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ICI'​s latest "Trends in Mutual Fund Investing, March 2013" shows that money fund assets dropped by $​57.​6 billion, or 2.​2%, in March, after dropping $​31.​7 billion, or 1.​2%, in February and $​9.​1 billion in January. YTD through 3/​31, ICI shows money fund assets down by $​97.​7 billion, or 3.​6%. ICI also released its latest "Month-​End Portfolio Holdings of Taxable Money Funds," which showed a huge decline in holdings of Repurchase Agreements and a smaller but noticeable drop in Commercial Paper during March. (​See Crane Data'​s April 12 News, "March 31 Portfolio Holdings Update: CDs Now No. 1 Holding, Repo Dives.") Month-​to-​date through Friday (​4/​26), our MFI Daily shows assets down $​7.​6 billion, or 0.​3%, though they appear to have tax-​related outflows behind them and have risen by $​7.​8 billion over the past seven days.

ICI'​s March "​Trends" says, "The combined assets of the nation’​s mutual funds increased by $​190.​9 billion, or 1.​4 percent, to $​13.​676 trillion in March, 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 $​16.​10 billion in March, compared with an inflow of $​20.​25 billion in February.... Money market funds had an outflow of $​58.​25 billion in March, compared with an outflow of $​31.​62 billion in February. Funds offered primarily to institutions had an outflow of $​53.​17 billion. Funds offered primarily to individuals had an outflow of $​5.​09 billion."

ICI'​s Portfolio Holdings for March 2013 show that Repos fell by $​75.​2 billion, or 13.​6%, to $​479.​3 billion (​20.​6% of assets) after falling by $​15.​5 billion in Feb.; they are now in a three-​way tie with CDs and Treasuries for the largest segment of taxable money fund portfolio holdings. Holdings of Certificates of Deposits remained the second largest position by a hair; they increased by $​10.​8 billion to $​479.​3 billion (​20.​6%). Treasury Bills & Securities, the third largest segment by another hair, increased by $​22.​7 billion to $​479.​1 billion (​20.​6%).

Commercial Paper remained the fourth largest segment behind U.​S. Government Agency Securities; CP holdings fell by $​24.​8 billion to $​357.​7 billion (​15.​4% of assets) and Agencies rose by $​9.​6 billion to $​331.​6 billion (​14.​3% of taxable assets). Notes (​including Corporate and Bank) fell fractionally (​down $​1.​3 billion) to $​104.​9 billion (​4.​5% of assets), and Other holdings rose by $​8.​7 billion to $​80.​3 billion (​3.​5%), likely on the strength of increased municipal holdings in taxable funds.

The Number of Accounts Outstanding in ICI'​s Holdings series for taxable money funds decreased by 300,​981 to 24.​555 million, while the Number of Funds fell by 4 to 397. The Average Maturity of Portfolios remained flat at 49 days in March. Over the past year, WAMs of Taxable money funds have lengthened by 3 days.

Finally, note that the archived version of our Money Fund Intelligence XLS monthly spreadsheet -- see our Content Page to download -- has Portfolio Composition and Maturity Distribution totals and final data corrections updated as of March 31, 2013 earlier today. We revise these following the monthly publication of our final Money Fund Portfolio Holdings data.

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Federated Investors hosted its First Quarter 2013 Earnings Call on Friday morning, and President & CEO J. Christopher Donahue discussed asset flows, fee waivers and regulatory issues. He comments, "Our market share for money market funds decreased slightly in the first quarter. Money market separate account assets were up $​8 billion in the first quarter, with most of the increase coming from the addition of [​a] previously discussed State of Massachusetts' mandate. As expected, the impact of yield-​related fee waivers increased in Q1.... On the regulatory front, public comments from an SEC commissioner indicate that a proposal may be forthcoming in the next couple of months.... Unless and until a proposal is put out for comment, there'​s not much in the way of additional commentary that I can make."

Donahue says, "​We continue to advocate for sound policy that enhances the resiliency of money funds for our clients, who fully understand that money funds, like other investments, have elements of risk. They are not interested in radical and unnecessary changes like floating NAVs, holdbacks or capital requirements. Money fund investors have remained confident in the product as presently constructed, a dollar in and a dollar out, uninsured, transparent, invested in a diversified portfolio of high-​quality securities and supported by proper accounting and market valuations. Our position is straightforward. We will continue to champion those things that enhance the resiliency of money funds while retaining the core features of a sound product with an unparalleled long safety record and success, all based on daily liquidity at par with the market rate of interest."

On Federated'​s Quarterly Money Market Update Thursday, CIO for Taxable Money Market Funds Deborah A. Cunningham comments that a new regulatory proposal might come "[​in the] next couple of months, probably in Q2". But it "​might get pushed" [​back further] she adds. Cunningham doesn'​t think the FSOC is reviewing the 128 comment letters, and believes that FSOC is waiting for the SEC to act. She tells us, "I don'​t think it [​the proposal] will be as draconian and problematic [​as some believe]." While Cunningham told listeners, "​We do think there will be a floating NAV" in the proposal, she doesn'​t expect it to make it to the final rule. Since the IRS reportedly declined to accommodate "​de minimis" gains associated with transactions, this "adds another nail in [​the] floating NAV coffin," she says. "​Capital is off the table [​with the] realization ... that [​a] 3% [​buffer] is far-​fetched." Cunningham believes, "Some sort of gating will be part of the proposal ... [​as well as] minor changes that might dial-​in risk."

Federated CFO Thomas R. Donahue says of the rise in fee waivers on the earnings call, "The increase was due mainly to lower rates for treasury and mortgage-​related securities. Based on current assets and expected yield levels, the impact of minimum yield waivers to pretax income in Q2 could be similar to the level it was in the first quarter. Looking forward and holding all other variables constant, we estimate that gaining 10 basis points in gross yields would likely reduce the impact of minimum yield waivers by about 40%, and a 25 basis point increase would reduce the impact by about 70%.... Revenues in Q1 decreased 7% from the prior quarter due largely to minimum yield waivers and fewer days, partially offset by higher average assets for equities, fixed income and money markets. Operating expenses decreased from Q4 due largely to lower distribution expenses due to minimum yield waivers and fewer days."

During the call'​s Q&​A, Chris Donahue responds, when asked about "​contingency plans" and money fund "​alternatives," "​Well, as regards what these guys might come up with, whether it'​s a variable NAV or not, it'​s a separate subject, which we can get into. But get to your question is the alternatives.... We have a very large separate account business, which works very well for very large clients.... Moving funds to offshore can be considered. Moving funds to other types of products, enhanced cash, etc., can be considered. Moving products to depository institutions and largely larger banks would also be considered."

He continues, "So all of these things, and there are other new products that I think could get created that haven'​t even shown up yet. Some have filed, including us, various forms of ETFs. But the thing about all of these alternatives is that none of them are as good for the customer, the economy or the issuer as the money market fund. But that would be an array of potential options. Obviously, the simplest one is if they throw prime funds under the bus, then everybody runs over the government funds."

When asked about new products taking market share from large players, Donahue responds, "​I don'​t see that. I see more the impact of the regulatory environment that we live in as the continuing the oligopolization of the business. Perhaps that'​s not its intent, but that'​s certainly its effect. It'​s very difficult to start brand-​new products, especially on the cash management side, when what the customer wants is daily liquidity at par. You need a bigger bunch of assets in order to make that viable. So I just don'​t see that."

Finally, he adds, "More likely, depending on what the proposal is, it will follow the line of a bunch of money moving into Govies if they trash prime and moving into large bank deposits for the rest of the money. That will be the main show. Then all these other products that could come up will take their place in line, but it'​ll be well behind. And I just don'​t see the underlying business efficacy of all new businesses for new type cash management products, which don'​t do what people want and require a lot more of assets than are available."

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The Financial Stability Oversight Council (​FSOC) issued its "2013 Annual Report, which contains an update on "Reforms of Wholesale Funding Markets" and a section on "Money Market Funds." It says, "The Council took concrete steps to support the implementation of structural reforms to mitigate the vulnerability of money market mutual funds (​MMFs) to runs, a recommendation made by the Council in its 2011 and 2012 annual reports. In November 2012, the Council issued Proposed Recommendations Regarding Money Market Mutual Fund Reform, under Section 120 of the Dodd-​Frank Act. This action followed the decision by SEC Commissioners not to move forward with the MMF reforms as proposed by their staff in August 2012."

FSOC explains, "The Council'​s proposed recommendations included three alternatives for public consideration: Alternative One: Floating Net Asset Value. Require MMFs to have a floating net asset value (​NAV) per share by removing the special exemption that currently allows MMFs to utilize amortized cost valuation and/​or penny rounding to maintain a stable $​1.​00 NAV. Alternative Two: Stable NAV with NAV Buffer and Minimum Balance at Risk. Require MMFs to have a NAV buffer with a tailored amount of assets of up to 1 percent to absorb day-​to-​day fluctuations in the value of the funds' portfolio securities and allow the funds to maintain a stable NAV. The NAV buffer would be paired with a requirement that 3 percent of a shareholder'​s highest account value in excess of $​100,​000 during the previous 30 days -- a minimum balance at risk (​MBR) -- be made available for redemption on a delayed basis. In the event that an MMF suffers losses that exceed its NAV buffer, the losses would be borne first by the MBRs of shareholders who have recently redeemed, providing protection for shareholders who remain in the fund."

The proposed recommendations continue, "Alternative Three: Stable NAV with NAV Buffer and Other Recommended Measures. Require MMFs to have a risk-​based buffer of 3 percent of NAV to provide explicit loss-​absorption capacity that could be combined with other measures to enhance the effectiveness of the buffer and potentially increase the resiliency of MMFs. The other measures include more stringent investment diversification requirements, increased minimum liquidity levels, and more robust disclosure requirements. The public comment period on the Council'​s proposed recommendations closed on February 15, 2013. The Council received approximately 150 comment letters on its proposed recommendations and is in the process of reviewing those comments. The SEC, by virtue of its institutional expertise and statutory authority, is best positioned to implement reforms to address the risk that MMFs present to the economy."

FSOC explains, "If the SEC moves forward with meaningful structural reforms of MMFs before the Council completes its Section 120 process, the Council expects that it would not issue a final Section 120 recommendation to the SEC. The Council understands the SEC is currently in the process of considering further regulatory action. To inform this examination, SEC staff produced a report, requested by certain SEC Commissioners, on the causes of investor redemptions in prime MMFs during the 2008 financial crisis, on changes in certain characteristics of MMFs before and after the SEC'​s 2010 modifications to MMF regulation, and on the potential effect of further reform of MMFs on investor demand for MMFs and alternative investments."

They add, "The Council also recommends that the SEC consider the views expressed by commenters on the Council'​s proposed recommendations and by the Council as the SEC considers any regulatory action to improve loss-​absorption capacity and mitigate MMFs' susceptibility to runs. The Council further recommends that its members examine the nature and impact of any structural reform of MMFs that the SEC implements to determine whether the same or similar reforms are warranted for other cash-​management vehicles, including non-​Rule 2a-​7 MMFs. Such an examination would provide for consistency of regulation while also decreasing the possibility of the movement of assets to vehicles that are susceptible to large-​scale runs or otherwise pose a threat to financial stability."

FSOC'​s 2013 Annual Report also comments on "Tri-​Party Repo," "In its 2012 annual report, the Council highlighted the tri-​party repo market'​s vulnerabilities and noted a lack of progress in addressing them. The vulnerabilities are as follows: Heavy reliance by market participants on intraday credit extensions from the clearing banks. Weakness in the credit and liquidity risk management practices of many market participants. Lack of a mechanism to ensure that tri-​party repo investors do not conduct disorderly, uncoordinated sales of their collateral immediately following a broker-​dealer'​s default."

Finally, it tells us, "Reliance on intraday credit is beginning to decline. Two government securities clearing banks, JPMorgan Chase (​JPM) and Bank of New York Mellon (​BNYM), have made operational and technological changes that reduce the intraday credit they extend. As a result of these efforts, market participants have begun to adjust their behavior in ways that reduce market demand for intraday credit. Consequently, intraday credit has declined to approximately 80 percent of market volume, down from 100 percent as of the Council'​s 2012 annual report. JPM and BNYM plan to implement further technology and operational changes through 2013 and 2014. These changes will improve the resiliency of tri-​party settlement by making clearing bank intraday credit available only on a pre-​committed basis, and by reducing the intraday credit supplied by the clearing banks to no more than 10 percent of volume by late 2014."

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The Vanguard Group recently released a series of publications discussing challenges and issues facing bonds and bond funds investors, and also posted a video discussing whether bond funds are a good alterative to money funds. Vanguard comments, "The historically low yield environment in the U.​S. bond market and recent cautions from commentators about the potential bursting of the "​bond bubble" have led some investors to question the role that fixed income plays in their portfolios. Vanguard believes that bonds bring the benefits of diversification and income to a balanced investment program but emphasizes that investors should have realistic expectations about future bond fund returns. Below is a recap of Vanguard'​s recent bond related research and commentary." Recent pieces includes: the video "Are bond funds a good alternative to money market funds?," "Reducing bonds? Proceed with caution," "The bond market: Challenges ahead," and a video of "Ken Volpert on the current bond landscape."

The video, subtitled, "Vanguard experts compare bond funds with money market funds," says, "With yields at historic lows, it may be tempting to use a bond fund to manage your money. Sarah Hammer of Vanguard Investment Strategy Group and David Glocke of Vanguard'​s Fixed Income Group caution that even a small increase in interest rates could reduce the value of your cash position."

The transcript asks, "With super low interest rates on money market funds, are short-​term bond funds a reasonable substitute?" They say, "​I think this is an important question and one that I want us to answer very seriously because we hear it a lot." Hammer comments, "​It is. We are hearing it a lot; we'​re seeing it a lot with our clients.... Obviously, everyone'​s feeling the low yields across the board and our people are very concerned about how to get that extra yield. Looking at a bond fund in comparison to a money market fund can be pretty complicated. When you think about what your goals are for managing your cash, one of your primary goals may be to protect principal. We talked about the concept of duration. A bond fund has a much longer duration; it'​s much riskier than a money market fund, so it'​s not a true cash management vehicle because it does have duration risk."

Hammer adds, "When you compare the average maturity of a money market fund, which is going to be 60 days or less, to even a short-​term bond fund that'​s going to be risky, have a duration of two, for example, you'​re talking about essentially a much riskier instrument. So, if you'​re looking to protect cash, if what you want is a true cash management vehicle, then a bond fund is not necessarily the right choice."

Glocke tells us, "​On the bond fund side, a lot of investors made an asset allocation switch, and we saw a lot more money move into the fixed income market early in the financial crisis.... Even our index bond funds saw enormous flows that were coming into them. A lot of the extra return that comes from the decline in yields has taken place in some of these portfolios.... Investors that have been in those funds have had extremely high returns on a relative basis, historically. It'​s a little tough right now at this particular juncture. Fixed income portfolios should still be part of people'​s core investment. So there still should be an allocation. But as interest rates rise, those portfolios will adjust too."

Vanguard'​s Amy Chain says, "I think what I hear you saying is that bond funds make a great bond portion of a portfolio. But, you know, think real hard if it'​s a cash management or a cash position that you'​re looking for." Glocke adds, "​Yes. Again to make the leap to go from a money market fund to, let'​s say, even a short duration bond fund of two years, like you mentioned ... It'​s a big leap. U.​S. Treasury securities yield approximately 25 basis points in the two-​year area. `​So it doesn'​t take much of an increase in yield to go ahead and wipe out a whole year'​s worth of income in a portfolio like that. So it is something that you need to be cautious about."

Vanguard'​s piece, "​Reducing bonds? Proceed with caution," says, "​While investors are increasingly looking for alternative ways to improve the expected returns of their portfolios with bond alternatives, Vanguard'​s researchers conclude that bonds remain the best diversifier for equity risk and therefore deserve strategic allocation in a balanced portfolio." Finally, in "​The bond market: Challenges ahead, they write, "Vanguard Chairman and CEO `​Bill McNabb and Robert Auwaerter, head of Vanguard Fixed Income Group, discuss the challenges bond investors face during a much less hospitable climate than the one they'​ve been accustomed to in the past."

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Crane Data, which produces largest annual gathering of money market professionals, Crane'​s Money Fund Symposium, and the "​basic training" event, Money Fund University, announces the launch of its third event, and first international offering, Crane'​s European Money Fund Symposium. European Money Fund Symposium will be held at the Conrad Hotel in Dublin, Ireland on September 24-​25, 2013, and will feature many of the world'​s foremost experts on "​offshore" money market mutual funds. Registration, which is $​1,​000 USD (​or 750 Euros), is now open and hotel reservations are now being accepted.

Our Peter Crane writes, "​Dear Money Fund & Cash Investment Professional: I'​m pleased to announce the launch of Crane'​s European Money Fund Symposium, Sept. 24-​25, 2013, at The Conrad Hotel in Dublin, Ireland. Crane Data'​s U.​S. Money Fund Symposium attracts the largest gathering of money fund professionals in the world, so we expect our inaugural European event to attract a robust crowd. We'​re now accepting registrations and hotel reservations, and are happy to discuss speaking and sponsorship opportunities."

He adds, "European Money Fund Symposium will offer money market portfolio managers, investors, issuers, and service providers a concentrated and affordable educational experience, as well as an excellent and informal networking venue. Our mission is to deliver the best possible conference content at an affordable price to money market fund professionals and investors. Attendee registration for Crane'​s European Money Fund Symposium is $​1,​000 (​or E750). A block of sleeping rooms has been reserved at The Conrad Dublin. The conference negotiated rate of E179 single and E189 double are available through September 5th. We hope to see you in Dublin!"

The preliminary Day One Agenda for Crane'​s European Money Fund Symposium includes: "State of MMFs in Europe & IMMFA Update" with Jonathon Curry, Global CIO Liquidity, HSBC Global Asset Management; "Global Regulatory Issues: What'​s Next?" with Dan Morrissey, Partner & Head of Asset Management, William Fry and John Hunt, Partner, Nutter, McClennen & Fish; "Risks & Ratings: Areas of Concern" with Yaron Ernst, Managing Director, Moody'​s Investors Service; "Monitoring European & Offshore MFs" with Peter Rizzo, Managing Director, Standard & Poor'​s and Aymeric Poizot, Head of EMEA Fund Ratings, Fitch Ratings; "Major Issues in Euro Money Funds" with Jason Granet, MD & Head International Liquidity PM, Goldman Sachs Asset Mgmt and an as yet unnamed Portfolio Manager from J.​P. Morgan Asset Management; "Major Issues in Sterling Money Funds" with Jennifer Gillespie, Head of Money Markets, Legal & General I.​M. and Jonathan Curry, Global CIO Liquidity, HSBC Global Asset Management; "Major Issues in USD & US Money Funds with Debbie Cunningham, MM CIO, Federated Investors and Jennifer Yazdanpanahi, Head of EMEA Cash, SSgA; and, "MMFs in Asia & Emerging Markets" with Peter Crane, President & Publisher, Crane Data and Andrew Paranthoiene, Director, Standard & Poor'​s.

The Day Two Agenda includes: "Dublin as a Domicile for Money Market Funds" with Pat Lardner, Chief Executive, Irish Funds Industry Association; "Distribution Panel: New Markets & Concerns" with Rich Boyd, Sr. VP & Head of Business Development, Federated Intl Management Ltd, Jim Fuell, Head of Global Liquidity, EMEA, J.​P. Morgan Asset Management; and Kathleen Hughes, Global Head of Liquidity Sales, Goldman Sachs A.​M.; "Dealer Update & Supply Discussion" with Kieran Davis, European Head of ST Trading, Barclays, Jean-​Luc Sinniger, Director, Citi Global Markets and David Hynes, Partner, Northcross Capital LLP; "From the Regulators Perspective" Bank of England, EU Regulator (​Invited); "Portal Panel: Beyond MMFs & Transparency" with Justin Meadows, Chief Executive, MyTreasury, Greg Fortuna, MD, State Street'​s Fund Connect, and Maryum Malik, Director of Business Development, SunGard; "Back Office Briefs: Accounting & Servicing"; and "Portfolio Manager Roundtable & Open Talk."

Sponsors to date of the event include: Moody'​s Investors Service, Federated International, J.​P. Morgan Asset Management, State Street Global Advisors, MyTreasury, Standard & Poor'​s. Sponsorship levels are $​3K, $​4.​5K, $​6K, and $​7.​5K, and limited speaking opportunities remain. Visit www.​euromfs.​com or contact us for more details.

Finally, preparations are being made for Crane Data'​s flagship event, Money Fund Symposium (www.​moneyfundsymposium.​com), which will take place June 19-​21, 2013, at The Baltimore Hyatt Regency. We expect over 400 money fund managers, marketers and professionals, money market securities dealers and issuers, servicers and cash investors of all stripes. We hope to see you in June in Baltimore!

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The Stable Value Investment Association, a low-​key non-​profit that represents conservative GIC-​like 401k options, recently published a document entitled, "Guaranteed Insurance Accounts -- Frequently Asked Questions." The SVIA tells us, "Because of the significant allocation of assets to guaranteed insurance accounts and the scant amount of publicly available information, the SVIA has released the following FAQ to shed some light on this segment. This FAQ is limited to an overview of guaranteed insurance accounts and focuses primarily on '​spread-​based' general account insurance products."

The FAQ explains, "​Given the complexity and uncertainty of today'​s financial markets and economy, it is no wonder that plan sponsors and plan participants continue to appreciate the benefits of stable value. As of December 31, 2011, over 25 million plan participants in more than 159,​000 defined contribution plans invested $​645.​5 billion in stable value products. Throughout their 40 year history, stable value products have consistently delivered a unique combination of benefits: liquidity, principal preservation, and consistent, positive returns. Stable value'​s unique characteristics are called "​benefit responsiveness." The standards that determine stable value'​s benefit responsiveness are set by the Financial Accounting Standards Board as well as the Governmental Accounting Standards Board."

The SVIA website, which has updated data through 12/​31/​12, tells us, "Stable value funds are a core investment in defined contribution employee benefit plans: $​701.​3 billion invested in stable value assets; 189,​000 defined contribution employee benefit plans; Offered in approximately half of all defined contribution plans; 401(​k) allocations to stable value funds have ranged between 17% to 37% over the life of the Aon 401(​k) Index."

SVIA'​s FAQ continues, "Stable value products, regardless of the product or how it is managed, have weathered various economic cycles and consistently performed in meeting the needs of plan participants and their beneficiaries. While stable value continues to deliver as promised, the challenges of the financial crisis and the Great Recession have resulted in subtle changes within the stable value landscape. Insurance companies have become more prominent, and have over $​281 billion outstanding in guaranteed insurance accounts."

It adds, "Because of the significant allocation of assets to guaranteed insurance accounts and the scant amount of publicly available information, the following FAQ seeks to shed some light on this segment. This FAQ is limited to an overview of guaranteed insurance accounts and focuses primarily on '​spread-​based' general account insurance products. For simplicity, the FAQ assumes a plan uses only one guaranteed insurance account product for the entirety of its stable value investment option. The FAQ does not address all the variations of guaranteed insurance accounts or the combination of stable value products that may be used by a plan. This FAQ does not discuss or compare other stable value products such as synthetic GICs or differences in investment management."

The piece asks, "What is a stable value guaranteed insurance account?" It answers, "Guaranteed insurance accounts are stable value products that are offered to defined contribution plans such as 401(​k), 457, 403(​b) and some 529 tuition assistance plans on a full service or investment only basis, generally managed entirely and guaranteed directly by a single insurance company. The guaranteed insurance account generally represents the entire stable value investment option. Further, a recent SVIA survey found that guaranteed insurance account general accounts represent thirty-​eight percent of stable value assets. Guaranteed insurance accounts are provided via a group annuity contract or a funding agreement that can be issued from either the general account or a separate account of the insurer. The underlying assets are typically managed by the insurance company or an affiliated manager. In all cases, guaranteed insurance accounts are backed by the full financial strength and credit of the issuing insurance company."

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Money fund industry nemesis Eric Rosengren, President of the Federal Reserve Bank of Boston, gave a speech last week at Bard College entitled, "​Risk of Financial Runs – Implications for Financial Stability". He commented, "Today I would like to discuss the risk of financial runs.... I believe the actions taken around other, less traditional financial institutions have not moved nearly as markedly or at the same pace as the corrective actions taken for commercial banks. This is despite the fact that less traditional financial institutions were at the epicenter of the crisis. My comments today will focus on one area that has received less attention in the United States than elsewhere -- the need to ensure that large broker-​dealers will not need to rely on a government safety net in the future."

Rosengren explains, "The financial runs that beset highly leveraged institutions, structures, and products were significant and unfortunate features of the financial crisis. While deposit insurance reduces the risk that depositors will flee en masse from commercial banks, the financial crisis highlighted that other types of financial institutions and structures were also highly susceptible to runs. `​For example, money market mutual funds, which are not required to hold capital, experienced credit losses and significant investor flight (​i.​e., runs) during the crisis. Policymakers put in place temporary backstops -- insurance funded by the U.​S. Treasury and a liquidity facility facilitated by the Federal Reserve -- to avoid further collateral damage. Since then, there has been much public discussion of regulatory actions that could significantly reduce the financial stability concerns around money market mutual funds -- which are regulated by the SEC -- but industry opposition has been vocal, and no significant actions have as yet been taken. Former SEC Chair Schapiro was right to pursue money market fund reform, and now that her successor is confirmed I am hopeful that the SEC will revisit this issue."

He tells us, "Structured investment vehicles (​SIVs), which financed long-​term, risky financial assets with short-​term commercial paper, also encountered trouble during the crisis. Investors who were concerned about the valuation of the SIVs' long-​term assets "​ran" from the short-​term commercial paper the SIVs issued to finance their assets, causing many SIVs to fail or be wound down. Additionally, broker-​dealer firms -- which were assumed by most observers to present less risk of a run because their borrowing is often fully collateralized -- proved vulnerable and also played a prominent role during the crisis. `​However, widespread questions about the appropriate valuation of collateral during the crisis made it apparent that collateral in and of itself was not sufficient to avoid runs."

Rosengren says, "Two prominent broker dealers failed at critical junctures during the crisis. The first major broker-​dealer failure involved Bear Stearns. Arguably the most disruptive failure was Lehman Brothers. Emergency loans were provided to Bear Stearns, and in the wake of its assisted merger a variety of emergency credit facilities to backstop the industry were set up. Additional actions were taken, to forestall more widespread runs after the failure of Lehman Brothers. Despite the central role that broker-​dealers played in exacerbating the crisis, too little has changed to avoid a repeat of the problem, I am sorry to say. In short, I firmly believe that a reexamination of the solvency risks of large broker-​dealers is warranted."

He adds, "[​B]​roker-​dealers experienced dramatic difficulties during the 2008 crisis, and the Federal Reserve needed to temporarily backstop broker-​dealers with substantial lending. Given that recent history, the assumption that collateralized lenders like broker-​dealers are not susceptible to runs has been proven wrong. At the same time, broker-​dealer capital regulation by the SEC remains largely unchanged, despite the lessons of the financial crisis. Consequently, broker-​dealers remain vulnerable to losing the confidence of funders and counterparties should the world economy again experience a significant financial crisis."

Rosengren continues, "​Moreover, the current broker-​dealer situation vis-​a-​vis capital poses the potential for significant moral hazard. Were a crisis to once again cause serious problems in liquidity and in securities-​market functioning, it is quite possible that programs such as the PDCF and TSLF would need to be considered again (​notwithstanding likely public opposition to what could be perceived as "​bailouts"). If broker-​dealers assume that they will once again have access to such government support should markets be disrupted, they will have little incentive to take the steps necessary to shield themselves from financing problems during a crisis and thus minimize their need for a government backstop."

He comments, "One of the fallouts of the financial crisis is that many of the large broker-​dealer operations are now part of bank holding company structures. Goldman Sachs and Morgan Stanley became bank holding companies during the crisis. Bear Stearns was acquired by J.​P. Morgan Chase, and Merrill Lynch was acquired by Bank of America. While these large broker-​dealer operations are in bank holding companies, there are significant regulatory requirements and restrictions that apply, including capital thresholds and limitations on transactions between the FDIC-​insured depository subsidiaries and the affiliated broker-​dealer subsidiaries. `​Despite these restrictions, however, broker-​dealers can still pose a risk to the broader organization by leaning on the parent bank holding company for support and, accordingly, reducing the availability of funds at the parent company to support any FDIC-​insured depositary."

Finally, Rosengren adds, "In summary and conclusion, I would just reiterate that broker-​dealers did not perform well during the financial crisis. Many of the largest broker-​dealers failed or were converted to or subsumed into bank holding companies. Despite these structural changes, significant government intervention was required to maintain market functioning and liquidity, in markets key to the stability of the U.​S. financial system and the economy that relies on it. Unfortunately, despite this history of failure and substantial government support, little has changed in the solvency requirements of broker-​dealers. The status quo represents an ongoing and significant financial stability risk. In my view, then, consideration should be given to whether broker-​dealers should be required to hold significantly more capital than depository institutions, which have deposit insurance and pre-​ordained access to the central bank'​s Discount Window."

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The Investment Company Institute announced earlier this week that "SEC Chairman Mary Jo White to Address ICI GMM and that the "Address Marks Chairman White'​s First Scheduled Speech to Fund Industry." The release explains, "Newly confirmed U.​S. Securities and Exchange Commission Chairman Mary Jo White will address the Investment Company Institute'​s 55th Annual General Membership Meeting (​GMM) at 8 a.​m. on Friday, May 3, in Washington, DC. The appearance will mark Chairman White'​s first scheduled speech to the fund industry." While it'​s unclear whether money market mutual funds will be a major part of her first address, we'​re guessing that White will take the occasion to buy more time for a regulatory reform proposal.

The release adds, "Chairman White was sworn in as the 31st Chair of the SEC on April 10, 2013. Previously, she was chair of the litigation department at Debevoise & Plimpton. From 1993 to 2002, White was U.​S. Attorney for the Southern District of New York, where she specialized in prosecuting complex securities and financial institution frauds and international terrorism cases. She is the only woman to serve as the district'​s U.​S. Attorney in the 200-​year-​plus history of that office."

ICI'​s General Membership Meeting will also features talks with Mary John Miller, Under Secretary of Domestic Finance for the U.​S. Treasury, Lloyd C. Blankfein, Chairman and CEO, The Goldman Sachs Group, and a panel moderated by Marie Chandoha, President and CEO, Charles Schwab Investment Management, Inc.. ICI says, "Register today to hear these great speakers and many more at ICI'​s 55th Annual General Membership Meeting (​GMM)."

In other news, ICI released its weekly "Money Market Mutual Fund Assets," which shows money fund assets dropping below the $​2.​6 trillion level. It says, "Total money market mutual fund assets decreased by $​27.​47 billion to $​2.​595 trillion for the week ended Wednesday, April 17, the Investment Company Institute reported today. Taxable government funds decreased by $​5.​72 billion, taxable non-​government funds decreased by $​17.​22 billion, and tax-​exempt funds decreased by $​4.​53 billion."

The report adds, "Assets of retail money market funds decreased by $​1.​89 billion to $​903.​56 billion. Taxable government money market fund assets in the retail category increased by $​10 million to $​193.​47 billion, taxable non-​government money market fund assets decreased by $​40 million to $​518.​15 billion, and tax-​exempt fund assets decreased by $​1.​87 billion to $​191.​94 billion.... Assets of institutional money market funds decreased by $​25.​58 billion to $​1.​691 trillion. Among institutional funds, taxable government money market fund assets decreased by $​5.​74 billion to $​694.​61 billion, taxable non-​government money market fund assets decreased by $​17.​18 billion to $​921.​50 billion, and tax-​exempt fund assets decreased by $​2.​66 billion to $​75.​38 billion."

The past two weeks, money fund assets have decreased by $​36.​3 billion, the largest April 15 tax-​related outflow since 2010. Year-​to-​date, money fund assets have declined by $​110 billion, or 4.​1%. Institutional funds are down by $​70 billion, or 4.​0%, while Retail funds are down by $​40 billion, or 4.​2%. Given the heavy buildup of money fund assets in late 2012, due partly to special dividends, we expect outflows from tax payments to be particularly heavy over the coming days.

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Fitch Ratings published two updates this week -- "Non-​government Assets Remain Prominent within Repo Markets" and "European Treasurers Using CNAV MMFs Value Clarity. The first says, "An updated Fitch Ratings review of collateral within the triparty repo market highlights some of the inherent liquidity risks associated with financing non-​government securities through this short-​term funding mechanism, as discussed in a report published today. Repos remain an important funding mechanism for a range of asset classes. FRBNY data indicates that, as of March 2013, approximately $​1.​83 trillion in assets were financed by the U.​S. triparty repo market, a 10% increase since the beginning of 2012."

Fitch explains, "According to Federal Reserve Bank of New York (​FRBNY) data, structured finance represents approximately 4-​5% of total U.​S. repo collateral, equating to roughly $​75 billion funded through this short-​term credit market. The amount of structured finance funded through tri-​party repo is about 10x the average daily trading volumes for these securities, an indication of the potential challenges should any reductions or disruptions to triparty repo funding for these assets occur."

They explain, "Based on Fitch'​s analysis of the disclosures of U.​S. prime money market funds (​MMFs), which provide unparalleled detail on repo collateral, structured finance repo is typically collateralized by deeply discounted, small-​sized legacy securities. Over half of Fitch'​s sample consists of subprime and Alt-​A RMBS and CDOs. Since money funds are short-​term, highly risk-​averse investors, a reduction in MMF appetite for this form of collateral could negatively affect the underlying asset class and repo borrowers more broadly."

Fitch adds, "Several senior government officials and agencies have highlighted the risks of using short-​term wholesale funding, including repo, to finance less liquid assets. Fitch'​s prior research demonstrated that repo funding for structured finance assets largely evaporated at the height of the U.​S. credit crisis. Fitch believes this loss of liquidity likely contributed to the steep valuation declines in this asset class during that period. For some money funds, structured finance repos provide a higher return opportunity in the ongoing low-​yield environment. Repos also provide security dealers a source of leverage and cost-​effecting funding for their structured finance securities."

The other update says, "Fitch Ratings says that European treasurers and others investing in constant net asset value (​CNAV) money market funds (​MMFs) are likely to be the most impacted by the current regulatory debate around MMFs in Europe. Fitch has further analysed the results of a survey of European treasurers published in conjunction with Treasury Management International (​TMI) on 26 February 2013 due to strong market interest, focusing on those respondents investing specifically in CNAV and differentiating by the respondent firms' total cash holdings."

It explains, "Almost half (​47%) of European treasurers investing in CNAV MMFs, irrespective of the amount of their cash holdings, view a regulatory shift to variable NAV (​VNAV) MMFs as a potential concern as the funds' risk profile may become less clear. This compares with 26% for all respondents as presented in Fitch'​s February survey. This is consistent with the widely held view of European treasurers' that the main strength of CNAV funds is their clear risk profile (​cited by 71% of CNAV users). 50% of CNAV investors also cite their simple tax and accounting treatment as a strength (​vs. 31% for the total sample of treasurers), which might disappear in VNAV funds."

Finally, they add, "​In their rationale for a move to VNAV, regulators have expressed the view that CNAV MMFs are perceived as being '​guaranteed', heightening the risk of a '​run.' Approximately 50% of European treasurers using CNAV MMFs cited the '​false perception of a guarantee' as, in fact, being a drawback of CNAV MMFs. This seems to highlight that treasurers understand that CNAV MMFs are managed products subject to potential losses. Conversely, these same CNAV investors place great emphasis on the importance of the sponsor, including the potential for a fund bailout."

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A statement entitled, "ESMA finds divergence in national supervision of money market funds," says, "​The European Securities and Markets Authority (​ESMA) has published a peer review report examining whether EU securities supervisors correctly apply ESMA'​s guidelines on money market funds (​MMFs). The review compared supervisory and enforcement practices for MMFs of 30 supervisory authorities across the European Economic Area (​EEA). ESMA reviewed those 20 jurisdictions that had transposed the guidelines into their national rules. The report found that more than two thirds of the 20 jurisdictions reviewed have implemented the ESMA guidelines on MMFs nationally as mandatory provisions, while a minority have used measures which do not have the force of law. However, the general supervisory and enforcement approaches relating to MMFs vary across Member States to a significant extent." (​Note: Crane Data has announced its first European Money Fund Symposium, which will take place on Sept. 24-​25, 2013, in Dublin.)

ESMA Chair Steven Maijoor comments, "In order to promote the creation of a single European securities market, ESMA must ex-​amine whether EU rules are duly applied in a consistent manner. Our mapping on money market funds has identified that there is a need for further convergence in supervisory practices, as ultimately, divergence may hamper the proper protection of investors and may result in an un-​level playing field. National supervisors should use the findings of this exercise to identify those areas where their national rules need to be further aligned to ESMA'​s MMF guidelines."

The report explains, "ESMA'​s MMF guidelines were introduced in 2010 to provide a common definition of European Money Market Funds, with the objective of improving investor protection by asking funds to label themselves as MMFs and implement certain governance rules. They apply to both UCITS and non-​UCITS MMFs and distinguish between short-​term MMFs and MMFs. According to the report, for 2012: 1,​256 MMFs were located in the EEA, with 641 in France, 203 in Luxembourg, 102 in Ireland, 71 in Spain and 57 in Hungary."

The release tells us, "The key findings are: Ten EEA Member States had not transposed the guidelines by the end of the review period (​of July 2012); four of them have since transposed the guidelines; 20 countries included the guidelines within their national supervisory tasks during the authorisation process and/​or the on-​going supervision of UCITS and non-​UCITS funds and their asset management companies. However, the level of implementation varied in the following areas: Licensing of funds: the authorisation process for new MMFs varies significantly between Members States: some authorities pre-​approve some or all fund documentations, others mostly rely on ex post monitoring; On-​going supervision: several Member States have not developed a specific supervisory approach for MMFs."

It continues, "​These regulators mainly rely on risk-​based approaches of monitoring funds. A compliance-​based approach is used by those Member States who have a limited number of authorised MMFs; Risk-​based supervision: national supervisors use a variety of different supervisory approaches resulting in variations regarding: the type and frequency of periodic reporting by funds, the parameters triggering alerts to identify the risks and prioritise actions, the level of reliance on external auditors and depositories in carrying out the monitoring; and Use of information: national supervisors usually use both quantitative and qualitative information from several different sources, including periodic reporting by supervised entities, investor complaints, and information from other authorities and other public sources. The annual and half-​year financial statements of MMFs are sometimes the sole source of information."

ESMA says its "Next steps are: "Next year ESMA, as part of its regular activities, will consider Member States' application of the guidelines, taking into account any possible legislative proposals by the European Commission regarding MMFs." The full report "​Peer Review - Money Market Fund Guidelines" may be accessed here.

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The International Monetary Fund released its latest "Global Financial Stability Report last week, which contained a chapter on "The Risks of Central Bank Policies and some comments on money market mutual funds. The piece, which we believe demonstrates unfamiliarity with funds and contains inaccuracies, says, "The prolonged period of low interest rates increases risks in money markets, including through developments in money market mutual funds (​MMMFs). With interest rates remaining near zero in the maturities at which MMMFs are permitted to invest, these institutions are experiencing very low (​in some cases zero or negative) returns that in many cases fail to cover the costs of fund management. As a consequence, U.​S. MMMFs have raised credit risk modestly (​within the confines of regulatory restrictions), engaged in more overnight securities lending, granted fee waivers, and turned away new money." (​See also, a Wall Street Journal blog'​s, "​IMF Warns Easing Could Threaten Future Stability".)

The IMF report mysteriously suggests, "The fundamental problem is that to become profitable the MMMF industry needs to shrink further, and the risk is that it may do so in a disorderly fashion. For example, another run on MMMFs may occur if downside credit risks materialize or securities lending suddenly halts, fueling investors' fear of MMMFs "​breaking the buck" (​that is, failing to maintain the expected stable net asset value)."

It explains, "Once started, a run may accelerate because investor guarantees that were established in the wake of the Lehman Brothers bankruptcy have been removed, and the Dodd-​Frank Act precludes the Federal Reserve from unilaterally stepping in to provide liquidity to the sector. [​The footnote says: The U.​S. Treasury Department introduced the Temporary Guarantee Program, which covered certain investments in MMMFs that chose to participate in the program and has now expired. The Federal Reserve created an Asset-​Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, through which it extended credit to U.​S. banks and bank holding companies to finance their purchases of high-​quality asset-​backed commercial paper from MMMFs.]"

We'​re not sure what they mean by "​overnight securities lending" (​repos?), but the IMF report tells us, "Although the assets of MMMFs are already shrinking in the low interest rate environment as investors seek higher returns elsewhere, an outright run would be undesirable and could have systemic consequences if the funding that these institutions provide to banks -- directly and through overnight securities lending -- dries up. Central bank interventions in the interbank markets were a response to a significant reduction in interbank lending activity that mostly resulted from increased sensitivity to counterparty risk."

It adds, "​With indirect credit easing policies, central banks made longer-​term funds available at fixed low rates and softened collateral rules, aiming to avoid a severe credit contraction. This form of credit easing lowered interbank spreads during the crisis, especially in the euro area and Japan. By partially replacing the interbank market, central banks play a crucial role in the distribution of bank funding in some areas."

Finally, the IMF writes, "From a money-​market perspective, risks stem not so much from central bank intervention itself as from a misstep in the eventual withdrawal from the market. If central banks exit from interbank markets before underlying conditions are addressed and the private bank funding market is fully restored, renewed strains could resurface, with the costs of short-​term bank financing turning significantly higher for some banks. These risks are difficult to quantify because central bank intervention may mask the dysfunction it was designed to address. A decomposition of interbank spreads may offer some insights."

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Last week, the Investment Company Institute, the trade association for mutual funds, published a study entitled, "Trends in the Expenses and Fees of Mutual Funds, 2012," which features a number of comments and statistics on money fund expenses. Under the section, "Money Market Fund Expense Ratios Drop, Reflecting Fee Waivers." ICI writes, "The average expense ratio of money market funds was 17 basis points in 2012, a drop of 4 basis points since 2011. Over two decades, expenses incurred by investors in money market funds dropped 67 percent, from 52 basis points in 1993 to the 2012 level. Expense ratios have fallen sharply in the past few years as the great majority of money market funds waived expenses to ensure that net returns to investors remained positive in the current low interest rate environment. When short-​term interest rates rise from their current historic lows, advisers may reduce or eliminate waivers, and money market fund expense ratios could rise."

The ICI study points out that money funds fell by 1/​3 from 1993 (​52 basis points on asset-​weighted average) through 2006 (​40 bps), due to the growth in assets and institutional funds, then fell by another 1/​3 through 2012 to 17 bps due to the Fed’​s zero yield policies. The report explains, "​Until 2009, the declining average expense ratio of money market funds largely reflected an increase in the market share of institutional share classes of money market funds. Because institutional share classes serve fewer investors with larger average account balances, they tend to have lower expense ratios than retail share classes of money market funds. Thus, the increase in the institutional market share helped reduce the industrywide average expense ratio of all money market funds."

It adds, "​By contrast, the market share of institutional share classes of money market funds dropped slightly in 2010 and 2011 (​to 65 percent from 68 percent in 2009) and held steady in 2012. This indicates that other factors pushed down the expense ratios of these funds. Primarily, the steep plunge in the average expense ratio of money market funds reflects developments stemming from the current low interest rate environment."

ICI explains, "​In 2007 and 2008, to stimulate the economy and respond to the financial crisis, the Federal Reserve sharply reduced short-​term interest rates. By early 2009, the federal funds rate and yields on U.​S. Treasury bills hit historic lows, both hovering just above zero. Yields on money market funds, which closely track short-​term interest rates, also tumbled. The average gross yield (​the yield before deducting fund expense ratios) on taxable money market funds has remained below 25 basis points since February 2011. `​In this setting, money market fund advisers increased expense waivers to ensure that fund net yields (​the yields after deducting fund expense ratios) did not fall below zero."

They tell us, "​Waivers raise a fund'​s net yield by reducing the expense ratio that investors incur. Historically, money market funds have often waived expenses, usually for competitive reasons. For example, in 2006, before the onset of the financial crisis, 60 percent of money market fund share classes were waiving expenses. By the end of 2012, 97 percent of money market fund share classes were waiving at least some expenses."

Finally, ICI writes, "Expense waivers are paid for by money market fund advisers and their distributors, who forgo profits and bear more, if not all, of the costs of running money market funds. Money market funds waived an estimated $​4.​8 billion in expenses in 2012, nearly four times the amount waived in 2006. These waivers substantially reduced revenues of fund advisers. If gross yields on money market funds rise, advisers may reduce or eliminate waivers, which could cause expense ratios on money market funds to rise somewhat. Finally, in 2012, assets in lower-​cost money market funds increased. This movement of assets into lower-​cost funds likely contributed to the reduction in the average expense ratio of money market funds."

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Crane Data released its latest set of Money Fund Portfolio Holdings earlier this week, and our collection for the month ended March 31, 2013, shows CDs surpassing repos to become the largest segment of money fund holdings. Money market securities held by Taxable U.​S. money funds overall decreased by $​34.​6 billion in March to $​2.​361 trillion. Repurchase agreements plunged and Commercial Paper dropped, while Agencies, Treasuries, CDs and Other securities rose. Repo relinquished its spot as the largest holding among taxable money funds for the first time since March 2012 (​when Treasuries held the No. 1 spot). Money funds' European-​affiliated holdings (​including repo) declined to their lowest level of 2013. Below, we review our latest portfolio holdings aggregates.

Repurchase agreement (​repo) holdings declined by $​70.​9 billion to $​473.​3 billion, or 20.​1% of fund assets, while Certificates of Deposit (​CDs) holdings increased by $​6.​9 billion to $​487.​2 billion, or 20.​6%. Treasuries also surpassed Repo and moved into the No. 2 Composition spot; they rose by $​21.​3 billion to $​476.​1 billion (​20.​2% of holdings). Repo is now the third largest segment. No. 4-​ranked Commercial Paper (​CP) fell by $​26.​2 billion to $​393.​7 billion (​16.​7% of holdings), while Government Agency Debt rebounded by $​21.​3 billion to $​332.​1 billion (​14.​1% of assets). Other holdings, which include Time Deposits, rose by $​11.​4 billion to $​150.​8 billion (​6.​4% of assets). VRDNs rose by $​1.​5 billion to $​47.​3 billion (​2.​0% of assets).

European-​affiliated holdings plunged by $​77.​6 billion in March to $​676.​6 billion; their share of holdings fell to 28.​7% from 31.​5% last month. Eurozone-​affiliated holdings fell to $​344.​4 billion in March; they now account for 14.​6% of overall taxable money fund holdings (​down from 17.​2% in Feb.). Asia & Pacific related holdings rose to $​291.​6 billion (​12.​4% of the total), while Americas related holdings rose to $​1.​391 trillion (​58.​9% of holdings).

The Repo totals were made up of: Government Agency Repurchase Agreements (​down $​37.​6 billion to $​244.​9 billion, or 10.​4% of total holdings), Treasury Repurchase Agreements (​down $​25.​1 billion to $​161.​4 billion, or 6.​8% of assets), and Other Repurchase Agreements (​down $​8.​1 billion to $​67.​1 billion, or 2.​8% of holdings). The Commercial Paper totals were comprised of Financial Company Commercial Paper (​down $​5.​3 billion to $​227.​5 billion, or 9.​6% of assets), Asset Backed Commercial Paper (​down $​8.​7 billion to $​106.​6 billion, or 4.​5%), and Other Commercial Paper (​down $​12.​2 billion to $​59.​5 billion, or 2.​5%).

The 20 largest Issuers to taxable money market funds as of March 31, 2013, include the USTreasury (​20.​2%, $​476.​1 billion), Federal Home Loan Bank (​6.​8%, $​160.​2 billion), Federal National Mortgage Association (​3.​0%, $​71.​4B), Federal Home Loan Mortgage Co (​2.​9%, $​68.​4B), Bank of Nova Scotia (​2.​7%, $​62.​7B), RBC (​2.​5%, $​58.​7B), Deutsche Bank AG (​2.​5%, $​58.​1B), Bank of Tokyo-​Mitsubishi UFJ Ltd (​2.​5%, $​58.​0B), JP Morgan (​2.​4%, $​57.​2B), BNP Paribas (​2.​4%, $​57.​1B), Credit Suisse (​2.​3%, $​54.​2B), Sumitomo Mitsui Banking Co (​2.​3%, $​53.​1B), Barclays Bank (​2.​2%, $​53.​0B), Bank of America (​2.​1%, $​49.​9B), Credit Agricole (​2.​0%, $​48.​1B), Citi (​1.​9%, $​45.​3B), Toronto-​Dominion Bank (​1.​6%, $​38.​0B), Bank of Montreal (​1.​6%, $​37.​7B), National Australia Bank (​1.​4%, $​33.​9B) and Societe Generale (​1.​4%, $​33.​8B).

The 10 largest Repo issuers (​with the amount of repo outstanding among the money funds we track) include: Bank of America ($​43.​6B), BNP Paribas ($​39.​3B), Barclays Bank ($​35.​4B), Deutsche Bank ($​34.​1B), Credit Suisse ($​31.​8B), Goldman Sachs ($​31.​7B), Credit Agricole ($​29.​6B), Citi ($​26.​6B), RBS ($​26.​4B) and JP Morgan ($​25.​6B).

The 10 largest issuers of CDs (​and the amount of CDs issued to our universe include: Sumitomo Mitsui Banking Co ($​47.​2B), Bank of Tokyo-​Mitsubishi UFJ Ltd ($​41.​3B), Bank of Nova Scotia ($​31.​4B), Toronto-​Dominion Bank ($​31.​3B), Bank of Montreal ($​28.​8B), National Australia Bank Ltd ($​27.​0B), Mizuho Corporate Bank Ltd ($​18.​8B), Rabobank ($​16.​4B), RBC ($​16.​0B), and Canadian Imperial Bank of Commerce ($​15.​9B).

The 10 largest issuers of CP as of March 31 include: JP Morgan ($​19.​8B), Westpac Banking Co ($​19.​7B), Commonwealth Bank of Australia ($​14.​8B), FMS Wertmanagement ($​14.​7B), General Electric ($​11.​9B), NRW.​Bank ($​11.​6B), Societe Generale ($​10.​7B), Barclays Bank ($​9.​5B), HSBC ($​9.​2B), and Toyota ($​8.​9B).

The largest increases among Issuers of money market securities (​including Repo) in March were shown by: US Treasury (​up $​21.​3B to $​476.​1B), Federal Home Loan Bank (​up $​12.​1B to $​160.​2B), Australia & New Zealand Banking Group (​up $​11.​9B to $​29.​5B), and DnB NOR Bank ASA (​up $​11.​6B to $​33.​2B). The largest decreases among Issuers included: Societe Generale (​down $​33.​3B to $​33.​8B), Deutsche Bank AG (​down $​32.​8B to $​58.​1B), Lloyd'​s TSB Bank (​down $​13.​7B to $​7.​6B) and Bank of America (​down $​13.​6B to $​49.​9B).

The United States is still the largest segment of country-​affiliations with 49.​2%, or $​1.​160 trillion. Canada (​9.​7%, $​229.​3B) remained the second largest country and France remained in third place (​7.​4%, $​175.​4B). Japan was again fourth (​6.​8%, $​161.​1B) and the UK (​5.​5%, $​128.​8B) remained fifth. Australia (​4.​9%, $​115.​2B) moved up to sixth, followed by Germany (​4.​5%, $​105.​1B) 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.​8%, $​89.​6B), Switzerland (​3.​4%, $​79.​8B), and the Netherlands (​2.​6%, $​60.​1B) continued to round out the top 10.

As of March 31, 2013, Taxable money funds held 20.​6% of their assets in securities maturing Overnight, and another 14.​3% maturing in 2-​7 days (​34.​9% total in 1-​7 days). Another 22.​4% matures in 8-​30 days, while 24.​9% matures in the 31-​90 day period. The next bucket, 91-​180 days, holds 12.​9% of taxable securities, and just 4.​9% 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 tomorrow (​the Tax Exempt MF Holdings will be released later today). Visit our Content center to download files or visit our Portfolio Laboratory to access our "​transparency" module and contact us if you'​d like to see a sample of our latest Portfolio Holdings Reports or our new Weekly Money Fund Portfolio Holdings collection.

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The U.​S. Chamber of Commerce hosted its "7th Annual Capital Markets Summit" yesterday, and published a "Financial Regulatory Reform: 2013 Report Card." The Chamber gave "Money Market Mutual Fund Reform" a '​C-' grade, and comments, "​Money market mutual funds (​MMMFs) play a critical role in meeting the short-​term capital and cash flow needs of American businesses. Despite reforms made in 2010 by the SEC that increase the transparency of funds and place stricter parameters on acceptable investments, some are calling for additional changes. The Chamber supports reasonable efforts to further strengthen the resiliency of MMMFs, but vigorously opposes reforms that would destroy or severely curtail their utility for companies and other users of money funds."

It explains, "​MMMFs are well positioned to endure financial market stresses, including the domestic debt-​ceiling crisis and the European sovereign debt crisis. Reform options considered in 2012 by the SEC did not receive a majority of support by the Commission in large part because they would have weakened rather than strengthened this product. At the SEC Chairman'​s request, the Financial Stability Oversight Council (​FSOC) sought comment on the SEC'​s reform options but also invited comments on additional alternatives. The Commission has since indicated it will re-​visit the issue and consider new approaches."

The Chamber continues, "CCMC believes the SEC should begin by clearly identifying the problem or problems it seeks to address, and ensuring that its proposals effectively address those problems without jeopardizing the fundamental role that MMMFs play as a source of both short-​term investment and financing for Main Street businesses, state and local governments, and other organizations."

They add, "To bring up the grade, the SEC should do the following: Define clearly the perceived problem to be solved and conduct a thorough analysis of potential reforms to MMMFs to understand the broader economic impacts and the company specific operational impacts, notably the tax and accounting issues that would ensue from floating the Net Asset Value. Ensure that any regulatory changes to MMMFs seek to strengthen these funds while preserving their utility to end-​users."

Finally, the report card tells us, "To bring the grade up, the FSOC should do the following: Allow MMMFs to stay within the jurisdiction of the SEC and ensure that any changes in regulation are independently implemented by the SEC."

In other news, Reuters wrote "`​Fed'​s Lacker: delay on reforming money market funds a problem" yesterday, saying, "Richmond Federal Reserve Bank President Jeffrey Lacker said on Tuesday that he was "​chagrined" by the slowness in agreeing on reforms to money market mutual funds, which he warned was a serious threat to financial stability." Reuters quoted, "It really is a major piece of unfinished businesses," he told an audience at the University of Richmond."

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We learned from Wells Fargo Securities' Strategist Garret Sloan about a report and release earlier this week from the International Capital Market Association on repo markets in Europe. The release, entitled, "ICMA European Repo Council calls for exemption of repo transactions from FTT," says, "The proposed EU Financial Transaction Tax would cause the short-​term repo market in Europe to contract by an estimated amount of at least 66%, with serious negative consequences for other financial markets and the real economy, according to a study commissioned by the European Repo Council of the International Capital Market Association. The study, authored by Richard Comotto, Senior Visiting Fellow at the ICMA Centre, Henley Business School, University of Reading, argues that it is essential for secured financing, such as repo and securities lending, to be exempted from the FTT to ensure an efficient debt capital market and support the continued collateralisation of the financial markets."

ICMA'​s release continues, "​The repo market is crucial to the efficient functioning of almost all financial markets; it provides cost effective and secure funding for professional financial intermediaries, which in turn lowers the cost of financial services to investors and issuers. The current proposal is for a minimum flat rate tax of 0.​1% on the gross market value of cash transactions with financial institutions located in the 11 EU member states which have signed the enhanced cooperation regime. The flat rate is applied regardless of the length of term of the repo, making repo trading for terms of less than 12 months (​and possibly longer) economically unviable."

They explain, "A major contraction in the repo market of the EU11 would have a number of unfortunate consequences. The loss of repo and the lack of an alternative secured financing instrument would pose serious problems for institutional and corporate investors, who would be forced into unsecured deposits which are not subject to FTT. Lending by banks to industry would be compromised by banks being unable to readily borrow from institutional investors and manage their liquidity in the interbank market. The absence of an efficient repo market to underpin primary and secondary debt market activities would make it harder for financial institutions and firms in the real economy to raise adequate capital from banks but especially for non bank investors. The difficulty of raising working and investment capital would impose a competitive disadvantage on EU11 financial institutions, corporates and governments."

ICMA adds, "EU monetary policy would also be challenged by the disappearance of EU11 repo markets as repo provides the framework of collateralised transactions through which ECB monetary policy is transmitted. The global regulatory framework for ensuring financial stability, being put together under the Basel regime and requiring the collateralisation of financial transactions would also be adversely affected. Collateral management would become too expensive and the infrastructure that supports the efficiency of collateral management would cease to be viable. Liquidity buffers would be harder to build up, other than in cash. The loss of short-​term repo (​and securities lending) would exacerbate systemic operational risk by removing the means of borrowing securities to prevent delivery failures."

Godfried De Vidts, Chair of ICMA'​s European Repo Council, comments, "Repo transactions fulfill a crucial role in financing the economy and are an increasingly important part of the regulatory landscape as a result of the Basel requirements moving financial institutions towards secured lending. Harming the efficient operation of this market by the imposition of a financial transaction tax would jeopardise central bank monetary implementation and be at odds with the various steps taken by the ECB to safeguard the single currency."

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On Friday, we published our latest Money Fund Intelligence and on Monday we released our latest Family & Global Rankings for April with data as March 31, 2013. The most recent market share rankings show that Vanguard was the only manager among the 10 largest to increase assets in March, as money fund assets declined by $​46.​2 billion in March after declining $​39.​1 billion in February. Fidelity Investments remained the largest money fund manager, followed by J.​P. Morgan and Federated Investors. The rest of the Top 10 managers of domestic U.​S. money funds also included -- Vanguard, Schwab, BlackRock, Dreyfus, Goldman Sachs, Wells Faro, and Morgan Stanley. 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, which moves to No. 8 and bumps Morgan Stanley down to No. 12. 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 $​410.​9 billion, or 16.​8% of all assets, followed by JPMorgan'​s $​236.​9 billion (​9.​7%). Federated Investors ranks third with $​229.​9 billion (​9.​4%), Vanguard ranks fourth with $​166.​4 billion (​6.​8%), and Schwab ranks fifth with $​157.​9 billion (​6.​4%) of money fund assets. The sixth through tenth largest U.​S. managers include: BlackRock ($​148.​1 billion, or 6.​0%), Dreyfus ($​147.​6 billion, or 6.​0%), Goldman Sachs ($​134.​4 billion, or 5.​5%), Wells Fargo ($​114.​9 billion, or 4.​7%), and Morgan Stanley ($​83.​7 billion, or 3.​4%). The eleventh through twentieth largest U.​S. money fund managers (​in order) include: Northern, SSgA, Invesco, UBS, BofA, DB Advisors, Western Asset, First American, RBC, and Franklin. Crane Data currently tracks 76 managers.

Over the past year, Morgan Stanley shows the largest asset increase (​up $​14.​5 billion, or 21.​5%), fueled by the shifting of Morgan Stanley Smith Barney brokerage assets away from Western Asset. Other big gainers since March 31, 2012, include: Northern (​up $​10.​8 billion, or 15.​5%), Franklin (​up $​7.​7 billion), Vanguard (​up $​5.​6 billion), and Schwab (​up $​5.​3 billion). The biggest declines over 12 months include: JPM (​down $​9.​7 billion), Federated (​down $​8.​5 billion), and Western (​down $​6.​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 ($​417.​5 billion), JPMorgan ($​379.​8 billion), BlackRock ($​245.​1 billion), Federated ($​241.​2 billion), and Goldman ($​203.​9 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 March 31, 2013, our Crane Money Fund Average, which includes all taxable funds covered by Crane (​currently 798), 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 third month in a row following a drop in January from 0.​05%. Our Prime Institutional MF Index yielded 0.​05% (​7-​day, down one basis point), the Crane Govt Inst Index yielded 0.​01% (​down one bps), 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.​05% for 1-​year, 0.​06% for 3-​years (​annualized), 0.​42% for 5-​year, and 1.​72% for 10-​years. We added Gross 7-​Day Yields to our Crane Indexes history file last month, and show 0.​11% for Treasury Institutional and Treasury Retail funds; 0.​14% for Government Institutional and 0.​15% for Govt Retail funds; 0.​24% for Prime Institutional funds and Prime Retail funds; and, 0.​19% for Tax Exempt money funds, on average.

Average expense ratios charged inched lower again in March along with gross yields. The Crane 100 and MF Average were 0.​17% and 0.​18% (​down from 0.​20% in December). Prime Retail funds charged the higher rates (​0.​23%) on average, while Treasury Inst charged the lowest rates at 0.​10%. Finally, WAMs, or weighted average maturities, remained the same or lengthened slightly, at 46 days and 49 days, for the Crane MF Average and Crane 100 Index, respectively. WAMs were 43 days 45 days, respectively, at year-​end 2012.

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Last week, the Federal Reserve "​announced approval of a final rule that establishes the requirements for determining when a company is "predominantly engaged in financial activities." The Fed'​s release explains, "The requirements will be used by the Financial Stability Oversight Council (​FSOC) when it considers the potential designation of a nonbank financial company for consolidated supervision by the Federal Reserve." Below, Stradley Ronan Counsel Joan Swirsky explained to Crane Data what this means for money market mutual funds.

Swirsky tells us, "The Federal Reserve ("​Fed") has adopted a rule that establishes the requirements for determining when a company is "​predominantly engaged in financial activities" ("​PEFA"). Only companies that are PEFA (​among other requirements) can be identified as nonbank financial institutions ("​NBFC'​s") by the Financial Stability Oversight Council ("​FSOC") for purposes of certain provisions of the Dodd-​Frank Wall Street Reform and Consumer Protection Act ("​DFA"). In the adopting release, the Fed explicitly states that mutual funds, including money market funds, and closed end fund, are engaged in "​financial activities." Accordingly, these funds are eligible to be identified as NBFCs."

She explains, "With respect to money market funds, two provisions under the DFA have particular significance if money market funds are considered to be NBFCs. First, FSOC may designate NBFCs as systemically important financial institutions ("​SIFIs") that are subject to supervision by the Fed. Second, FSOC may make recommendations to the SEC regarding activities of NBFCs. FSOC has already proposed recommendations to the SEC for fundamental reform of money market funds during November 2012. Some opponents of money market fund reform had argued that it was premature for FSOC to issue those proposed recommendations before the Fed finalized the rule regarding the meaning of the phrase PEFA. The issuance of the final rule thwarts that argument against those proposed recommendations, and also thwarts a potential argument that it would be premature for FSOC to designate a money market funds as a SIFI that is subject to supervision by the Fed."

Swirsky also comments, "Some opponents to money market fund reform also had made separate arguments to the Fed on the proposed rule defining the phrase PEFA. Those opponents stated that activities of a money market fund do not qualify money market funds as PEFA, based on the description of "​financial activities" in the DFA. The Fed has rejected those arguments, and discusses its reasoning in the attached release."

Swirsky continues, "In sum, the Fed'​s action satisfies one regulatory prerequisite to FSOC'​s exercise of authority to pursue reform recommendations for money market funds or to designate money market funds as SIFIs. It was expected that the Fed would finalize the PEFA rule at some point, so the action is not surprising. The Fed'​s action also confirms that the Fed has rejected a separate argument against FSOC'​s authority to make reform recommendations to the SEC or to designate money market funds as SIFIs -- because the Fed opines that money market fund activities do constitute financial activities. Again, some may not be surprised by the Fed'​s rejection of this argument. The various stakeholders who oppose money market reform presumably will continue their arguments on other fronts. It also is possible that industry stakeholders, at some point, could mount legal challenges to the Fed'​s view that money market fund activities can qualify the funds as "​PEFA" under the DFA."

Finally, she adds, "In the meantime, the money market fund industry faces continuing regulatory uncertainty, as it is unclear whether FSOC will finalize its proposed money market fund recommendations, and press reports indicate that the SEC is also fully engaged on this issue, but the SEC has not issued any formal proposal." We will continue to keep you informed as the landscape unfolds."

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The April issue of Crane Data'​s Money Fund Intelligence newsletter, which was e-​mailed to subscribers Friday morning, features the articles: "A Little Too Quiet on Reg. Front; Waiting for White," which again talks about potential pending regulations; "S&​P'​s Rizzo & Friedman Talk MFs, '​AAAm' Ratings," which profiles two ratings agency veterans; and, "Worldwide Money Fund Assets Q4'​12: U.​S. Jumps," which discusses the latest statistics on money funds globally. We'​ve also updated our Money Fund Wisdom database query system with March 31, 2013, performance statistics and rankings, and our MFI XLS will be sent out shortly. Our March 31 Money Fund Portfolio Holdings are scheduled to go out on Wednesday, April 10. Note that we'​ve also made some changes to the agenda for Crane'​s Money Fund Symposium, which will be held June 19-​21, 2013, in Baltimore, Md. Registrations ($​750). We urge attendees to book hotel reservations soon via our website at www.​moneyfundsymposium.​com.

Our piece on the SEC and FSOC says, "After months of seemingly nonstop heated discussion on potential pending money fund regulatory proposals, the debate has suddenly gone quiet. While the nomination of Mary Jo White to head the SEC, which is expected as soon as next week, may move things forward again, there remain no imminent SEC or FSOC proposals. But while we didn'​t get a proposal by the end of the first quarter, many expect the SEC to issue one within another month or two. We'​ll wager that it'​ll be a little longer still."

MFI also writes in its monthly "​profile," "​This month, Money Fund Intelligence interviews Standard & Poor'​s Financial Services' Peter Rizzo, Managing Director and Joel Friedman, Senior Director in S&​P'​s Funds Ratings Group. Each of them have been involved in rating money funds for over 20 years, and S&​P'​s funds rating business is preparing to mark its 30th anniversary later this year. S&​P currently rates about 450 funds '​AAAm' for principal stability which account for $​2.​48 trillion globally. Our Q&​A follows."

The article on Worldwide Money Fund Assets explains, "​The Investment Company Institute released its latest Quarterly Worldwide Mutual Fund data yesterday for Q42012. Crane Data pulled out the money market information and analyzed the latest results. Money market fund assets worldwide rose by $​154.​5 billion, or 3.​3%, during Q4 to $​4.​973 trillion. They rose by $​97.​8 billion, or 2.​1%, during 2012 overall."

The piece adds, "​U.​S. money fund assets continue to make up the majority of all assets worldwide. U.​S. assets jumped by $​142.​2 billion in the 4th quarter to $​2.​694 trillion, which is 59.​4% of all money fund assets. For 2012, US MMF assets rose by just $​2.​1 billion, or 0.​1%." (​To request our latest spreadsheet of worldwide assets, e-​mail Pete and ask us to send it.)

In other news, Reuters writes "​As yields dwindle, '​cash' fund investors take on more risk". It says, "A hunt for higher yields by risk averse investors is helping spark a resurgence in funds that can invest more broadly and take bigger risks than strictly regulated money market funds. The growth in these so-​called cash funds, however, is worrying for some who see it as another symptom that the Federal Reserve'​s ultra loose monetary policy is bringing on another broad credit boom that could end badly for borrowers, lenders and investors."

It explains, "Assets in these funds that have average weighted maturities up to a year, excluding exchange-​traded funds, have grown to $​48 billion as of February 2013, from $​36.​4 billion at the end of 2011, according to data by Lipper. At the end of 2008 there was just $​12.​1 billion in the funds. BlackRock, Oppenheimer, Pioneer, Fidelity and Putnam are among those that have launched such funds in the past two years."

The piece quotes, "The history of mutual funds is the story of demand creating its own supply," said Peter Crane, President of Crane Data, which analyses money fund investments. Crane said the main risk is the possibility of an investor exodus on concerns about what the funds are exposed to, as happened in the crisis on concerns over asset-​backed exposures at both regulated money funds and enhanced cash alternatives. Many of the newer funds have not been tested in an environment of volatile or falling markets. Investors that hunt out higher yields for yields' sake may be among the most likely to run at the first sign of trouble, Crane said."

Finally, ICI'​s latest "​Money Market Mutual Fund Assets" says, "Total money market mutual fund assets increased by $​2.​61 billion to $​2.​631 trillion for the week ended Wednesday, April 3, the Investment Company Institute reported today. Taxable government funds decreased by $​2.​25 billion, taxable non-​government funds increased by $​4.​40 billion, and tax-​exempt funds decreased by $​460 million."

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Last week, a research paper written by Larry Locke, Ethan Mitra, and Virginia Locke from the University of Mary Hardin-​Baylor College of Business was published in the Clute Institute'​s Journal of Business & Economics Research. Entitled, "Harnessing Whales: The Role of Shadow Price Disclosure in Money Market Mutual Fund Reform," the paper "indicates that the SEC'​s shadow price disclosure regime has no greater impact on institutional investors than on retail investors, and with no discernible distinction between funds with shadow NAV'​s under $​1 versus over $​1," we'​re told by author Locke. He says, "This seemed interesting to us given both the SEC'​s and FSOC'​s continued interest in using shadow price reporting as a means to coopt institutional investors into disciplining money fund advisors, and some fund firms' introduction of daily shadow price disclosure. We also took the opportunity of writing on the topic to discuss some of our views on the reform efforts currently underway."

The paper'​s "Abstract" explains, "The money market mutual fund industry is experiencing a sea change. Thanks, in large part, to their role in the 2008 market break, U.​S. securities regulators have targeted money market funds for a structural overhaul. Runs on money market funds by institutional investors in the wake of the Lehman Brothers bankruptcy weakened the short-​term credit market to the point of collapse. The resulting intervention of the Federal Reserve and the Treasury may have saved the economy from further damage but came at such a perceived cost that legislation now forbids it. Both the Securities and Exchange Commission (​SEC) and the Financial Stability Oversight Council (​FSOC) believe restructuring is necessary. Their only question appears to be exactly what form the product will take."

It continues, "One of the elements being considered in the reform effort will be increased disclosure of money market fund shadow prices. The regulators have posited that more frequent and more available disclosure of fund shadow prices will lead to more discipline being exerted on the fund industry, especially by the institutional market. A revamped disclosure regime, however, has been in effect since monthly shadow price disclosures were imposed by the SEC in December 2010."

Locke'​s Abstract adds, "This study looks at the impact of those 2010 disclosure regulations on different sectors of the market. It seeks to identify a correlation between shadow prices and changes in assets for both retail and institutional funds. The authors assess the findings of the study and discuss the implications of those findings for the impending regulatory restructuring."

The paper'​s "Introduction" tells us, "Money market mutual funds have been a favorite of both institutional and retail investors for decades. From their origins in the 1970'​s, money market funds grew to $​3.​8 trillion in 2008 before declining to $​2.​69 trillion as of year-​end 2011 ("2012 Investment Company Fact Book", n.​d.). They invest exclusively in short-​term, highly rated securities, minimizing both interest rate risk and credit risk ("​Frequently Asked Questions About Money Market Funds", n.​d.). Money market funds are a peculiar form of mutual funds registered with the SEC under the Investment Company Act of 1940. While most open-​ended registered investment companies sell and redeem their shares at the next determined net asset value, money market funds are permitted by Rule 2a-​7 under the '​40 Act to issue and redeem shares at the fixed price of $​1 per share."

It continues, "​Their substitutability for commercial bank checking accounts probably has contributed to their popularity. Unlike bank accounts, however, money market mutual funds are uninsured and investors in money funds are, in fact, exposed to the risk of the funds' underlying investments (​Waddell, 2012). A money market fund is only permitted by Rule 2a-​7 to sell and redeem shares at $​1 if it maintains a true net asset value per share (​or shadow price) within one half of one cent of a dollar (​Rule 2a-​7(​c)). If the shadow price deviates from $​1 by more than half a penny, the fund is required to take immediate measures such as liquidating the fund or allowing its share price to float with the NAV (​Rule 2a-​7(​c)(​8)(​ii)(​B)). Only when a money fund "​breaks the buck" will investors be exposed to losses imbedded in the fund. `​Fortunately for investors, breaking the buck has been a historically rare event. Between the 1970'​s and 2008, only one money market fund had ever broken the buck (​Mamudi, 2008). Investors may have understandably assumed that money funds were a safe and liquid place to invest short-​term funds."

The study says, "In 2012, two of the authors published a study showing that there was no statistical correlation between published money fund shadow prices and investor activity with respect to aggregate buying or selling of shares of those funds (​Locke, 2012). The lack of correlation found by the study was significant because, as discussed above, the SEC'​s stated purpose for the new requirement that funds disclose their shadow prices monthly was to encourage the market to discipline fund managers. The 2012 study indicated that investors generally were not responding to the published shadow prices and, therefore, the SEC'​s regulatory purpose was not being fulfilled, despite the industry'​s compliance."

It adds, "Two questions that arose after the 2012 study was published were whether the sample in the 2012 study was sufficient and whether institutional investors might behave differently than the market overall. The sample for the 2012 study was necessarily small because the funds had only begun to report their shadow prices monthly in December 2010. Although the sample for the 2012 study amounted to approximately 30% of the industry'​s total assets, the study could only measure activity through August 2011 (​Locke, 2012). Industry observers also suggested that the overall lack of correlation between shadow price performance and investor activity might have been masking a potentially significant correlation between shadow prices and institutional investor behavior. Because the 2012 study did not differentiate between retail and institutional funds, the behavior of institutional investors was indistinguishable from the behavior of the market overall. The current study has sought to answer both of these open questions."

The study concludes, "There appears to be various levels of disconnect in the relationship between shadow price reporting and the current regulatory reform efforts. In 2010, the SEC created a new reporting regime designed to impose discipline on money fund managers. The study indicates that imposition is not currently effective for either retail or institutional funds. Securities regulators have the option to either accept that lack of correlation as a reality of investor behavior or they can seek to increase the disclosure, or impose other financial incentives, in order to achieve the level of market discipline they seek. Current indications are a preference for the latter. At the same time that regulators are discussing the options, major market players have moved forward offering the most extreme level of shadow price reporting that either the FSOC or the SEC has considered. It is a surprising move on their part and seemingly out of sync with the past negotiations between the industry and the regulatory community over the future of the product."

It says, "Another disconnect in the current situation may be one of the underlying premises of the regulatory effort. The focus of regulatory thinking has been on restructuring money funds so that investors would not have an incentive to "​run" on money funds because of the disruption and potential risks funds face when assets decline precipitously (​Patterson, 2012). That focus could be subject to question as it was arguably not the run on the funds that ultimately required government intervention, but rather the funds' own retreat from the commercial paper market."

Finally, Locke adds, "​The lack of correlation that continues to be found between shadow price reporting and investor activity highlights the complexity of the relationship between this market and its regulatory superstructure. As those responsible for regulatory policy, and those responsible for directing the industry, continue to seek a new model for the money market mutual fund product, they would be well served to consider the effects on the investor community, the market overall, and an industry that has served both with distinction for the last four decades."

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Reuters reports that HighMark Funds, the fund family owned by Union Bank (​formerly Union Bank of California), will sell its money market mutual fund assets to Reich & Tang. The story, entitled, "Exclusive: Nationwide, Reich & Tang to buy HighMark funds - sources," says, "Columbus, Ohio-​based Nationwide Financial and New York-​based Reich & Tang are buying UnionBanCal Corp'​s mutual fund business, three sources told Reuters on Tuesday. San Francisco-​based UnionBanCal is expected to announce the sale of its HighMark Funds to the two parties in the next few days, said two of the sources, who wished to remain anonymous because they are not permitted to speak to the media." (​See Reich & Tang'​s press release, "​Reich & Tang Acquires HighMark Funds' Money Market Mutual Fund Business," here.)

Reich & Tang'​s Wednesday release says, "Reich & Tang today announced that it has entered into an agreement to acquire five money market funds from HighMark Capital Management, Inc., a wholly-​owned subsidiary of Union Bank, N.​A. The deal, which represents more than $​4 billion in shareholder assets, has been approved by each company'​s Board of Trustees and is expected to close by July 2013."

It adds, "New York-​based Reich & Tang is a cash management and liquidity specialist servicing broker-​dealer, bank, and institutional markets, and is the third longest running money market mutual fund manager in the world. Reich & Tang currently supervises nearly $​30 billion across money market mutual funds, FDIC insured programs, and separately managed account portfolios. Reich & Tang is a subsidiary of Natixis Global Asset Management, S.​A., one of the largest asset managers in the world with approximately $​779 billion in assets under management."

Reich & Tang is currently the 28th largest manager of money funds with $​7.​9 billion while HighMark is currently the 34th largest (​out of 76) with $​4.​2 billion, according to Crane Data'​s Money Fund Intelligence XLS (​as of 2/​28/​13). Union Bank is owned by the Bank of Tokyo Mitsubishi UFJ.

The Reuters story explains, "UnionBanCal is selling its five money market funds, which have $​4.​2 billion in assets, to Reich & Tang, a New York-​based subsidiary of Natixis Global Asset Management, S.​A., the two sources said. It could not be determined how much Nationwide [​who is buying HighMark'​s stock and bond funds] and Reich & Tang are paying for the funds."

It adds, "Given how difficult it is for firms to make money offering money market funds in the current low interest rate environment, along with the potential for regulatory reform of money market funds, it makes sense that Highmark is getting out of the business, said Jeff Tjornehoj, an analyst at Lipper."

The deal would be the first substantial money fund transaction of 2013 and the latest change since a series of municipal money fund liquidations in late 2012. See Crane Data'​s previous "News" articles on mergers and liquidations -- "More Fund Liquidations: HSBC, Dreyfus T-​E; More FSOC MMF Comments (​1/​3/​13), "More State Tax Exempt MMFs Liquidate: BlackRock'​s BIF AZ, FL, NC (​12/​26/​12)," "Sterling Capital Liquidates MMFs (​12/​18/​12)," and "Consolidation Continues: Pyxis, Some Dreyfus Muni MFs Liquidating."

Reich & Tang previously acquired Value Line U.​S. Government Money Market Fund in October 2012. (​We wrote about this in our Oct. 25, 2012, News). Their press release said, "Reich & Tang ... announced that it has acquired the Value Line U.​S. Government Money Market Fund. The transaction was completed on October 19, 2012." The previous release quoted Michael Lydon, Chief Executive Officer, "​We are pleased to have completed a deal with Value Line that accomplishes its primary goal of adding shareholder value. The deal also underscores Reich & Tang'​s commitment to growing its money fund business and diversifying its shareholder base."

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Wells Fargo Advantage Funds is the latest money fund family to begin providing daily "​shadow" or mark-​to-​market net asset values. To date, those posting this information on their own websites includes: BlackRock, BofA Funds (​prime only), Dreyfus, Federated (​prime), Fidelity, First American (​prime), Goldman, Invesco (​prime), JPMorgan, Reich & Tang, Schwab, SSgA, Wells Fargo, and Western Asset (​prime). (Crane Data'​s Money Fund Intelligence Daily tracks these "MNAVs" and lists the Wells numbers starting with today'​s issue.) The statement announcing these latest postings, entitled, "Wells Fargo Advantage Money Market Funds to begin disclosing daily market-​based net asset values," says, "Beginning April 1, 2013, Wells Fargo Advantage Funds will begin publishing daily market-​based net asset values (​NAVs) for its entire suite of money market funds."

The release says under "Key points for our investor clients: We already calculate the daily market-​based NAVs for the funds each trading day. Applicable regulations do not require the disclosure of a fund'​s market-​based NAV, except as is reported monthly on Form N-​MFP and made public on a 60-​day delayed basis. This disclosure of daily market-​based NAVs will not change how shareholders buy and sell Wells Fargo Advantage Funds money market shares. Transactions will still be executed at the $​1.​00 NAV, in accordance with Rule 2a-​7 under the Investment Company Act of 1940. Disclosing a daily market-​based NAV should not be interpreted as instituting a floating NAV."

Wells explains, "Stable-​NAV money market funds have long provided money market fund investors with ease of trading, stability of principal, and daily access to funds while offering a competitive yield. As detailed in past comment letters to industry regulators, we remain opposed to the introduction of a requirement that money market funds switch to a floating NAV. In addition to reviewing the market-​based NAV data point, we encourage investors to understand and monitor other key attributes of money market funds when making investment decisions. Credit quality, liquidity, portfolio maturity, and fund manager experience should be the primary considerations of a broader due diligence process for those seeking a better understanding of the money market funds in which they invest."

The posting'​s "Frequently Asked Questions" says, "​1. Which funds will have their market-​based NAVs disclosed on a daily basis? We will disclose the market-​based NAVs for all of our money market funds: California Municipal Money Market Fund, Cash Investment Money Market Fund, Government Money Market Fund, Heritage Money Market Fund, Municipal Cash Management Money Market Fund, Municipal Money Market Fund, Money Market Fund, National Tax-​Free Money Market Fund, Treasury Plus Money Market Fund, and 100% Treasury Money Market Fund."

The FAQ also asks, "3. What is a market-​based NAV and how is it different than the stable $​1.​00 NAV used for transactions? A market-​based NAV is produced by valuing portfolio securities at current market prices, also known as mark-​to-​market. Currently, we calculate market-​based NAVs daily.... The stable $​1.​00 NAV is calculated based on amortized cost accounting and rounded to the nearest cent. More specifically, portfolio securities are valued at acquisition cost plus or minus any amortization of premium or accretion of discount. We intend to continue to value money market fund portfolios according to this method and to process purchases and redemptions of fund shares at the stable $​1.​00 NAV, in accordance with Rule 2a-​7. For more explanation about the differences between a stable $​1.​00 NAV and a market-​based NAV, please see the report Update on market-​based NAVs."

Wells also tells us, "4. Why would a fund'​s market-​based NAV fluctuate? The market prices for money market fund securities may fluctuate in value on a daily basis, although the amount of the fluctuation is typically small. In addition to changes in the prices of portfolio securities due to changes in interest rates or credit spreads, some of the factors that may affect a fund'​s market-​based NAV include flows in and out of the fund due to shareholder transactions and dividend distributions."

Finally, they add, "5. Is disclosing the market-​based NAV on a daily basis an endorsement of a floating NAV? No. We oppose any regulatory requirement that would require money market funds to maintain a floating NAV rather than the current stable $​1.​00 NAV per share. A stable $​1.​00 NAV has long provided investors with stability of principal and daily access to funds while offering a competitive yield. Additionally, there are a number of other important benefits to a stable $​1.​00 NAV in terms of tax, accounting, and recordkeeping simplification, which we believe are important to maintain for money market fund investors. To learn more about our position on proposals to require money market funds to switch to a floating NAV, please consult the second page of our summary of a recent comment letter to the Financial Stability Oversight Council."

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ICI'​s Emily Gallagher and Chris Plantier published an update entitled, "U.​S. Prime Money Market Funds' Eurozone Holdings Remain Low and Limited in Scope," which reviews the most recent batch of money fund portfolio holdings and confirms the lack of exposure to European periphery countries such as Italy or Cypress. They write, "Given February'​s elections in Italy and recent developments in Cyprus, questions have resurfaced about the eurozone debt crisis and how it might affect the U.​S. economy. For example, in testimony before the Senate Banking Committee in February, Senator Charles Schumer (​D-​NY) asked Federal Reserve Chairman Ben Bernanke what exposure American financial institutions had to Italy'​s debt. Bernanke suggested that indirect effects, rather than direct holdings of Italian debt, were more likely to impact the U.​S. economy. In passing, however, he may have left the impression that U.​S. money market funds hold Italian bank debt."

The "Viewpoint," which uses ICI tabulations of Crane Data'​s Money Fund Portfolio Holdings, explains, "​To address these questions, we examined the N-​MFP holdings data that money market funds report monthly to the Securities and Exchange Commission. U.​S. money market funds do not hold any Italian bank securities, nor do they hold Italian sovereign debt. In fact, the vast majority of their eurozone holdings are to entities whose ultimate parent is in France, Germany, or the Netherlands. Prime money market funds moved away from Italian private sector debt during the spring and summer of 2011, and have not returned since."

It continues, "At present, money market funds do have a very small exposure -- just over $​100 million -- to an Illinois-​based financing arm of CNH Global N.​V. CNH is a manufacturer of agricultural and construction equipment; it makes tractors, backhoes, and other industrial equipment in the United States. Fund holdings in CNH are predominantly asset-​backed loans to U.​S. businesses. We classify these holdings as Italian because CNH is a subsidiary of Turin, Italy-​based Fiat Industrial (​which, incidentally, has plans to relocate its headquarters to the Netherlands). It is debatable whether this represents exposure to the Italian economy or to the U.​S. economy, but it certainly is not exposure to Italian banks or Italian government debt.

Gallagher and Plantier add, "[​O]​ver the last six months, prime money market funds have increased their holdings of eurozone issuers: from 14.​0 percent of assets in August to 19.​8 percent of assets in February 2013. [See the chart in the full article here.] This increase can be explained by a rise in holdings of French assets (​rising from 5.​1 percent last August to 9.​6 percent) and in holdings of German assets (​up from 5.​1 percent in August to 6.​4 percent). More than 96 percent of these eurozone holdings are in France, Germany, and the Netherlands."

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