms that would take effect only when a fund is already threatened with breaking a dollar."
Finally, Keen writes, "What should also be clear from this review is that the proposals under consideration by FSOC all lead to dead ends. Floating the NAV would be the antithesis of reform; capital is uneconomical; and a minimum balance requirement offers no advantages to having a fund break a dollar. FSOC's attempts to interfere in the SEC's deliberations have, since the end of 2011, impeded the SEC's progress on reform proposals that might benefit shareholders, other money market funds and the money market generally. Therefore, it would be best for FSOC and its members to turn their attention to more pressing matters, such as belated adoption of regulations required by the Dodd-Frank Act, and drop money market funds from their agenda."
While the SEC's Norm Champ declined to say much on money market mutual funds at Monday's "Mutual Funds and Investment Management Conference" in Palm Desert, the Investment Company Institute's Karrie McMillan did address the topic at length. In her opening speech, entitled, "Regulatory Climate Change and the New Environment for Funds," McMillan says, "We can also see how high the stakes are in another area marked by shifting regulatory patterns: money market funds. As you know, last summer, the SEC staff were working on set of proposals for structural reform. A bipartisan majority of SEC Commissioners, however, declined to support making those proposals. One reason for their resistance -- a highly commendable reason in my view -- was that the SEC, simply put, hadn't laid the groundwork for the staff's proposals. Namely, they felt that there hadn't been enough study of the impact of the comprehensive reforms for money market funds that the SEC had adopted in 2010. As Commissioner Aguilar said at the time, "This critical analysis must precede any proposals to further amend our rules.""
She continues, "At this point, shifting regulatory patterns became apparent when then-Chairman Schapiro got the newly-created Financial Stability Oversight Council (FSOC) engaged on the issue of money market funds. Her thinking, as she's said recently, was that "otherwise it would have died at the SEC." At ICI, we viewed this handoff to FSOC with deep concern, and we still do. For one, we never thought the issue was going to "die at the SEC" -- and indeed, it has not. Last November, the agency's Division of Risk, Strategy, and Financial Innovation released an economic study that was a thorough and dispassionate examination of what happened with money market funds during 2008, as well as the effectiveness of the 2010 reforms. We commend that study and hope to see more like it in other complicated rulemakings."
McMillan tells us, "A second concern with the FSOC intervention: as the regulator of mutual funds, the SEC is far and away the most appropriate agency in Washington to evaluate additional money market fund reforms. It has the strong expertise. It has the seven-plus decades of experience. Yet the FSOC's actions, taken despite the RiskFin's study, seemed calculated to undermine the SEC's role, its independence, and the democratic process at the heart of its approach to rulemaking. As a group of former SEC commissioners and senior staff recently wrote to FSOC, the Council's intervention "could disrupt the long-standing collaborative nature of the [SEC's] deliberative processes.""
She adds, "Finally, consider the substance of the FSOC's recommendations. The Council put forth last November the very same concepts that the majority of SEC commissioners had declined to support just three months prior. More recently, we've seen SEC reassert its authority over money market funds, which we welcome. The shifting regulatory patterns that led to money market funds getting tangled up in the FSOC process, however, remain something I think we should stay wary of."
McMillan also comments, "[W]e've seen the increasing clout of a new class of global super-regulators like the Financial Stability Board (FSB), headquartered in Basel, and the Madrid-based International Organization of Securities Commissions (IOSCO). It's clear by now that these super-regulators are not just comparing and contrasting existing regulatory regimes -- or making vague pronouncements that can be safely ignored. Even if your business is focused only on the U.S. market, you need to pay attention to what they're doing."
She explains, "The broadest of these global issues, of course, is systemic risk. The Lehman Brothers failure illustrated the need to pay closer attention to the interconnected aspect of global markets. Ferreting out and mitigating systemic risk has now become a guiding principle of global regulation. This search has led, for example, to heightened scrutiny of so-called "shadow banking." Now, if the phrase "shadow banking" sounds pejorative to you, that's because it is pejorative. Nonetheless, this is the mindset of many super-regulators who, like the FSOC, are largely made up of banking regulators and thus naturally tend to look at things through the prism of what they know best: banking regulation."
Finally, she adds, "Remember, the financial crisis was at its origin a banking and real estate crisis. I can't help but recall a comment that former Federal Reserve Chairman Paul Volcker made at an SEC roundtable on money market funds two years ago. He was suggesting, essentially, that the 650 U.S. money market funds should be turned into banks. He said, "This country could use 650 more banks. We just lost about 1,000 during the crisis!" That kind of thinking, in our view, is deeply flawed. Moving more financial activity into the banking system will concentrate risks and make the financial system more vulnerable, not less."
J.P Morgan Securities' Alex Roever writes in his most recent "Short Duration Strategy Weekly" a piece entitled, "MMF Reform: Drumbeats growing louder, faster." He says, "In the forest of financial reform, the money market drum beats have grown louder and more frequent. The pace of headlines on money market fund reforms have surged in the past week, prompted both by the Senate Confirmation Hearings for Mary Jo White, nominee to head the SEC, as well as the completely coincidental timing of a major annual money fund conference (MMX Money Market Expo). Another conference scheduled for next week, the 2013 Mutual Funds and Investment Management Conference, also promises to be a source of more MMF reform headlines)."
JPM's Roever, along with Teresa Ho and Chong Sin write, "In her confirmation hearing, Mary Jo White did not wade into the muck of money fund reform, but did forcefully argue that the SEC -- and not the FSOC – should be the author of new MMF rules. In expressing this sentiment, White seems aligned with recent comments by SEC Commissioners Daniel Gallagher, Luis Aguilar, and Troy Parades. The Senate Banking Committee will vote on White’s confirmation. Assuming that the vote passes, the nomination will also have to be voted on by the full Senate. So far, no date has been set for the full Senate vote."
The weekly continues, "Speaking at MMX, Parades made further observations on MMF regulations which we summarize and paraphrase here, based on our own notes. Parades stated that the SEC is where the experience and expertise are with respect to money fund regulation. He characterized the relationship between the FSOC and the SEC as a study in political science, in that the SEC is by design a bipartisan regulatory agency, a structure with checks and balances that is conducive to debate and compromise."
It continues, "In contrast, the FSOC is a committee composed of the heads of the various regulatory commissions, who are not bound to support the position of the agency they head, but instead are free to support their own personal views. By its construction, the FSOC is potentially a more partisan entity with the ability undermine the work of individual agencies. Parades suggests that if the SEC reaches a decision based on a thoughtful, deliberative approach given careful consideration of costs and benefits, then it should be comfortable reflecting that in its rulemaking, even if there's FSOC opposition to that decision. If the SEC only ratifies the wishes of the FSOC, one may wonder if the SEC has really done its job."
Roever adds, "Although press reports suggest the SEC staff is close to completing a new rules draft for the Commission's consideration, Parades declined to set out a time frame for future reforms, but noted that MMF reform has a very high profile at the Commission. He also withheld comment on the potential content of forthcoming proposals, but he did allow that given the nature of the SEC rulemaking process, final rules often differ from what is initially proposed, influenced by public comment and the practicalities of implementing certain policies."
JPM's update tells us, "As to the efficacy of variable NAV funds, Parades says "it depends on what we are trying to solve for." If the problem is to keep funds from breaking the buck, eliminating the $1 CNAV and replacing it with a VNAV has a certain logic. But, if the goal is to try to limit runs related to systemic risk, it may not be the best solution, since -- like many other investments -- there is still an incentive for shareholders to liquidate holdings sooner rather than later, and at a higher price rather than a lower price."
The piece adds, "Current institutional money fund shareholders should have a long time to react to changes. Time will be necessary as the accounting and tax implications of prospective changes will need to be vetted by various accounting bodies (FASB, IASB, GASB) and taxing authorities (IRS, Congress). Lack of clarity on these fronts prior to implementation may ultimately lead prime fund shareholders to pursue alternatives, if only temporarily. In a low interest rate environment, shifting from prime funds into Treasury or government funds is easy and has a relatively low opportunity cost. The same might be said of offshore money funds not governed under Rule 2a-7. Similarly, shifting into non-interest bearing transaction accounts remains an option, although it's uncertain if banks will sustain the current level of earnings credits for commercial customers given the Fed's current proclivity for creating reserves combined with the costs banks face for holding these liabilities. However, in the event that US interest rates rise before MMF reforms become effective, it's possible higher yields could entice some shareholders into higher yielding alternatives including short duration mutual funds, separate accounts or direct investments."
Finally, Roever writes, "We have been asked multiple times what MMF reforms could mean for borrowers in the short-term markets. Again, the answer depends heavily on the reaction of MMF shareholders to the yet unknown details of forthcoming proposals. As with the fund shareholders, we think borrowers will have time to adapt to reform, and given the changes in the financing market forced upon them since the crisis (including a lessened reliance on short-term funding), borrowers may be able to better adapt to new financing than some shareholders.... [R]eliance of individual firms on prime money funds for funding is relatively low, as our analysis of the top 25 borrowers indicates."
Note that Crane Data's Peter Crane will be attending the ICI's MFIMC conference in Palm Desert Sunday through Tuesday (March 17-19). The keynote (9am California time) will be given by Norm Champ, Director of the Division of Investment Management, U.S. Securities and Exchange Commission. We're guessing that more details will be released on the SEC's timetable and plans for money fund reforms, so look for a Crane Data News update later on Monday or on Tuesday a.m.
Moody's Investors Service recently released an update on how Euro money market funds are preparing for the possibility of negative yields. The "Special Comment," entitled, "Money Market Funds: Structural changes to combat negative yields are credit neutral," says, "The European Central Bank (ECB) decided to lower its deposit facility rate to zero in July 2012 and, as a result, a number of high-quality credits that are standard money market fund (MMF) holdings have traded at negative yields at times during the past six months. In response to these negative yields, a number of MMFs have implemented structural changes or amended terms of their prospectus to allow the MMF to implement changes in the event the fund experiences negative yields. We view these actions as credit neutral."
The report explains, "Asset management firms -- including Royal Bank of Scotland, Morgan Stanley Investment Management, Goldman Sachs, BlackRock, Inc. and HSBC Global Asset Management -- have made amendments to the terms or share structures of their respective funds (the "Funds") to enable them to continue operating as constant net asset value (CNAV) funds during periods of sustained ultra-low or negative interest rates. While there are some variations, the changes made typically incorporated a share-reduction mechanism into the Funds' structures to compensate for negative aggregate portfolio yields. In case of negative aggregate portfolio yields, maintaining a stable 1.00 NAV would be impossible absent these mechanisms or alternative structural changes. To date, there has not been a need to activate the share reduction mechanism in these Funds."
Moody's tells us, "In our view, the changes to the Funds' structures are credit neutral because (i) the Funds' promise to investors regarding principal preservation and provision of liquidity was not breached; In addition, we note that all the asset managers maintained sufficient liquidity to ensure that all redemption requests from investors could be settled timely at par. (ii) the Funds sought -- and obtained -- investors approval before implementing the structural changes: dissenting investors had the right to redeem their shares at par prior to the conclusion of any amendment or restructuring; and (iii) neither the Funds' investment strategy nor their portfolio composition changed as a result."
They add, "Despite the structural changes, the MMF investment managers aim to keep the gross yields of their Funds above zero, unless market events push yields below zero. Based on the current portfolio characteristics of the Funds, we continue to rate them Aaa-mf."
Moody's list of Dublin-domiciled funds that have amended their offering documents to allow automatic redemptions to pay expenses or negative yields include: Goldman Sachs Euro Liquid Reserves Fund, Goldman Sachs Euro Government Liquid Reserves Fund, Morgan Stanley Funds plc -- Euro Liquidity Fund, RBS Global Treasury Funds PLC -- Dollar, Euro, and Sterling, RBS GTF plc -- Euro Government Fund, HSBC Euro Liquidity Fund, HSBC Euro Government Liquidity Fund, HSBC Sterling Liquidity Fund, HSBC US Dollar Liquidity Fund, HSBC Canadian Dollar Liquidity Fund, BlackRock Institutional Euro Government Liquidity Fund, and BlackRock Institutional Euro Liquidity Fund.
For more news on this topic, see our latest issue of Money Fund Intelligence, which features the article, "HSBC's Jonathan Curry Talks Global Liquidity." See too our Nov. 21, 2012 story, "Moody's on JPM Euro Liquidity Funds' Launch of Flex Distributing Class," and our Oct. 19, 2012 story, "World Turned Upside Down: JPM Flex Class For Negative Euro Rates." Finally, see our latest Money Fund Intelligence International for fund asset sizes, yields, and performance information on Euro, Sterling and USD "offshore" money funds. MFII's Crane Euro MMF Index shows the average 7-day yield for the 65 Euro-denominated funds we track at 0.03% (net) as of March 13.
Crane Data released its taxable Money Fund Portfolio Holdings data for the month ended February 28, 2013, early this week. Our latest holdings collection shows money market securities held by Taxable U.S. money funds decreased by $27.1 billion in February (after rising $25.7 billion in January, $34.4 billion in December, and $58.1 billion in November) to $2.395 trillion. CDs, Time Deposits and Treasury Repo all dropped sharply, while ABCP and Treasury Debt jumped in February. Repo remained the largest segment among taxable money fund holdings, followed by CDs, Treasuries, CP, and Agencies. Money funds’ European-affiliated holdings (including repo) rose to their highest level, on a percentage basis, since November 2011. Below, we review our latest portfolio holdings aggregates (from our Money Fund Wisdom product suite).
Repurchase agreement (repo) holdings declined by $24.9 billion to $544.2 billion, or 22.7% of fund assets, and Certificates of Deposit (CDs) holdings declined by $40.6 billion to $458.0 billion, or 19.1%. Treasuries rose by $14.5 billion to $454.8 billion (19.0% of holdings). Commercial Paper (CP) rose by $24.6 billion to $442.2 billion (18.5% of holdings), while Government Agency Debt dropped by $8.6 billion to $310.7 billion (13.0% of assets). European-affiliated holdings dipped by $2.7 billion in February to $754.2 billion, but their 31.5% share of holdings was the highest level since Nov. 2011’s 31.8%. Eurozone-affiliated holdings though rose to $412.0 billion in February; they now account for 17.2% of overall taxable money fund holdings.
The Repo totals were made up of: Government Agency Repurchase Agreements (down $4.4 billion to $282.5 billion, or 11.8% of total holdings), Treasury Repurchase Agreements (down $15.0 billion to $186.5 billion, or 7.8% of assets), and Other Repurchase Agreements (down $5.4 billion to $75.2 billion, or 3.1% of holdings). The Commercial Paper totals were comprised of Financial Company Commercial Paper (up $2.1 billion to $232.9 billion, or 9.7% of assets), Asset Backed Commercial Paper (up $20.9 billion to $137.6 billion, or 5.8%), and Other Commercial Paper (up $1.6 billion to $71.7 billion, or 3.0%). "Other" Instruments (including Time Deposits and Other Notes) were the sixth largest sector with $139.3 billion (5.8%) and VRDNs (including Other Muni Debt) were the smallest segment with $45.9 billion (1.9 of holdings) in February.
The 20 largest Issuers to taxable money market funds as of Feb. 28, 2013, include the US Treasury (19.0%, $454.8 billion), Federal Home Loan Bank (6.2%, $148.51 billion), Deutsche Bank AG (3.8%, $90.9B), Federal National Mortgage Association (2.8%, $67.4B), Societe Generale (2.8%, $67.1B), BNP Paribas (2.7%, $64.6B), Federal Home Loan Mortgage Co (2.7%, $64.3B), Bank of America (2.7%, $63.5B), JP Morgan (2.5%, $58.8B), RBC (2.3%, $54.4B), Credit Suisse (2.3%, $54.1B), Bank of Nova Scotia (2.3%, $53.9B), Bank of Tokyo-Mitsubishi UFJ Ltd (2.2%, $52.8B), Sumitomo Mitsui Banking Co (2.2%, $52.4B), Barclays Bank (2.1%, $51.1B), Citi (2.0%, $46.8B), Bank of Montreal (1.6%, $38.7B), Credit Agricole (1.6%, $37.4B), Toronto-Dominion Bank (1.5%, $36.0B), and HSBC (1.4%, $34.6B).
The 10 largest Repo issuers (with the amount of repo outstanding among the money funds we track) include: Deutsche Bank AG ($59.4B), Bank of America ($57.7B), BNP Paribas ($46.8B), Credit Suisse ($35.7B), Societe Generale ($34.3B), Barclays Bank ($32.9B), Goldman Sachs ($31.3B), Citi ($29.3), JP Morgan ($28.5B), and RBS ($23.3B). The 10 largest issuers of CDs (and the amount of CDs issued to our universe include: Sumitomo Mitsui Banking Co ($46.0B), Bank of Tokyo-Mitsubishi UFJ Ltd ($36.2B), Bank of Montreal ($28.8B), Toronto-Dominion Bank ($28.6B), Bank of Nova Scotia ($26.5B), National Australia Bank Ltd ($24.6B), Deutsche Bank AG ($19.7B), Mizuho Corporate Bank Ltd ($18.9B), and Rabobank ($14.4B). The 10 largest issuers of CP in February (includes affiliated ABCP programs) include: Westpac Banking Co ($23.3B), JP Morgan ($20.5B), General Electric ($18.6B), Societe Generale ($17.4B), Rabobank ($15.4B), Commonwealth Bank of Australia ($14.3B), FMS Wertmanagement ($14.3B), NRW.Bank ($11.0B), Deutsche Bank AG ($10.4B), and HSBC ($9.7B).
The largest increases among Issuers of money market securities (including Repo) in February were shown by: US Treasury (up $14.5B to $454.8B), Deutsche Bank AG (up $8.9B to $90.9B), Federal National Mortgage Association (up $8.7B to $67.4B), UBS AG (up $5.5B to $19.9B), Natixis (up $3.4B to $19.3B), JP Morgan (up $2.8B to $58.8B), Credit Agricole (up $2.5B to $37.4B), Morgan Stanley (up $2.0B to $13.5B), Svenska Handelsbanken ($2.0B to $30.4B), and NRW.Bank (up $1.4B to $11.0B). The largest decreases among Issuers included: Federal Home Loan Bank (-14.5B to $148.1B), Credit Suisse (-8.9B to $54.1B), Bank of America (-6.3B to $63.5B), Sumitomo Mitsui Banking Co (-6.1B to $52.5B), Mizuho Corporate Bank Ltd (-5.7B to $31.9B), National Australia Bank Ltd (-5.2B to $34.2B), DnB NOR Bank ASA (-5.1B to $21.6B), BNP Paribas (-4.6B to $64.6B), RBS (-3.9B to $23.8B), and Swedbank AB (-3.6B to $12.9B).
The United States is still the largest segment of country-affiliations with 47.8%, or $1.144 trillion. Canada (8.9%, $214.1B) remained the second largest country and France remained in third place (8.6%, $205.6B). Japan was again fourth (6.7%, $160.4B) and the UK (6.1%, $145.06B) remained fifth. Germany (5.8%, $139.3B) was again sixth, followed by Australia (4.5%, $107.4B) among country-affiliated securities and dealers. (Note: Crane Data attributes Treasury and Government repo to the dealer's parent country of origin, though funds themselves "look-through" and consider these U.S. government securities.) Sweden (3.9%, $93.3B), Switzerland (3.4%, $81.8B), and the Netherlands (2.7%, $63.8B) continued to round out the top 10.
As of Feb. 28, 2013, Taxable money funds held 23.0% of their assets in securities maturing Overnight, and another 14.0% maturing in 2-7 days (36.9% total in 1-7 days). Another 18.1% matures in 8-30 days, while 26.9% matures in the 31-90 day period. The next bucket, 91-180 days, holds 12.8% of taxable securities, and just 5.2% 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 later today (the Tax Exempt MF Holdings were updated yesterday). 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.
Nancy Prior, President, Money Markets, of Fidelity, gave a speech Tuesday afternoon at iMoneyNet's Money Market Expo conference in Orlando, entitled, "Proceed With Caution: Striking the Right Regulatory Balance for Money Market Mutual Funds." (Note that Crane Data is unaffiliated with this event; we run the competing Money Fund Symposium.) Prior's talk says, "As the largest provider of money market mutual funds, Fidelity is very much committed to ensuring the safety, stability and viability of this product. Our money market fund portfolio management team is focused each and every day on researching and analyzing the short-term markets to help ensure that our funds can deliver – today and tomorrow, in stable and volatile markets -- principal stability, ready liquidity and a market-based return that our shareholders count on. We take our fiduciary responsibility to our shareholders very seriously. Our highest priority in managing MMFs is maintaining the safety and liquidity of our clients' principal, and we are proud of our track record over the past 30+ years."
She explains, "Ever since the SEC adopted a robust and comprehensive set of amendments to money market funds in 2010, Fidelity and the entire MMF industry have been actively engaged in deliberations about whether there is a need for further regulatory reform. Over this three-year period, we have heard a range of viewpoints and recommendations from MMF investors, issuers, providers, academics and policymakers. The debate has been open and transparent, with hundreds of hours of public meetings, voluminous comment letters online for all to see, and countless headlines and articles in the press. I want to thank everyone who has been actively involved in this debate. It has certainly been a thorough process, some would say exhaustive!
Prior continues, "But while differences remain as to whether additional reform is necessary and, if so, what the best approach might be ... we all share the same goals: to ensure the strength and stability of MMFs and our financial system ... and to preserve the benefits that these funds provide investors, issuers and our economy. I believe we are beginning to see a consensus emerge that could lead to a path forward ... a consensus across the various constituencies that have been actively involved in this debate -- including, most importantly, the regulators. I will elaborate on that later in my remarks."
She tells the audience, "We at Fidelity support reform that could serve to strengthen the resiliency of MMFs. But, as with any potential regulation, the expected benefits need to be carefully weighed against any potential harm or unintended consequences that might result from a change. We believe that some of the structural changes being considered by regulators would greatly diminish the attractiveness of these highly effective and low-cost cash management vehicles, with potentially severe consequences. On behalf of our shareholders, we have been -- and will continue to be -- vocal in our opposition to proposals that would undermine the core features that customers value in MMFs while providing no benefit to the overall stability of the financial system."
Prior adds, "We firmly believe that the 2010 amendments to Rule 2a-7 have made MMFs more resilient ... and that further action is simply not warranted. That's why our message to the Financial Stability Oversight Council (FSOC) is simple: take no further action on MMFs at this time. The SEC is the regulator with the authority and expertise to consider whether and how to adopt additional reforms on MMFs. Furthermore, the alternatives the FSOC has proposed are not workable; and the FSOC has failed to meet the procedural and substantive requirements as well as the policy justifications that are necessary to exercise its authority to make such recommendations."
She comments, "Our recent stress tests have demonstrated that our prime funds can now handle in a single day outflows twice the size of the largest redemptions we saw over the course of an entire week at the height of the crisis.... The results of these stress tests raise the question of how much protection is enough. We do not think removal of all risk from these funds is a desirable or realistic goal.... Based on the facts, data and empirical evidence, there simply is no justification, or benefit, for further reforms to Treasury, Government, Municipal or Retail Prime MMFs."
Prior says, "Unfortunately, no regulatory classification of funds as institutional or retail exists today. MMF advisers self-classify funds.... Therefore, an important step toward creating properly tailored reform is to establish formal criteria that distinguish between these two fund types.... But, more importantly, any regulatory changes should be narrowly tailored to address actual, identified risks. We urge regulators to focus on the problems they are trying to solve -- the ability of MMFs to sustain large, abrupt redemptions in times of severe market stress. Because Treasury, Government, Municipal, and Retail Prime MMFs do not pose the liquidity, credit, and redemption risks that the FSOC and SEC have identified as a concern, these types of funds should be excluded from any additional reform measures."
She continues, "Indeed, the comment letters filed in response to the FSOC's proposed recommendations on MMF reform show strong support for limiting further reform to Prime funds. Of the comment letters that addressed the issue of distinctions across types of MMFs, more than 95% agreed that Treasury MMFs should be excluded from further regulatory changes; 86% said that government funds require no changes; and 83% held the same view for Muni funds. The SEC should continue to review the results of its study prior to considering structural changes to MMFs. And the Commission should clearly identify and thoroughly evaluate the costs and benefits of any additional regulations."
Prior adds, "The fact is ... MMFs are already among the safest, most transparent -- and most heavily regulated -- investment products available anywhere.... Recently, Fidelity and other fund sponsors have begun providing even greater transparency by disclosing their portfolios' per-share market values on a daily basis. MMFs are subject to strict liquidity, maturity and credit restrictions. They can invest only in issuers that represent minimal credit risk. They don't engage in leverage or risky financial activity. They are not permitted to have foreign currency risk, invest in long-dated, lower-quality securities, or engage in credit default swap transactions."
She continues, "No one cares more about the strength and stability of the MMF industry than we do. We remain open to new ideas and creative thinking about the best way to improve the resiliency of MMFs. Yet, in support of our shareholders' best interests, we remain steadfastly opposed to changes that would eliminate the core features that investors value in MMFs. That said, we recognize that some policymakers strongly believe that further regulation is needed, and we appear headed down that path. In that case, we respectfully call on the SEC to ensure that any further reforms of MMFs be consistent with the goal of creating a stronger, more resilient product ... and do not impose harmful, unintended consequences on financial markets or the economy. We should not regulate for the sake of regulating. If additional regulation is necessary, it should be narrowly tailored to address a clearly identified problem."
She says, "The SEC should consider a prudent and balanced regulatory response to this narrow issue. A floating NAV is not the answer. It would impose burdensome tax, accounting and recordkeeping requirements for investors. Moreover, there is no evidence to suggest that it would prevent outflows in a crisis. It won't reduce risk in the system. Always-on redemption restrictions (like the MBR), those that prevent shareholders from redeeming all of their cash, also are not the right answer. Our customers have told us -- loudly and clearly -- that they have little or no interest in a product with a floating NAV or one that continually limits access to their funds. Why would such drastic changes to the core features that investors value in the MMF product be necessary or helpful?"
Finally, Prior adds, "In closing, neither the SEC nor the FSOC has demonstrated the need for any additional regulation of Treasury, Government, Muni or Retail Prime funds. These funds are not susceptible to runs, they present negligible credit risk, and they have massive liquidity. Fundamentally changing the core characteristics of MMFs would jeopardize the viability of this crucial cash management product and drive investors to products that may be less-regulated, less transparent or less stable, with adverse consequences for the stability of the financial system. The result, we are convinced, would be restricted access to credit, increased borrowing costs, and significant harm to the overall economy. We urge the SEC to carefully tailor any further reforms. Taking a broad-brush approach by imposing further regulations on all types of MMFs, regardless of their risk profile, would be contrary to the SEC's mandate ... to protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation. If more reform is needed, it should be limited to Institutional Prime Funds and be narrowly tailored to address the risk in this specific segment of the industry as highlighted by the SEC study."
Yesterday, a press release entitled, "SunGard Selects J.P. Morgan Clearing Corp. to Add Access to Centralized Custody and Settlement Capabilities for Short-Term Cash Management," says, "SunGard is adding the ability for customers of its SGN Short-Term Cash Management multi-fund cash investment solution to access centralized custody and settlement services through J.P. Morgan Clearing Corp. The combination of SGN and J.P. Morgan capabilities will help provide cash investors with cost savings and operational efficiencies by accessing multiple fund providers through a single connection."
SunGard explains, "As the role of the corporate treasurer expands and increased cash surpluses place added pressure on corporates' short-term investment strategies, customers that maintain many fund provider relationships are looking to streamline their cash management operations. According to the Association for Financial Professionals' (AFP) Treasury Benchmarking Program: 2012 Survey, treasury in a majority of organizations has taken on a number of additional functions over the past five years, with at least two-thirds of survey respondents indicating that they are now responsible for 18 functional areas within the scope of their organization's treasury function. In addition, SunGard's recent cash management study revealed that 37 percent of corporates have increased their cash surpluses over the last year."
It adds, "To address these challenges, the consolidated settlement and custody offering available to SGN customers will help treasurers efficiently manage larger amounts of cash and focus on multiple responsibilities by helping to reduce paperwork and eliminate the need for multiple fund applications, while increasing choices for investing excess capital."
Joseph Triarsi, managing director at J.P. Morgan Clearing Corp., comments, "We welcome the opportunity to work with SunGard and provide services to support their worldwide network of corporate and institutional clients."
SunGard brokerage President Bob Santella adds, "By leveraging the clearing expertise, breadth of services and credit quality of J.P. Morgan Clearing, SunGard is able to expand its offerings to cash managers globally by further automating the short-term investment process. SGN helps cash managers be more agile and productive, by providing the tools they need to help improve workflows and reduce costs while helping to mitigate trade and credit risk."
SunGard also recently posted a "Viewpoint" blog, entitled, "Cash Investment Settlements: Custody or Fully Disclosed?. It asks, "Treasurers have choices in the way they settle their cash investment trades: the custody model, or the fully disclosed model. What are the main attributes of each model, and in what case would a treasurer or cash manager choose one model over another?"
SunGard's Vince Tolve answers, "Many treasurers are using platforms to help them transact business in institutional money market funds. The difference between the custody or net settlement model and the fully disclosed model is on the settlement side of these transactions. With the fully disclosed model, the transaction settles directly with the fund families. The net settlement model allows the company to settle the transaction via a brokerage account through a single connection."
He adds, "The fully disclosed, direct access model offers full transparency with the individual fund providers. This means customers maintain a direct account and access to their fund providers. The settlement occurs directly at the fund's transfer agent in the name of the underlying client. This model has many benefits, especially from a relationship perspective.... The custody model can enhance operational efficiencies by allowing cash managers to access multiple fund providers through a single brokerage account.... However, they need not choose one model over the other; the tools treasurers use should give them the flexibility to choose the access model or combination of these models to meet their specific cash management needs."
Last week, we published our latest Money Fund Intelligence along with our recently-launched Family & Global Rankings for March with data as fo Feb. 28, 2013. The most recent market share rankings show that Fidelity Investments remains the largest manager of money market mutual funds both in the U.S. and globally, followed by J.P. Morgan. While money fund assets declined by $31.4 billion in February, the Top 10 managers of domestic U.S. money funds remained the same -- Federated, Vanguard, Schwab, BlackRock, Dreyfus, Goldman Sachs, Wells Faro, and Morgan Stanley round out the 10 largest list. When "offshore" money fund assets -- those domiciled in places like Dublin, Luxembourg, and the Cayman Island -- are included, the top 10 match the U.S. list, except for Western Asset bumping Morgan Stanley, though the order changes slightly. We review these rankings below and also summarize our Crane Money Fund Indexes for the latest month.
Our latest domestic U.S. money fund Family Rankings show Fidelity managing $415.8 billion, or 17.2% of all assets, followed by JPM's $241.2 billion (10.0%). Federated Investors ranks third with $235.3 billion (9.7%), Vanguard ranks fourth with $165.8 billion (6.9%), and Schwab ranks fifth with $158.9 billion (6.6%) of money fund assets. The sixth through tenth largest U.S. managers include: BlackRock ($158.3 billion, or 6.5%), Dreyfus ($152.4 billion, or 6.3%), Goldman Sachs ($140.4 billion, or 5.8%), Wells Fargo ($118.1 billion, or 4.9%), and Morgan Stanley ($89.4 billion, or 3.7%). The eleventh through twentieth largest U.S. money fund managers (in order) include: SSgA, Morgan Stanley, UBS, Invesco, Western, BofA, DB Advisors, First American, RBC, and T Rowe Price. Crane Data currently tracks 77 managers.
Over the past year, Morgan Stanley shows the largest asset increase (up $22.0 billion, or 33.8%), moving from 12th to 10th place, driven primarily by the shifting of Morgan Stanley Smith Barney brokerage assets away from Western Asset. Other big gainers since Feb. 28, 2012, include: BlackRock (up $12.4 billion, or 8.7%), Northern (up $9.1 billion, or 12.7%), Franklin (up $6.9 billion), and Wilmington Trust (up $6.2 billion on the merger with MTB). The biggest declines over 12 months include: JPM (down $15.6 billion), Federated (down $9.1 billion), and UBS (down $7.5 billion). (Note that money fund assets are very volatile month to month.)
Looking at the largest Global Money Fund Manager Rankings, the combined market share assets of our Money Fund Intelligence XLS (domestic U.S.) and our Money Fund Intelligence International ("offshore), we show these families: Fidelity ($422.2 billion), JPMorgan ($392.3 billion), BlackRock ($252.0 billion), Federated ($247.2 billion), and Goldman ($212.0 billion). Dreyfus, Vanguard, Schwab, Western, and Wells Fargo round out the top 10. These totals include offshore US dollar funds, as well as Euro and Sterling funds converted into US dollar totals. For more details, see our latest MFI Family & Global rankings e-mail.
For the month ended Feb. 28, 2013, our Crane Money Fund Average, which includes all taxable funds covered by Crane (currently 802), remained at 0.02% for both the 7-Day and 30-Day Yield (annualized). Our `Crane 100 Money Fund Index shows an average yield (7-Day and 30-Day) of 0.04% for the second month in a row following a drop in January from 0.05%. Our Prime Instititional MF Index yielded 0.06% (7-day), the Crane Govt Inst index yielded 0.02%, and the Crane Treasury Inst, Treasury Retail, Govt Retail and Prime Retail indexes all yielded 0.01%. The Crane Tax Exempt MF Index yielded 0.01%.
The Crane 100 MF Index returned on average 0.00% for 1-month, 0.01% for 3-month, 0.01% for YTD, 0.06% for 1-year, 0.06% for 3-years (annualized), 0.47% for 5-year, and 1.73% for 10-years. We added Gross 7-Day Yields to our Crane Indexes history file this month as well, and show 0.12% for Treasury Institutional funds and 0.13% for Treasury Retail funds; 0.16% for Government Institutional and Govt Retail funds; 0.27% for Prime Institutional funds and 0.25% for Prime Retail funds; and, 0.19% for Tax Exempt money funds, on average.
Average expense ratios charged moved lower in February along with gross yields. The Crane 100 and MF Average both were 0.18% (down from 0.19% last month and 0.20% in December). Prime Retail funds charged the higher rates (0.24%) on average, while Treasury Inst charged the lowest rates at 0.11%. Finally, WAMs, or weighted average maturities, again lengthened in February, rising to 46 days and 48 days, for the Crane MF Average and Crane 100 Index, respectively. WAMs were 43 days 45 days, respectively, at year-end 2012.
The Federal Reserve's huge Z.1 "Flow of Funds" statistical release for the Fourth Quarter of 2012 was published yesterday, and the four tables it includes on money market mutual funds show that the Household sector remain the largest investor segment and that SecurityRPs (repo) remain the largest investment segment. Table L.206 shows the Household sector with $1.110 trillion, or 41.9% of the $2.650 trillion held in Money Market Mutual Fund Shares as of Q42012. Household shares increased by $66 billion in the 4th quarter, but they fell by $4 billion during 2012. Household sector money fund assets remain well below their record level of $1.582 trillion at yearend 2008.
Funding corporations, which includes securities lenders, remained the second largest investor segment with $589 billion, or 22.2% of money fund shares. They decreased by $18 billion in the latest quarter and fell by $62 billion in 2012. (Funding corporations held over $1.025 trillion in money funds at the end of 2008.) Nonfinancial corporate businesses were the third largest investor segment, according to the Fed's data series, with $445 billion, or 16.8% of the total.
State and local governments ranked a distant fourth in market share among investor segments with 4.5%, or $119 billion, while the Rest of the world category jumped (up $49 billion in Q4) into fifth place with 4.2% of assets ($112 billion). Private pension funds held $96 billion (3.6%), Nonfinancial noncorporate businesses held $79 billion (3.0%), State and local government retirement held $42 billion (1.6%), Life insurance companies held $32 billion (1.2%), and Property-casualty insurance held $26 billion (1.0%), according to the Fed's Z.1 breakout.
The Flow of Funds Table L.119 shows `Money Market Mutual Fund Assets largely invested in Security RPs ($545 billion, or 20.6%), Treasury securities ($458 billion, or 17.3%), and Time and savings deposits ($435 billion, or 16.4%). Money funds also hold large positions in Agency and GSE backed securities ($344 billion, or 13.0%), Open market paper (we assume this is CP, $341 billion, or 12.9%), and Municipal securities ($337 billion, or 12.7%). The remainder is invested in Corporate and foreign bonds ($102 billion, or 3.9%), `Foreign deposits ($43, or 1.6%), Miscellaneous assets ($29 billion, or 1.1%), and Checkable deposits and currency ($17 billion, or 0.6%).
During 2012, Security RPs (up $61 billion), Time and savings deposits (up $55 billion) and Municipal securities (up $40 billion) showed large increases, while Agencies (down $60 billion), "Miscellaneous" (down $44 billion) and Corporate and foreign bonds (down $28 billion) showed large declines. (We're not aware of a detailed definition of the Fed's various categories, so aren't sure in some cases how to map some of these figures against other data sets.)
In other news, Wells Fargo Advantage Funds published its latest "Overview, strategy, and outlook." It discusses the expiration of unlimited deposit insurance, saying, "The Federal Deposit Insurance Corporation's (FDIC's) unlimited insurance coverage for balances in noninterest-bearing transaction accounts (NIBTA) expired at the end of 2012 and insurance coverage reverted to the $250,000 limit adopted in October 2008. After watching NIBTA balances increase steadily since the cap was removed and unlimited insurance was in effect, we, along with most market observers, believed we would see a decrease in NIBTA balances if the unlimited insurance was allowed to lapse."
Wells explains, "In fact, NIBTA balances exceeding the $250,000 limit increased by $49.6 billion during the fourth quarter of 2012. This increase, coupled with an $80 billion increase in total institutional money market fund assets over the same period, goes a long way toward explaining compressed credit spreads and declining yields on term money market securities. The FDIC doesn't give us the data to understand the trend in the NIBTA balances during the quarter. The decision to not extend the insurance coverage wasn't made until the last days of the year, when there was a seasonal lack of paper available, and because many logistical steps would need to be taken in order to move these balances, it may be that balances didn't move until after the year-end. According to Federal Reserve (Fed) data, total U.S. bank deposits fell about $100 billion in January, but this seemed to be a partial reversal of the $350 billion buildup that occurred in the fourth quarter."
They add, "We wouldn't be surprised if NIBTA balances greater than $250,000 fell in the first quarter of 2013, but our guess is that most of the decline will have simply shifted to other interest-bearing deposits. Still, the expiration of the unlimited insurance likely played a role in the plunge in repurchase agreement (repo) rates at year-end. Fed data showed approximately $150 billion in deposits from public entities. Many state laws require that these deposits be collateralized by U.S. government securities, a requirement which was fulfilled by the unlimited FDIC insurance. When the unlimited insurance expired, banks had to pledge collateral against these deposits, effectively removing $150 billion in collateral from the repo markets."
The March issue of Crane Data's Money Fund Intelligence newsletter, which was e-mailed to subscribers this morning, features the articles: "Update on MMF Reforms: Will the SEC Wait for FSOC?," which talks about (still) pending regulatory proposals; "HSBC's Jonathan Curry Talks Global Liquidity," which profiles one of the largest managers of European money funds; and, "Money Fund Assets: Recent Trends & Primer," which discusses asset flows and differences in data series. We've also updated our Money Fund Wisdom database query system with Feb. 28, 2013, performance statistics and rankings, and our MFI XLS will be sent out shortly. Our Feb. 28 Money Fund Portfolio Holdings are scheduled to go out on Monday, March 11. Note that we've also released the agenda for Crane's Money Fund Symposium, which will be held June 19-21, 2013, in Baltimore, Md. Registrations ($750) and hotel reservations are now being accepted via the website at www.moneyfundsymposium.com.
Our piece on MMF Reforms says, "Money fund providers, suppliers and investors are bracing for a possible reform proposal, but it's unclear whether it will be issued by the SEC or by the FSOC, or both. It's also unclear when we might see a proposal, and there remains the distinct possibility that the stalemate continues indefinitely. Here's what we know now. The comment period for the Financial Stability Oversight Council's "Proposed Recommendations Regarding Money Market Fund Reform" ended on February 15, and the letters (again) overwhelmingly opposed a floating NAV, capital buffer and minimum balance at risk."
MFI also writes in its monthly "profile," "This month, MFI interviews Jonathan Curry, Global CIO for Liquidity, at HSBC Global Asset Management. The London-based Curry is also the current Chairman of the Institutional Money Market Funds Association (IMMFA), which represents AAA-rated money funds regulated in Europe. HSBC Global Asset Management manages approximately $65 billion in money fund assets globally in 12 different currencies. Below, we discuss European, U.S. and global regulatory and investment issues impacting money market funds."
Our article on Assets explains, "Money fund assets have been on a rollercoaster ride since last October. They rose slightly in the latest week after falling for six straight weeks. This follows as huge spike in November and December 2012. Here we discuss the recent asset trends, and we review some basics about various asset totals and series."
In other news, the Federal Reserve Bank of New York published a Liberty Street Economics Blog piece entitled, "Pick Your Poison: How Money Market Funds Reacted to Financial Stress in 2011" which was written by Neel Krishnan, Antoine Martin, and Asani Sarkar. The piece says, "The summer of 2011 was an unsettling period for financial markets. In the United States, Congress was unable to agree to terms for raising the debt ceiling until August, creating considerable uncertainty over whether the government would be forced to default on its debt. In Europe, the borrowing costs of some peripheral countries increased dramatically, raising questions about the health of some of the largest banks. In this post, we analyze data recently made public by the Securities and Exchange Commission (SEC) to see how the U.S. money market mutual fund (MMF) industry reacted to these stresses. We conclude that MMFs appeared to be more concerned with the European debt crisis because they increased their holdings of U.S. Treasuries and other government securities while decreasing their holdings of financial securities issued by European banks over that period."
The brief adds, "The dog days of summer 2011 were worrisome for investors, who faced a variety of risks. With a limited number of investment options, money funds had to choose among the least unpleasant of many risky options. Data recently made public by the SEC suggest that money funds considered the European crisis to represent a greater risk than the U.S. debt-ceiling crisis, as they moved away from European assets and increased their investments in U.S. Treasury securities and related assets. The relatively benign effects of the 2011 U.S. debt-ceiling crisis on U.S. financial markets appear to have been serendipitous, as the U.S. and European debt crises occurred concurrently. Money funds nevertheless reacted to the increased riskiness of Treasuries by dramatically decreasing the maturities of Treasuries held in their portfolios during the debt-ceiling crisis. This behavior suggests that we can't be sure that the effects of future fiscal crises on financial markets will be similarly benign."
Dechert LLP's Financial Services Group published "The Debate Continues -- U.S. Money Market Fund Update" yesterday, written by Jack Murphy, Stephen Cohen, Justin Tait, and Aline Smith. The "OnPoint" paper says, "Since the U.S. Financial Stability Oversight Council ("FSOC") issued proposed recommendations to the U.S. Securities and Exchange Commission ("SEC") regarding additional reforms to money market fund ("money fund") regulation on November 13, 2012 ("FSOC Recommendations"), there have been a number of important developments, including: In December 2012, the SEC published for public comment a report prepared by the staff of the Division of Risk, Strategy, and Financial Innovation ("Staff Report"), which responded to questions that had been posed by Commissioners Aguilar, Paredes and Gallagher regarding the need for additional money fund reform; In January 2013, the Investment Company Institute ("ICI") released a study entitled "Money Market Mutual Funds, Risk, and Financial Stability in the Wake of the 2010 Reforms" ("ICI Study"), in which the ICI concluded that money funds' ability to manage both the Eurozone crisis and U.S. debt ceiling crisis in 2011 demonstrated the efficacy of the 2010 Amendments (as hereinafter defined); In January 2013, several large money fund complexes announced that they would be posting on their websites daily marked-to-market net asset values ("NAVs"), a move interpreted by some as an effort to dispel the need for further money fund reform; and, In February 2013, the comment period on the FSOC Recommendations ended and many commenters expressed their concerns regarding many aspects of the FSOC Recommendations, especially the FSOC's proposal for requiring certain money funds to convert to a "floating NAV."
Dechert explains, "These developments have added to the discussion in the ongoing debate over whether additional reforms of money fund regulations are necessary, but their effect on the SEC and the FSOC remains unclear. There are some indications that the SEC may take the lead to issue proposed reforms, based on public comments from SEC Commissioners who previously opposed additional money fund reform and have modified their positions. In addition, an SEC Commissioner recently expressed concerns over the FSOC's structure and its involvement in the money fund reform process. The nomination and potential confirmation of Mary Jo White as the new SEC Chairman may also lead to action by the SEC on money fund reform. However, at present, Ms. White's views on the advisability of further money fund reform or on particular reforms are unknown. This DechertOnPoint provides an update regarding these developments."
The piece tells us, "On December 5, 2012, the SEC published for public comment the Staff Report. The Staff Report sought to respond to questions posed by Commissioners Aguilar, Paredes and Gallagher regarding the need for additional money fund reform, and, in particular, the following three categories of questions: (i) whether a money fund "breaking the buck" outside of a period of financial distress would cause a systemic risk to the financial system; (ii) whether the 2010 Amendments had been effective in addressing perceived issues involving liquidity, credit risk and interest rate risk of money funds; and (iii) how future reforms might affect the demand for investments in money fund substitutes and the implications for investors, financial institutions, corporate borrowers, municipalities and states that sell their debt to money funds."
Dechert later says, "In January 2013, the ICI issued the ICI Study, which supports the view that the 2010 Amendments have been effective in addressing many of the issues that occurred in 2008. The ICI Study noted, in particular, the success of the shortened liquidity requirements, greater transparency, orderly liquidation and other features of the 2010 Amendments during two recent financial challenges -- the possible U.S. debt ceiling debate during the summer of 2011 and the issues relating to the Eurozone sovereign debt crisis.... The ICI Study concluded that the credit risk of prime money funds in 2011 remained minimal, even though the events of the Eurozone crisis led to small increases in credit risk."
On the subject of "Daily Posting of Marked-to-Market NAVs," the paper adds, "Also in January, several major money fund complexes independently announced plans to post daily the marked-to-market NAVs of money funds they manage, thereby increasing the transparency of those funds to investors. One press release announcing the decision stated that "[g]iven that much of the discussion about systemic risk has centered on the commercial paper fund market in the US, we have decided as a first step to disclose those funds' market value NAVs."
Dechert continues on "Comments on the FSOC Recommendations," "Many large money fund complexes submitted comment letters expressing their concerns regarding the FSOC Recommendations. Most of the commenters focused on the proposal to require the conversion to a floating NAV. Some commenters also expressed the view that the SEC, rather than the FSOC, would be the proper regulator to consider money fund reform. Many commenters supported the imposition of liquidity fees upon redeeming shareholders during times of market turmoil. Other commenters proposed the imposition of redemption gates as an alternative to a floating NAV and the other proposals in the FSOC Recommendations. In addition, many commenters suggested additional changes to Rule 2a-7 to further tighten up the risk-limiting requirements of that rule."
They explain, "Although the Staff Report did not provide definitive responses to the Commissioners' questions or analyze the potential impact of proposed reforms recommended in the Staff Proposals or by the FSOC, the Staff Report may assuage some concerns expressed by those Commissioners who had opposed the Staff Proposals in August. In fact, statements from Commissioners Aguilar and Gallagher indicate that their previous positions regarding additional reforms may be changing."
Dechert adds, "Commissioner Gallagher also recently stated that a proposal on money funds could be coming in the next few months. If this is the case, the SEC may consider additional reforms before the FSOC offers final recommendations that the SEC would be required to consider under Section 120 of Dodd-Frank. In a recent speech, Commissioner Gallagher also expressed concerns regarding the FSOC's involvement in money fund reform, noting the active role taken by the SEC in examining the need for further money fund reforms and questioning the FSOC's continued involvement in the process."
Finally, they say, "The nomination and potential confirmation of Mary Jo White as the new SEC Chairman may also spur further action by the SEC on money fund reform, although Ms. White's views on the advisability of further money fund reform or on particular reforms are, at present, unknown. If the events described above are any indication, we can expect that the debate over the future of money fund regulation will continue to be both lively and contentious going forward. Please look for future DechertOnPoints as we continue to cover this very important topic."
Brian Reid, the Investment Company Institute's chief economist, takes issue with a recent speech by New York Fed President William Dudley in a "Viewpoint" entitled, "The New York Fed's Flawed Approach to Fixing the Money Market." Reid writes, "William C. Dudley, president and CEO of the Federal Reserve Bank of New York, recently delivered a speech, "Fixing Wholesale Funding to Build a More Stable Financial System." I was interested to read his remarks, as the New York Fed has been instrumental in pursuing reforms to strengthen the financial markets, particularly in the market for tri-party repurchase agreements. I was disappointed, however, that Dudley suggested money market funds are the key source of instability in the money markets. The facts don't support this view, as I've detailed in a recent letter to Dudley. Worse, his focus on a single product risks diverting regulators from the far more useful approach that the New York Fed pursued in the repo markets -- market-wide reforms."
Reid tells us, "Here are the key points from my letter. Dudley Conveys a Faulty Narrative of the Financial Crisis. At the beginning of his remarks, Dudley mentions the "extensive use of short-term funding" prior to the financial crisis and the contribution of supply-side factors to the mispricing of risk. He does not explicitly mention the supply-side effects of money market funds, but his focus on money market fund reforms implies that these funds were the primary source of supply-side factors. As we discuss in our comment letter to the Financial Stability Oversight Council on its Proposed Recommendations Regarding Money Market Mutual Fund Reform, money market funds cannot credibly be held to account for the credit bubble. The data simply won't support that argument."
He explains, "From the beginning of 2000 to mid-2007, the money markets expanded by $4.5 trillion, while taxable money market funds' holdings of these short-term securities increased by only $299 billion. The repo and commercial paper markets grew substantially during this period, yet money market funds accounted for only 11 percent of the increased supply of funding to the repo market and less than 1 percent of the increase in the commercial paper market. In addition, money market funds financed, at most, 6 percent of home mortgage borrowing over this period."
Reid continues, "Dudley's remarks also implied that money market funds were the primary source of pressure in the repo and commercial paper markets during the financial crisis. Again, the data say otherwise. For example, during September 2008, while the repo market declined by $400 billion, money market funds increased their holdings of repurchase agreements by more than $90 billion. Even during the week between September 16 and 23 -- when prime money market funds were enduring their largest outflows in history -- money market funds expanded their lending in the repo market by $67 billion. Clearly, the problems financial institutions had in obtaining repo funding originated with investors other than money market funds."
He adds, "Events in the commercial paper market show a similar pattern: during late summer 2007, investors other than money market funds accounted for most of the decline in commercial paper. Even in September 2008, the sell-off of commercial paper by other investors equaled that of money market funds. In addition, these investors continued to pull back from the commercial paper market in October, while money market funds became net buyers. Again, the problems faced by commercial paper issuers were market-wide across a spectrum of buyers, not specific to money market funds."
Under, "The SEC's 2010 Reforms for Money Market Funds Are Much More Than a "First Step"," Reid writes, "Dudley downplays the 2010 reforms of money market funds by the Securities and Exchange Commission (SEC) as "a first step" that make money funds "somewhat less risky." He also says these reforms do little to reduce investors' incentives to run at the first sign of trouble. The facts: today's money market funds are stronger and substantially more resilient than the funds that were available in 2008, thanks to the tools and regulatory requirements provided by the SEC's 2010 reforms."
He continues, "The 2010 amendments addressed the liquidity challenges that prime funds faced during the financial crisis by imposing, for the first time, explicit minimum daily and weekly liquidity requirements. In practice, money market funds are operating with liquidity well in excess of the required minimum levels.... Even if investors pull away from a troubled prime fund, the impact on broader credit markets will be minimal, because the fund will be selling securities that other investors are eager to buy. Another reform, often overlooked, is that money market fund sponsors are now allowed to suspend redemptions and close a fund to prevent a fire sale of assets from spilling over into the markets and affecting other funds and investors."
Reid comments "Additional Reforms Endorsed by Dudley Are Bad Ideas," saying, "Dudley endorses the idea of a minimum balance requirement as "the best one for financial stability purposes." ICI has extensively examined this concept, also known as the minimum balance at risk (MBR) or redemption holdback, and found it suffers from many defects. By denying investors complete access to their fund shares, the MBR would make money market funds less liquid than other investment pools, including other mutual funds. The MBR also creates serious operational issues for funds, intermediaries, and investors that would reduce or eliminate the usefulness of many services that money market funds provide. Given investors' stated negative reactions to such holdback proposals, funds, intermediaries, and service providers will be unable to justify, from a business standpoint, the significant costs of complying with an MBR in the face of a rapid shrinkage of money market fund assets."
Finally, Reid writes, "The danger here is that a policy response that focuses solely on one product -- and in this case, on the most-regulated and most-transparent product in the market -- will drive investors into less-regulated, less-transparent alternatives. This exit would increase, not reduce, risks to the financial system and would reduce information available to regulators."
Last week, Fitch Ratings published "European Treasurer Survey 2013," which examines large investors' thoughts on the possibility of a move to a floating NAV regime, and "U.S. Money Fund Exposure and European Banks: Eurozone Climbs Again," which reviews the latest trends in the portfolio holdings of the largest money market funds." Fitch's first report, subtitled, "European Treasurers Split on Impact of Potential Regulatory Changes, explains, "Money market funds are subject to regulatory debate around the world. Many changes have been proposed, notably a potential move from the constant net asset value (CNAV) structure, which represents around half of total MMF assets in Europe, to a variable net asset value (VNAV) structure, which is predominant in French funds and represents the remaining MMF assets."
Fitch explains, "While calling for changes to MMF operating frameworks, regulators have also expressed concerns about the potential impact on short term investors who have adopted pooled solutions in recent years.... European treasurers surveyed by Fitch have increasingly turned to money market funds, which many view as an extension of traditional bank deposits. While deposits remain the preferred vehicles, half have also adopted MMFs and a fifth of those treasurers that invest in MMFs use both CNAV and VNAV."
The piece tells us, "MMF guidelines still mainly adopt an "AAAmmf or nothing" approach for CNAV, even though a quarter of respondents could accommodate MMFs rated "AAmmf" or "Ammf". This is an area where regulators are concerned with a "cliff risk", that is the risk of a "run on the fund" should it be downgraded below "AAAmmf".... Treasurers appear to hold mixed views on the respective merits and flaws of CNAV and VNAV funds. Treasurers highlight the clear profile of CNAV funds and the true valuation of VNAV. Conversely, perception of guarantee and lack of valuation transparency in CNAV represent concerns, while for VNAV, the worries centre around funds' volatility and potential hidden capital losses."
Fitch adds on "Differing Views on Regulatory Impact," "47% do not expect to be materially affected but 42% anticipate a significant or material impact, mostly in accounting and tax areas. Moreover, 42% do not have an opinion on whether funds converted to VNAV would be less clearly defined, which Fitch views as a real risk. This makes clear the need for a sound transition and more communication on the part of industry and regulators.... 80% of respondents consider the financial standing of the sponsor when selecting an MMF, and not just the portfolio and investment strategy. But treasurers take a holistic view, emphasising the financial as well as operational role of the fund sponsor."
The second study, the monthly "U.S. Money Fund Exposure and European Banks," comments, "After retreating slightly in December, U.S. prime money market fund (MMF) exposure to eurozone banks increased in January. As of end-January 2013, exposures to eurozone banks represented 14.5% of MMF assets under management within Fitch Ratings' sample, the highest level since end-October 2011 and a more than 90% increase (on a dollar) basis since the end-June 2012 trough. From the money funds' perspective, ECB actions and improved eurozone market conditions have helped to promote a more positive posture to banks in the region. For eurozone banks, continuing access to MMFs can enhance funding diversification and bolster liquidity."
They continue, "For the seventh consecutive month, MMFs increased their exposure to French banks, which at 6.8% of MMF assets reached their highest point since end-August 2011. For a second straight month, French banks represented the largest single country exposure within Europe. Since end-December 2012, MMFs have increased their bank allocations across the rest of Europe as well, with gains in exposure to the U.K. (31% increase), Netherlands (22% increase), Germany (19% increase), Switzerland (11% increase), and the Nordic region (9% increase)."
Finally, Fitch adds, "In addition to the continuing resumption of flows to eurozone banks, several other trends also indicate an easing in MMF risk aversion. The proportion of eurozone exposure in the form of repos remains below last summer's peaks, a decline which likely reflects a greater willingness by funds to take on unsecured exposure to the region. Additionally, in the case of France, MF exposure in the form of certificates of deposit (CD) have increased by about thirtyfold since end-June 2012 (albeit from a very low base), while over the same period, exposure in the form of time deposits (which typically mature overnight or within a few days) has decreased by roughly 70%. As of end-January 2013, French bank CDs had a weighted average residual maturity of more than 40 days. This shift away from short-duration time deposits towards longer-duration CDs is another indication of diminishing risk aversion."
The London-based Institutional Money Market Funds Association, or IMMFA, which is the association representing the triple-A rated money market fund industry in Europe, has stepped up its lobbying efforts to counter some of the assumptions being made by regulators in Europe and worldwide. They've recently posted three papers -- "Bank Runs Money Market Funds and the First Mover Advantage," "The Use of Amortised Cost Accounting," and "IMMFA Summary Paper on Money Market Funds" -- that appear to be aimed at dispelling some of the more harmful persistent myths that bank regulators have been propagating. The first paper, written by former Barclays Global PM Mark Hannam, says, "Several recent reports from regulatory bodies have recommended that money market funds should be required to move from stable to variable net asset valuation pricing, to reduce the risk of first-mover advantage and the risk of a run on the fund. Most money market fund sponsors doubt that this proposal will reduce either run risk or first-mover advantage."
He explains, "Thirty years of academic research on bank runs has concluded that the best protections against bank runs are retail deposit insurance or the suspension of convertibility. There are no arguments within the academic literature in favour of changing the terms of the demand deposit contract, from stable to variable value: it is quite remarkable that the preferred solution for MMFs is one without precedent in banking regulation. Money market funds are different from banks in four fundamental respects. These differences concern their legal form but also, importantly, their economic function. Money market funds do not engage in fractional reserve banking and they do not perform liquidity creation. Money market funds, like other capital markets products, are vulnerable to the unanticipated actions of investors during periods of market distress. At such moments there is a risk that money market funds might contribute to the amplification of systemic risk."
The Abstract adds, "In a period of heightened systemic risk, the ability of money market funds to suspend the standard terms under which shareholders are able to redeem fund units for cash, is the mechanism most likely to eradicate the possibility of a first mover advantage and thereby to reduce the risk of a run. In the absence of a credible deposit insurance policy for the money market fund industry, suspension of convertibility should be the preferred option: for regulators, for fund sponsors and for investors."
IMMFA's second paper tells us about amortized cost accounting, saying, "Much of the recent debate about money market funds (MMFs) has focused on the purported advantages of variable net asset value (VNAV) funds over constant net asset value (CNAV) funds. Yet CNAV and VNAV funds share much in common. Both are collective investment schemes, the objective of which is to provide investors with security of capital and high levels of liquidity, and which seek to achieve that objective by investing in a portfolio of high quality, low duration money market instruments. If a CNAV or VNAV fund meets its objective -- which it usually does -- then a redeeming investor will receive repayment of their original investment plus an income return which reflects the prevailing rate in the money markets. If a CNAV or VNAV fund does not meet its objective -- and there is no guarantee that it will -- then a redeeming investor may not receive full repayment of her original investment, even net of the income return, perhaps due to a default by one of the fund's underlying portfolio investments."
It explains, "Despite these fundamental similarities, the convention of distinguishing CNAV and VNAV funds persists, in particular because some regulators have argued that CNAV funds pose greater risks that VNAV funds. They have therefore proposed restrictions on the mechanisms that CNAV funds use to maintain a constant price, including the use of amortised cost accounting to value their assets. The objectives of this paper are to: explain why MMFs use amortised cost accounting; assess the risks arising; and explore potential remedies."
IMMFA's draft adds, "In summary, in the absence of traded or quoted prices, amortised cost accounting is a pragmatic way for MMFs to evaluate the fair value of money market instruments. Amortised cost accounting is widely used in the EU (where it is often used as a proxy for fair value) and in the financial statements of MMFs in the USA (and has been accepted by the Financial Accounting Standards Board as compliant with generally accepted accounting principles). Amortised cost accounting (and equivalent valuation techniques) is also used in the financial statements of banks to value loans and certain other assets."
Finally, the third paper (IMMFA Summary Paper on Money Market Funds) comments, "European domiciled money market funds (MMFs) provide a valuable service to investors, issuers and the real economy: investors value MMFs for their credit diversification, transparency, ease of use and because they are bankruptcy remote; and MMFs provide a small but relatively stable source of cross-border funding for European banks. Whilst European banks continue to obtain most of their US dollar funding from wholesale markets, including US domiciled MMFs, regulation of European domiciled MMFs is ill-suited to address this specific issue."
IMMFA explains, "Regulators have concluded that MMFs did not cause the financial crisis in 2007/2008 but remain concerned over the role MMFs played in transmitting the financial crisis via client redemptions and sponsor support. IMMFA recognizes these concerns. We believe that further transparency, liquidity buffers and "know your client" requirements, combined with, redemption gates and liquidity fees in stressed market conditions, will be most effective in mitigating the impact of client redemptions in the future. In addition, we recommend that transactions between a mutual fund and its sponsor be clearly defined in regulation and either prohibited or require explicit pre-approval."
Finally, they add, "IMMFA strongly believes that this combination of reforms meets the FSB's requirement that safeguards for stable value MMFs ('CNAV MMFs') "be functionally equivalent in effect to the capital, liquidity and other prudential requirements on banks that protect against runs on their deposits". Other potential risk mitigants -- such as a restriction in the use of amortised cost accounting, the mandatory conversion from CNAV to variable NAV MMFs ('VNAV MMF') or capital -- will not reduce systemic risk but will reduce significantly the size of MMF in Europe with unintended consequences for investors and issuers. European investors would increasingly turn to bank deposits, other short term investment funds and to CNAV MMFs domiciled outside Europe. The European economy’s reliance and direct exposure to wholesale bank funding would increase."