ICI's latest "Trends in Mutual Fund Investing, May 2013" was released late yesterday, showing that money fund assets increased by $28.3 billion in May, after falling $24.5 billion in April, $57.6 billion in March, $31.7 billion in February, and $9.1 billion in January. YTD through 5/31, ICI shows money fund assets down by $93.9 billion, or 3.5%. ICI also released its latest "Month-End Portfolio Holdings of Taxable Money Funds," which showed a surge in holdings of Certificates of Deposits during May. (See Crane Data's June 14 News, "Time Deposits, CDs, and CP Jump in May; France No. 2 Country Again.") Money fund assets are down slightly in June. Month-to-date through 6/26, our MFI Daily shows assets declining by $9.8 billion, or 0.4%, though Taxable Retail assets are up by $23.6 billion, or 3.1% in June (likely due to bond fund outflows).
ICI's May "Trends" says, "The combined assets of the nation's mutual funds increased by $89.1 billion, or 0.6 percent, to $13.947 trillion in May, 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 $11.70 billion in May, compared with an inflow of $12.03 billion in April.... Money market funds had an inflow of $27.81 billion in May, compared with an outflow of $24.43 billion in April. Funds offered primarily to institutions had an inflow of $23.51 billion. Funds offered primarily to individuals had an inflow of $4.30 billion."
The latest weekly "Money Market Mutual Fund Assets" from ICI says, "Total money market mutual fund assets increased by $7.66 billion to $2.594 trillion for the week ended Wednesday, June 26, the Investment Company Institute reported today. Taxable government funds increased by $5.29 billion, taxable non-government funds increased by $3.54 billion, and tax-exempt funds decreased by $1.18 billion. Assets of retail money market funds increased by $4.74 billion to $923.83 billion. Taxable government money market fund assets in the retail category increased by $1.70 billion to $198.90 billion, taxable non-government money market fund assets increased by $3.72 billion to $533.66 billion, and tax-exempt fund assets decreased by $670 million to $191.26 billion.... Assets of institutional money market funds increased by $2.92 billion to $1.671 trillion."
ICI's Portfolio Holdings for May 2013 show that Repos fell by $5.8 billion, or 1.1%, to $523.4 billion (22.3% of assets) after rebounding strongly in April (up $49.9B); they retained their lead as the largest segment of taxable money fund portfolio holdings (after being in a 3-way tie with CDs and Treasuries in March). Holdings of Certificates of Deposits, the second largest position, surged by $35.3 billion to $488.3 billion (20.8%). Treasury Bills & Securities, the third largest segment, decreased by $8.4 billion to $428.5 billion (18.3%).
Commercial Paper remained the fourth largest segment ahead of U.S. Government Agency Securities; CP holdings rose by $3.7 billion to $379.5 billion (16.2% of assets) and Agencies rose by $5.8 billion to $323.0 billion (13.8% of taxable assets). Notes (including Corporate and Bank) fell fractionally again (down $3.7 billion) to $98.4 billion (4.2% of assets), and Other holdings rose by $2.3 billion to $88.7 billion (3.8%).
The Number of Accounts Outstanding in ICI's Holdings series for taxable money funds decreased by 50,984 to 24.530 million, while the Number of Funds fell by 1 to 393. The Average Maturity of Portfolios remained flat for the fourth month in a row at 49 days in May. Over the past year, WAMs of Taxable money funds have lengthened by 3 days.
Liquidations continue in the money market mutual fund space, though there have been surprisingly few so far in 2013. Recent filings and statements from Calvert and from Hartford funds announced that both are giving up on the sector. Money funds hadn't seen an exit announcement since April, when Union Bank's HighMark funds announced its sale to Reich & Tang (see Crane Data's April 3, 2013, News, "Union Bank's HighMark to Sell MMFs to Reich and Tang Reports Reuters"). (Prior to that, the last exit was documented in our Jan. 3, 2013, News, "More Fund Liquidations: HSBC, Dreyfus T-E; More FSOC MMF Comments".) The exits could be poor timing though, as substitute ultra-short bond funds begin to show losses and outflows, and as pressures on money fund due to ultra-low rates and potentially drastic regulatory changes may finally be easing.
Calvert, which runs $733 million in MMFs (ranked 51 out of 76 managers tracked by Crane Data's MFI XLS), says in an "Update: Proposed Money Market Fund Mergers," "Recently, the boards of directors of the Calvert Tax-Free Reserves Money Market Portfolio, the Calvert Money Market Portfolio, the Calvert First Government Money Market Fund, and the Calvert Cash Reserves Institutional Prime Fund voted to merge these portfolios into the Calvert Ultra-Short Income Fund (CULAX), a taxable bond fund with a variable NAV. Pending shareholder approval, we expect these mergers to be finalized on or prior to December 31, 2013, with the completion of the mergers being staggered between late September 2013 and early December 2013."
They add, "Shareholders will have their money market shares automatically replaced with Class A shares (at NAV) of the Calvert Ultra-Short Income Fund unless, prior to the completion of the applicable merger, they either liquidate their positions in the money market funds or transfer their assets in these funds to another Calvert fund.... A meeting for record-date shareholders to vote on the proposed mergers will be held on September 20, 2013." Calvert's Ultra-Short Income Fund shows a year-to-date loss of 1.03% through 6/26/13.
Hartford, which ranks 61st among money fund managers with $415 million, comments in its Money Market Fund filing, "On June 18, 2013, the Board of Directors of The Hartford Mutual Funds, Inc. approved a Plan of Liquidation for The Hartford Money Market Fund pursuant to which the Fund will be liquidated on or about September 27, 2013.... Effective after market close on June 20, 2013, the Fund will no longer sell shares to new investors (including purchases through automatic investment plans, if any), other than purchases made through reinvestment of dividends and automatic rollovers.... The Fund's voluntary fee waivers will continue through the Liquidation Date."
The filing adds for "Traditional Individual Retirement Account, Roth IRA, SIMPLE, SEP AND 403 Plans," "Unless a shareholder provides instructions otherwise, Fund shares held on the Liquidation Date in the Fund will be exchanged for shares of The Hartford Short Duration Fund, in accordance with the amended custodial agreements, to avoid tax penalties that may be imposed if Fund shares were redeemed in cash."
In related news, bond funds, and ultra-short bond funds, have been showing losses and seeing outflows for the first time in recent memory. ICI's latest "Estimated Long-Term Mutual Fund Flows" show bond funds losing $8.0 billion in assets last week (the week ended June 19), their third straight week of declines. ICI showed bond funds losing $13.5 billion the prior week and $10.9 billion the week before. Meanwhile, retail money market funds have gained almost $20 billion in June.
A statement yesterday from TrimTabs Investment Research adds, "U.S.-listed bond mutual funds and exchange-traded funds have lost an all-time record $61.7 billion in June through Monday, June 24. This outflow far exceeds the previous record monthly outflow of $41.8 billion at the height of the financial crisis in October 2008."
A statement entitled, "Federal Reserve Board proposes new data collection requirements related to money market instruments" says, "The Federal Reserve Board on Tuesday proposed new data collection requirements related to selected money market instruments. To assist the Federal Reserve in monitoring money market conditions, the proposal would require insured depository institutions with total assets of $26 billion or more, and U.S. branches and agencies of foreign banks with third party assets of $900 million or more, to report daily to the Federal Reserve on their federal funds transactions, Eurodollar transactions, and certificates of deposit. Comments to the Board on the proposal will be due 60 days after it is published in the Federal Register, which is expected shortly. The Federal Register notice is attached. For media inquiries, call 202-452-2955."
The "Proposed Agency Information Collection Activities; Comment Request" explains, "On June 15, 1984, the Office of Management and Budget (OMB) delegated to the Board of Governors of the Federal Reserve System (Board) its approval authority under the Paperwork Reduction Act (PRA), pursuant to 5 CFR 1320.16, to approve of and assign OMB control numbers to collection of information requests and requirements conducted or sponsored by the Board under conditions set forth in 5 CFR 1320 Appendix A.1. Board-approved collections of information are incorporated into the official OMB inventory of currently approved collections of information.... You may submit comments, identified by FR 2420, by any of the following methods: Agency Website: http://www.federalreserve.gov. Follow the instructions for submitting comments at http://www.federalreserve.gov/apps/foia/proposedregs.aspx.... E-mail: email@example.com. Include OMB number in the subject line of the message. FAX: (202) 452-3819 or (202) 452-3102.... All public comments are available from the Board's website at www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted, unless modified for technical reasons.
The Fed explains, "The following information collection, which is being handled under this delegated authority, has received initial Board approval and is hereby published for comment. At the end of the comment period, the proposed information collection, along with an analysis of comments and recommendations received, will be submitted to the Board for final approval under OMB delegated authority. Comments are invited on the following: a. Whether the proposed collection of information is necessary for the proper performance of the Federal Reserve's functions; including whether the information has practical utility; b. The accuracy of the Federal Reserve’s estimate of the burden of the proposed information collection, including the validity of the methodology and assumptions used; c. Ways to enhance the quality, utility, and clarity of the information to be collected; d. Ways to minimize the burden of information collection on respondents, including through the use of automated collection techniques or other forms of information technology; and e. Estimates of capital or start up costs and costs of operation, maintenance, and purchase of services to provide information."
The proposal's "Abstract" explains, "The Federal Reserve proposes to implement the mandatory Report of Selected Money Market Rates (FR 2420). The FR 2420 would be a transaction-based report that collects daily liability data on federal funds, Eurodollar transactions, and certificates of deposits (CDs) from domestically chartered commercial banks and thrifts that have $26 billion or more in total assets and from U.S. branches and agencies of foreign banks with total third-party assets of $900 million or more. The FR 2420 data would be used in the analysis of current money market conditions."
It adds, "The FR 2420 would collect data for three liability types including federal funds, Eurodollars, and CDs, specifically with the amount of each transaction on the report date, the maturity of the transaction, and the interest rate for each transaction. In addition, as CDs may have floating rates, several additional items are being requested to better understand their interest rate structure."
The Proposal explains, "Federal Funds (Part A) - The federal funds transaction data would be the only source of high-frequency data used in the analysis of current market conditions. Data would be reported for federal funds purchased by domestic offices of reporting institutions on the reporting date. For purposes of the FR 2420, "federal funds" would be defined as all unsecured borrowings of U.S. dollars made to the institution's U.S. offices at the close of business for the report date except: Deposits, ... Debt instruments ... Repurchase agreements and security lending transactions, ... Currency and Coin, Overdrafts, Affiliate and related party transactions, Intraday transactions, and All forward starting transactions, even when the reporting date is the settlement date."
It continues, "Eurodollar Transactions (Part B) - There are many similarities between federal funds and Eurodollars, and Federal Reserve monitors and analyzes the Eurodollar market concurrent with the coverage of the federal funds market. At this time, the Federal Reserve has no source of transaction data from the Eurodollar market, so the transaction data collected in this report would be the main source of Eurodollar data for the Desk at the Federal Reserve Bank of New York (FRBNY). In addition, many firms can easily switch between these liabilities. Eurodollar data need to be collected to prevent reporting institutions from booking trades as Eurodollars instead of federal funds to avoid the reporting requirement."
The Fed proposal adds, "CDs (Part C) - Data on CD transactions would provide an alternative source of data for the current daily survey of CD rates conducted by the Federal Reserve. These data would also improve market monitoring capabilities because it would provide CD interest rate information that is not currently available. These data could also provide some optionality for creating a broad-based unsecured dollar rate: the CD rates could be combined with the daily commercial paper rates and the federal funds and Eurodollar rates in this collection.... Unlike federal funds and Eurodollars, CDs may have floating rates. For that reason, the FR 2420 would collect additional data fields for reportable CD transactions that would be necessary to understand the interest rate structure over the life of each CD."
It adds, "The combined reporter panel would capture 155 banking institutions and would be based on definitions that would cap the panel size at the point of significantly reduced marginal benefits. Using the total federal funds purchased data on the September 30, 2012, Call Report, the combined panel of 155 banking institutions is expected to capture over 80 percent of federal funds outstanding. This would create a relatively small aggregate panel, minimizing the number of institutions that would be subject to the reporting burden, yet would be expected to capture a significant portion of the targeted transaction volume."
Finally, the proposal says, "Frequency - The FR 2420 report would be submitted daily. Data collected would be used by FRBNY daily as part of the market monitoring responsibilities. Part of that analysis would be calculating average rates across products and tenors, and following trends in the aggregate levels of transactions. In order to calculate timely effective rates, daily data are needed. Time Schedule for Information Collection - The FR 2420 is a mandatory electronic report. Respondents would be required to file the FR 2420 daily with the FRBNY by 7 a.m. ET each business day for the preceding day's reportable transactions. There would be a short transition period."
We go back to the well of the 2013 AFP Liquidity Survey, this time examining the Association for Financial Professionals' comments on "Multi-Family Trading Portals and on Money Market Mutual Funds. AFP writes on portals, "Electronic, multi-family trading portals allow organizations to compare investment choices and gain more transparency around co-mingled assets. The trading portals help companies better manage counterparty risk exposure and make more informed decisions about their investment mix. In executing short-term investment transactions, trading portals can also lower the costs of managing and administering an organization's short-term investments. Thirty-four percent of organizations use an electronic, multi-family trading portal to execute at least a portion of their short-term investment transactions."
The survey explains, "Large organizations and those that are publicly held are much more likely than smaller and privately held ones to use a multi-family trading portal, with 46 percent and 44 percent, respectively, of such companies doing so. While organizations can use electronic trading portals to trade a number of investment vehicles, they do so primarily to trade prime MMFs (cited by 64 percent of respondents) and Treasury MMFs (53 percent). About one in three organizations that use an electronic trading portal do so to manage bank time deposits. Fifteen percent use portals for direct investment in Treasury/government securities and 13 percent use them for transactions involving holdings of commercial paper."
AFP's section on Money Market Funds (MMFs) tells us, "When selecting money market funds, 54 percent of financial professionals cite yield as a primary consideration. Indeed, yield is the leading factor in the current survey, unlike in recent years. Fund ratings is the second most common driver in the selection of funds, cited by 52 percent of survey respondents, down from 60 percent last year. Fund sponsorship status as part of a bank relationship and counterparty risk are also factors, cited by 47 percent and 42 percent of financial professionals."
It continues, "Even as allocations to money funds declined during the survey period, yield is the primary driver behind fund selection. On par with fund ratings, the popularity of yield likely reflects the transparency in reporting requirements and regulations put in place several years ago, along with a more positive outlook on credit expectations and counterparty risk of underlying investments. Also notable is the third-place ranking of fund sponsor (as part of the bank relationship) as the primary factor in selecting a fund. With many companies allocating over half of their balances to bank deposits and almost half of the money funds selected as part of a bank relationship mix, one might infer there's even greater focus in incorporating money funds in the bank relationship process."
AFP says of "Reforms in rules governing money market funds," "MMFs continue to be a top priority for policymakers. The Securities and Exchange Commission (SEC) offered its most recent proposals in June 2013. Proposed changes include those that would (1) require the value of MMF shares to fluctuate and (2) limit redemptions or charge fees for full redemptions of MMF holdings. The first proposal, most commonly referred to as floating the net asset value (NAV), would require MMF shares to fluctuate on prime institutional funds. This would remove the special exemptions that allow MMFs to use amortized-cost accounting and rounding to maintain stable NAVs. The second rule change would effectively limit or charge fees for full redemptions of MMF holdings. Under such a reform scenario, funds could impose liquidity fees, potentially coupled with temporary "gates" on redemptions."
Finally, the survey adds, "Currently, over three-quarters of organizations consider money funds as a destination for corporate cash, including more than four in five large organizations with annual revenues of at least $1 billion. The differences in responses across organization demographics also reveal nuances in the level of support of prime funds versus government-only funds. Almost half of the respondents consider all money funds as appropriate investment vehicles. Whether they invest in the funds is a different story, given that current allocation in money market funds is only 16 percent and contingent on regulatory matters yet to be determined."
Thank you to those of who attended last week's Money Fund Symposium in Baltimore! We had another record turnout (about 450 in total), and we appreciate the support of our sponsors and the efforts of our speakers. We hope to see you all in Boston next year (June 23-25) for our 2014 Symposium! Watch for more news coverage and excerpts from speeches in coming days, and look for the Powerpoints and audio recording to be posted to our Subscriber Content page later this week.... In other news, we mentioned the release of the 2013 AFP Liquidity Survey at Symposium last week, but today we cover the 38-page report in more detail. AFP's 2013 Survey says in its "Introduction," "Treasury departments remain cautious with their organizations' short-term cash and investment holdings, intent on ensuring safety of principal and liquidity. Five years after the financial crisis, this cautious posture is understandable since there are few opportunities for yield. The short-term investment landscape continues to be defined by low-return and relatively flat yield curve as the Federal Reserve keeps interest rates low, pegged to unemployment and inflation targets in the near term. In this environment, corporate cash levels -- both domestically and in international operations -- also remain high." (Note: Crane Data's Peter Crane will be participating in an AFP Webinar, "Making the Most from the 2013 AFP Liquidity Survey Results" on July 16 from 3-4pm Eastern.)
AFP tells us, "[C]ompanies still remain heavily invested in bank deposits -- half of corporate cash resides in bank deposits. Some asset classes saw increased restrictions under corporate investment policies in the past year. But in a sign of how uninspiring short-term investment alternatives truly are, preference for bank deposits held steady despite the expiration of unlimited FDIC insurance under the Transaction Account Guarantee (TAG) program at the end of 2012. Treasuries indicate that higher yielding investment opportunities and greater corporate spending would be the most likely factors to shrink their companies' high proportion of cash in bank deposits."
They write, "Companies' short-term investment strategies may also shift if recently released proposals from the U.S. Securities and Exchange Commission (SEC) for reform of money market funds (MMFs) are enacted in the future. Proposed changes include floating of the net asset value (NAV) for prime institutional funds as well as imposition of liquidity fees and "gates" on redemptions. Implementation of one or both of these proposals may cause organizations to stem their investment in MMFs and liquidate some, if not all, of their current MMF holdings, further curtailing short-term investment options. One question for the future is, would any such withdrawals flow to banks or would they go elsewhere?" [Note that most of the survey was conducted before the SEC's proposals, which were much milder than the market expected, were released.]
AFP explains, "To gauge these and other current and emerging trends in organizations' cash and short-term investment holdings, investment policies and strategies, the Association for Financial Professionals (AFP) conducted its eighth annual Liquidity Survey in May 2013. The survey generated 885 responses which are the basis of this report. Results from this survey report can provide financial professionals with critical benchmarks on short-term investment holdings and strategies. AFP thanks RBS Citizens for underwriting the 2013 AFP Liquidity Survey. The Research Department of the Association for Financial Professionals, which designed the survey questionnaire, analyzed the survey results and produced the report, is solely responsible for the content of this report."
Among the survey's Key Findings: "Forty percent of survey respondents report that their organizations held greater cash balances during the first quarter of 2013 than in the first quarter of 2012. Fewer than one in four indicate their organizations reduced cash and short-term investment balances during that same period, while there was no significant change for 39 percent of respondent organizations. Key reasons why companies built up cash balances include: Generation of higher operating cash flow (cited by 54 percent of survey respondents) [and] Accessing debt markets (17 percent)."
It continues, "Fifty percent of short-term investment balances are maintained in bank deposits, essentially unchanged from the 51 percent reported in the 2012 survey and the highest share reported since AFP began conducting the Liquidity Survey. As recently as the 2008 survey, the average bank deposit allocation was 25 percent. Seventy-four percent of all cash balances are maintained in banks, money market funds and Treasury securities. Safety is the driving principle of organizations' investment strategies, but liquidity has gained ground. More than two-thirds of respondents (68 percent) indicate that safety is the most important short-term investment objective for their organizations compared to the 29 percent of respondents that indicate their organizations' most important cash investment policy objective is liquidity (versus 22 percent in 2012)."
AFP adds, "Three in four organizations have a written document defining their policies for short-term investments. Beyond bank deposits, the most widely cited permissible investment vehicles are Treasury securities, money market funds and commercial paper. On average, organizations permit 4.6 investment vehicles beyond bank deposits for their short-term investment portfolio, a slight increase from the average 4.3 vehicles reported in the 2012 survey. Organizations invest in an average of 2.7 vehicles for their cash and short-term investment balances, a figure up slightly from the 2.4 reported in the 2012 survey. For 65 percent of organizations, short-term investment portfolios are maintained in investments with maturities of 30 days or less. Four out of five respondents do not anticipate any change in the tenor of their organizations' investment portfolios over the next year."
Finally, the survey says, "In light of possible rule changes involving money market funds (MMFs): Up to 65 percent of organizations would be less willing to invest in MMFs and/or would reduce/eliminate their holdings of MMFs currently in their short-term investment portfolios as a result of requiring NAVs to float. Fifty-six percent of organizations would be less willing to invest in MMFs and/or would reduce/eliminate their holdings of MMFs in their short term investment portfolios should fund companies limit redemptions or charge fees for full redemptions of MMF holdings." Look for more coverage of the survey later this week.
As we wrote yesterday, Investment Company Institute President & CEO Paul Stevens delivered the opening keynote to the 5th annual Crane's Money Fund Symposium in Baltimore (which runs through Friday). Today, we excerpt more from his speech. Entitled, "Top of the Ninth? The State of Play for Money Market Funds," Stevens says, "From the start, ICI and the fund industry have consistently supported measures designed to make money market funds more resilient, subject to two conditions. First, we must preserve the key features of money market funds that make them so valuable for investors and issuers. Second, we must preserve choice for investors by ensuring a robust and competitive global money market fund industry. The 2010 amendments to Rule 2a-7 met those conditions -- they made money market funds stronger without damaging their core features or undermining competition."
He explains, "[M]oney market funds are plainly much stronger products than they were in 2008. Unfortunately, this evidence was largely dismissed last summer, when the SEC was working on proposals championed by then-Chairman Mary Schapiro. As members of the Commission themselves noted, those 2012 proposals were drafted without a proper economic study on the impact of the 2010 reforms. Instead, as Commissioner Gallagher said, the 2012 proposal was prepared "without the input of the Commissioners and presented to the Commission as an inviolate fait accompli." We all know what happened: A bipartisan majority of the Commission opposed Chairman Schapiro's plan, and she in turn invited the Financial Stability Oversight Council, or FSOC, to intervene in the issue. Or, to quote Commissioner Gallagher again, the SEC "abdicate[d] responsibility for money market fund regulation to the Financial Stability Oversight Council.""
Stevens tells us, "That rush to judgment clearly was a mistake -- for the SEC as an institution and indeed for all concerned. The flawed ideas for capital buffers and redemption holdbacks that the Council put forward clearly reflected FSOC's domination by banking regulators -- with their decades-old antipathy toward money market funds, indifference to the interests of investors, and faith in bank regulatory concepts. Fortunately, the regulatory process took a distinct and encouraging turn for the better last autumn, thanks to the persistent efforts of the SEC. Last November, the agency's Division of Risk, Strategy, and Financial Innovation released an economic study that offered the first official examination of the experience of money market funds in 2008 and the effectiveness of the SEC's 2010 reforms. The Commissioners who insisted on this study recognized that no one -- not the President's Working Group, not FSOC, and not even the SEC under its former leadership -- had attempted such an objective, rigorous analysis."
He explains, "Then-Chairman Elisse Walter launched a collaborative process to bring forward a new proposal, considering the views of all the commissioners as well as the economic analysis that the staff and others have offered. And in first her two months on the job, SEC Chair Mary Jo White has engaged deeply on this issue. Crucially, she has made it clear that she grasps the vital role that money market funds play in our financial system. Indeed, the SEC should be strongly commended for pursuing an appropriate and thoughtful process before bringing the current proposal to a vote."
Stevens continues, "The Commission has unique expertise -- expertise in depth, developed over eight decades of overseeing the U.S. securities markets. The SEC recognizes the crucial role that money market funds play for individuals, businesses, state and local governments, and nonprofits. As the Commission's release states, these funds are not just "popular cash management vehicles for both retail and institutional investors," but also provide "an important source of financing" for the economy. And significantly, the SEC has recognized that different types of money market funds pose different risks and thus should be addressed by different reforms."
He states, "Against this backdrop, it seems clear that the FSOC would have no basis for intervening in this regulatory process again. Fortunately, we've heard recently from regulators in Washington who recognize and support the SEC's role as the industry's primary regulator. For instance, Mary John Miller, the U.S. Treasury Department's Under Secretary for Domestic Finance, recently appeared at ICI's General Membership Meeting. Under Secretary Miller, who coordinates Treasury's capital markets policy, said that the FSOC would "gladly" defer to the SEC as the Commission proceeds with another round of reforms. We think that deference to the SEC is the appropriate and correct approach."
Stevens explains, "That doesn't mean we love everything in the SEC's proposal -- because we do not. But we respect the integrity of the process that Chairs Walter and White have pursued. So let's turn now to substance -- the content and quality of the ideas the Commission has brought forward. As you all know, the 698-page proposal has three central components that can either stand alone or be combined. Reform option number one: requiring Institutional prime and tax-exempt funds to adopt floating net asset values. This proposal exempts funds that invest principally in Treasury and government agency securities, reflecting the SEC's recognition that different types of funds pose different risks. It also attempts to exempt "retail" funds, which the SEC identifies as those that would bar shareholders from redeeming more than $1 million per business day."
He says, "Reform option number two would allow all money market funds to offer a stable NAV, coupled with the new ability to impose liquidity fees and redemption gates when a fund's liquidity is constrained. Government funds would not be required to offer fees and gates, although they could opt in. Under this alternative, if a money market fund's level of weekly liquid assets dipped below 15 percent of its total assets, the fund would impose a liquidity fee of up to 2 percent on all redemptions, unless its board determines the fee is not in the fund's best interests. As for gates, the proposal sets forth that once a money market fund crosses the 15 percent threshold, its board of directors may temporarily suspend redemptions altogether."
Stevens adds, "The third core component of the proposal provides a set of enhanced standards on disclosure, reporting, and diversification. Those are the broad outlines. Please understand that we have had just two weeks to study the 698 pages of detail fleshing out the proposal. There is a lot to chew over. With that in mind, what do we make of it so far? Let's work backwards, starting with the third component that I mentioned: enhanced disclosure and diversification. We're still examining the particulars, but we see potential for positive changes. Some of these items bring the rules up to speed with practices already taking place in the industry. For example, many fund complexes are already disclosing their funds' mark-to-market value on a daily basis. We need more time, however, to assess the costs of providing the other disclosures, and how the information would affect investors."
He tells the Baltimore crowd of 450, "Next, alternative two: liquidity fees and redemption gates. To us, this is the best alternative. Liquidity fees and gates precisely address the core problem that regulators express greatest concern about: heavy redemption pressure in periods of market turmoil. A liquidity-based trigger introduces immediate redemption frictions and exacts a substantial cost for liquidity when liquidity in a particular fund is at a premium. Liquidity fees, if deemed appropriate by a fund's board, still allow investors access to their cash. But the fees compensate both the fund and its remaining shareholders for the potential cost to the fund of withdrawing liquidity. Thus, the fees both help slow redemptions and protect investors when they most need that protection."
Stevens continues, "As for temporary gates, they provide breathing room for a fund under intense pressure. They give the fund's board time to assess whether it can restore liquidity or should move to an orderly liquidation. Fees and gates also can relieve other funds and the markets if they too are facing tight liquidity pressures. A number of European funds -- and a few U.S. funds -- were able to suspend redemptions during the financial crisis in 2008, and thus successfully protected their investors. Some critics claim that liquidity fees and gates will induce "preemptive runs" -- that investors will flee a fund when its weekly liquidity is approaching the trigger. We don't buy that. As Commissioner Paredes pointed out, under the SEC's proposal, fees and gates are imposed at the discretion of the board -- so investors "may find it difficult to redeem preemptively with any confidence that their timing is correct.""
He says, "It's also important to note that these gates and fees are triggered on a fund-by-fund basis. So even if investors redeem preemptively at one fund, any systemic effect -- in other words, spillover to other funds -- is unlikely.... Finally, I'll mention what is perhaps the foremost advantage to liquidity fees and redemption gates: the approach would in no way limit investors' access to their shares when their fund has adequate liquidity. That clearly distinguishes it from the FSOC's proposed minimum balance at risk suggestion, which would penalize investors and impose heavy costs on funds and intermediaries even when liquidity is plentiful. Thus, gates and fees would not radically change the characteristics of money market funds -- or their value to investors and the economy."
Stevens also says, "That brings me at last to the SEC's alternative number one: forcing institutional prime and tax-exempt funds to float their share prices. This option is a nonstarter, in our view. Yes, our opposition to floating NAVs remains as firm as ever. And this opposition springs in large part from the same notion that -- on the flip side -- makes liquidity fees and gates a more compelling alternative. Simply put, forcing funds to float their NAVs doesn't address the problem that most preoccupies many regulators -- how to avert heavy redemptions out of money market funds. As Commissioner Paredes quite succinctly said: "If a run does start, a floating NAV is unable to stop it.""
Finally, he adds, "Regulators also argue that floating NAVs will make investors more aware that the assets held by money market funds may fluctuate in value. The trouble with that argument is that there's no evidence that investors are operating under any illusions on that score now. And if they are, enhanced disclosure can educate them just as well -- without destroying the value of money market funds for shareholders or the markets. Failing to address the central problem that regulators want to solve -- that would seem to be one big strike against floating NAVs. Here's strike two: Floating NAVs will eliminate important benefits to investors."
ICI's Paul Stevens kicked off our 5th Annual Money Fund Symposium Wednesday. A press release announcing the talk says, "The Investment Company Institute, in its preliminary reaction to the recent Securities and Exchange Commission (SEC) proposal of two options for the reform of money market funds, made clear its continuing opposition to floating the net asset value (NAV) for any category of money market funds. ICI President and CEO Paul Stevens, in a speech titled "Top of the Ninth? The State of Play for Money Market Funds" at Crane Data's Money Fund Symposium in Baltimore, also called the SEC's proposed alternative -- liquidity fees and redemption gates -- the best approach. Noting that money market fund reform may be "in the top of the ninth" inning after several years of debate, Stevens praised the SEC for resuming control of the issue and pursuing a thoughtful regulatory process since last summer. He singled out the SEC staff's economic analysis last fall as a notable contribution."
Under the section, "Floating NAV Remains Wrong Approach," "Stevens reiterated the fund industry's strong belief that floating NAVs, which the SEC would apply to institutional prime and tax-exempt funds under one of its two alternatives, would harm the product, investors, and the economy, while failing to meet regulators' objectives."
Stevens says, "Simply put, forcing funds to float their NAVs doesn't address the problem that most preoccupies many regulators -- how to avert heavy redemptions out of money market funds. Let's check the count against floating NAVs. They don't address regulators' goals. They eliminate key benefits to investors. They harm the economy. They increase systemic risk. And they carry immense costs and operational complications."
The release tells us, "Stevens also cited the broad-based opposition of dozens of groups representing individual investors, businesses, state and local governments, and nonprofits to proposals to undermine the stable $1.00 value of money market funds." "Since 2009, hundreds of entities from the private and public sectors across the economy have expressed their opposition to floating NAVs and other ill-considered proposals," Stevens noted. Under a floating NAV, "corporate America could see a significant reduction in the supply of short-term credit," and "the pool of capital that state and local governments use for financing vital needs will shrink or dry up."
It adds, "While praising the SEC for exempting Treasury, government, and retail funds from its floating NAV proposal, Stevens maintained that it was "a mistake" not to similarly exempt tax-exempt funds."
ICI's release continues, "In contrast to the floating NAV, Stevens said, "[l]iquidity fees and gates precisely address the core problem that regulators express greatest concern about: heavy redemption pressures in periods of market turmoil." If redemption fees were imposed when a money market fund experiences difficulties -- based on levels of weekly liquid assets and at the board's discretion -- the fees would slow redemptions while still allowing investors access to their cash."
ICI writes, "Stevens noted that ICI sees "potential for positive changes" in the proposed set of standards on disclosure, reporting, and diversification. "We need more time, however to assess the costs of providing detailed disclosures," Stevens added. He noted that the ICI will explain its views on the SEC proposal more fully when the Institute files a comment letter in September.... Citing the economic analysis conducted by the SEC staff last fall and the agency's "collaborative process," Stevens said the SEC "should be strongly commended for pursing an appropriate and thoughtful process before bringing the current proposal to a vote. Against this backdrop ... it seems clear that the FSOC [Financial Stability Oversight Council] would have no basis for intervening in this regulatory process again."
Finally, the release adds, "From the start, ICI and the fund industry have consistently supported measures designed to make money market funds more resilient, subject to two conditions," Stevens noted. "First, we must preserve the key features of money market funds that make them so valuable for investors and issuers. Second, we must preserve choice for investors by ensuring a robust and competitive global money market fund industry."
The Association for Financial Professionals (AFP) published a press release entitled, "Corporate Cash Flowing to Business Investment: AFP Survey" and announced the results of its "AFP 2013 Liquidity Survey" at the 5th Annual Crane's Money Fund Symposium in Baltimore Wednesday. The release is subtitled, "Despite TAG expiration, treasurers keep giant reserves in bank deposits; Corporate allocations to MMFs decline to 16 percent of short-term holdings." AFP explains, "According to data in the AFP 2013 Liquidity Survey released today by the Association for Financial Professionals (AFP) and underwritten by RBS Citizens, corporate cash reserves remain high and growing in banks, but a significant stream of cash is flowing into the types of corporate investment that augur well for American business."
The release tells us, "Corporate treasurers and CFOs reported that their companies were more likely to have expanded cash and short-term investment holdings over the past year than to have contracted them (40 versus 22 percent), but companies that reduced cash were making clear investments for the future, often taking the opportunity to acquire or launch businesses. Top reasons for paring reserves were acquiring a company or launching new operations (36 percent), increasing capital expenditures (32 percent); retiring debt (19 percent); or share repurchases or dividends (16 percent)."
Jim Kaitz, AFP's president and CEO, comments, "Though CFOs and treasurers are cautious, these are significant amounts of cash being invested in American businesses. If the trend continues to play out as we expect, business investment should continue to rise." James Gifas, head of Treasury Solutions at RBS Citizens, added, "There are good signs that companies are building and investing now, and laying the groundwork for their future. We are seeing confidence levels rise among our treasury customers, and the survey results underscore this trend."
AFP's study adds, "Companies continue to maintain ultra-conservative investment strategies for their short-term holdings, the survey found, with 74 percent of their short-term investment balances placed in one of three investment vehicles: banks, money market funds, or treasury securities."
It says, "Despite the expiration of unlimited FDIC insurance (Transaction Account Guarantee, or TAG) at the end of December, companies didn't pull their cash from banks. In fact, three out of five companies indicated that expiration of TAG had no effect on their investment strategies. About the same percentage of corporate cash resides in banks as did last year (50 percent, compared to 51 percent in 2012)."
AFP tells us, "Uncertainty about the future of money market funds (MMFs) likely accounts for the large amounts that companies place in bank deposits as they seek safety of principal. This month, the U.S. Securities and Exchange Commission proposed that Prime MMFs shift to a floating-rate net asset value structure and might include redemption restrictions, which could affect institutional investors. Financial professionals indicated in the survey that their companies likely would further disinvest in MMFs should these proposals go into effect. As uncertainty around MMFs lingers, corporate holdings have declined from previous years to just 16 percent of short-term investments in the 2013 survey, down from 30 percent as recently as the 2011 survey."
Finally, the release explains, "AFP conducted the survey, underwritten by RBS Citizens, in May 2013, generating 885 responses. The survey respondents were senior finance and treasury executives from a broad range of companies -- typically U.S.-based multinationals with a median of $2 billion in revenue. The typical AFP member works at an organization with complex treasury operational needs that can be met only by large regional banks and global banks. Download key findings from the AFP 2013 Liquidity Survey here."
Note that AFP Chief of Content Jeff Glenzer will discuss the findings and present, along with Treasury Strategies Tony Carfang, at 3:15pm Wednesday at the Money Fund Symposium. The session is entitled, "Corporates & MMFs: Liquidity Is Still King."
Note: Check back at 9am for breaking news from the start of Crane's Money Fund Symposium, which begins Wednesday at 1pm in Baltimore (and runs through Friday). We'll be releasing an "embargoed" news story then and we'll cover the keynote speech by ICI's Paul Stevens in tomorrow's News.... In today's News, law-firm Dechert LLP published a new "OnPoint legal update entitled, "SEC Proposes Sweeping Amendments to Rules Governing Money Market Funds." It says, "The U.S. Securities and Exchange Commission (SEC or Commission) on June 5, 2013 proposed for public comment sweeping amendments to Rule 2a-7 under the Investment Company Act of 1940 and other rules relating to money market funds (money funds). The Proposal included two key alternatives -- (i) requiring "institutional" prime money funds to operate with a floating net asset value (NAV), rounded to the fourth decimal place (e.g., $1.0000) (Alternative 1) or (ii) requiring money funds (other than government money funds) to impose a 2% liquidity fee during times of stress and allowing them temporarily to suspend redemptions using "redemption gates" during such times (Alternative 2). At the meeting approving the Proposal for public comment, several Commissioners raised the possibility of combining the two Alternatives into a single proposal and the SEC asked for public comment on that approach in the Proposal."
Dechert explains, "In addition to the Alternatives, the SEC recommended reforms that would be adopted under either Alternative, including more stringent disclosure, diversification and stress testing requirements. The SEC also recommended amendments to Form PF to require investment advisers to private liquidity funds, which generally operate in a manner similar to registered money funds, to disclose the funds' portfolio holdings and certain other information. Finally, the SEC proposed a number of amendments to clarify certain provisions of Rule 2a-7."
They add, "The Proposal begins a new phase in the ongoing debate over the regulation of money funds that has loomed over the investment management industry since the 2008 financial crisis. This DechertOnPoint provides background on the events leading up to the Proposal and discusses each of the proposed reforms in the Proposal.... The SEC is proposing a compliance period of two years for Alternative 1, one year for Alternative 2 and nine months for the other proposed amendments that are not specifically related to either Alternative."
The Dechert piece says in Conclusion, "Overall, the Proposal sets forth sweeping potential changes to money fund regulation. While representing a more balanced and tailored approach to reform than the approaches advocated in the Staff Proposals, FSOC Recommendations and PWG Report, the Proposal nevertheless would have a tremendous impact on the money fund industry and, potentially, on the markets in which money funds invest. Comments on the Proposal are due 90 days after its publication in the Federal Register."
Finally, note that Dechert's Jack Murphy will speak Friday at Money Fund Symposium. He joins Federated's John McGonigle and the SEC's Sarah ten Siethoff on a panel entitled, "Regulatory Roundtable: Pending and Potential.
A press release entitled, "J.P. Morgan Asset Management to disclose daily and weekly money market fund liquidity," announced that, "J.P. Morgan Asset Management's U.S. money market funds will begin disclosing their levels of daily and weekly liquid assets online each business day as of the prior business day, effective June 18, 2013. The information will provide investors with greater transparency, but there will be no change to the operation of the funds." The company is getting the jump on the SEC's recent Proposed Rules on Money Market Fund Reform, which includes a recommendation for "Daily Disclosure of Daily Liquid Assets and Weekly Liquid Assets." J.P. Morgan is the second largest manager of money funds with $230.7 billion according to the most recent Money Fund Intelligence XLS.
The SEC Proposal says starting on page 326, "We are proposing amendments to rule 2a-7 that would require money market funds to disclose prominently on their websites the percentage of the fund's total assets that are invested in daily and weekly liquid assets, as well as the fund's net inflows or outflows, as of the end of the previous business day. The proposed amendments would require a fund to maintain a schedule, chart, graph, or other depiction on its website showing historical information about its investments in daily liquid assets and weekly liquid assets, as well as the fund's net inflows or outflows, for the previous 6 months, and would require the fund to update this historical information each business day, as of the end of the preceding business day. These amendments would complement the proposed requirement, as discussed elsewhere in this Release, for money market funds to provide on their monthly reports on Form N-MFP the percentage of total assets invested in daily liquid assets and weekly liquid assets broken out on a weekly basis."
The SEC explains, "We believe that daily disclosure of money market funds' daily liquid assets and weekly liquid assets would promote transparency regarding how money market funds are managed, and thus may permit investors to make more efficient and informed investment decisions. Additionally, we believe that this enhanced disclosure may impose external market discipline on portfolio managers, in that it may encourage fund managers to carefully manage their daily and weekly liquid assets, which may decrease portfolio risk and promote stability in the short-term financing markets. We also believe that it could encourage funds to ensure that the fund's liquidity level is at least as large as its shareholders' demand for liquidity. The proposed daily disclosure requirement would provide an additional level of detail to the proposed requirement for money market funds to break out their daily liquid assets and weekly liquid assets on a weekly basis on their monthly reports on Form N-MFP, which in turn would further enhance investors' and the Commission's ability to monitor fund risks."
It continues, "[D]aily website disclosure of liquid asset levels would help investors estimate, in near-real time, the likelihood that a fund may be able to satisfy redemptions by using internal cash sources (rather than by selling portfolio securities) in times of market turbulence, or, if our liquidity fees and gates proposal is adopted, whether a fund may approach or exceed a trigger for the potential imposition of a liquidity fee or gate. Requiring daily website disclosure of liquid assets across the money market fund industry also would permit investors more readily to determine whether liquidity-related stresses are idiosyncratic to particular funds, thus minimizing the prospect of redemption pressures on funds that are not similarly affected. This disclosure also could make information about fund liquidity more accessible to a broad range of investors. This daily website disclosure should also assist the Commission in its oversight role and promote certain efficiencies, in that it would permit the Commission to access detailed portfolio liquidity information as necessary to its oversight of money market funds, without the need to contact fund management or service providers to obtain it.... The proposed disclosure also could increase the volatility of a fund's flows, even during times when the fund is not under stress, if shareholders are sensitive to changes in the fund's liquidity levels."
JPMAM's release explains, "This liquidity disclosure is in addition to the money market funds' current practice of disclosing daily market-based net asset values (NAVs) per share, announced by J.P. Morgan Asset Management on January 9, 2013. The information can be found on the web at www.jpmorganfunds.com."
John Donohue, Chief Investment Officer, J.P. Morgan Asset Management Global Liquidity, comments, "Providing investors with timely and easy access to daily and weekly liquidity information about money market funds helps investors develop a better understanding of how market movements impact liquidity fluctuations. This will allow investors to make more informed decisions about their investments."
Note: Crane Data currently publishes "%Mat7" (percent maturing in 7 days) and "%M1" (percent maturing in 1 day) statistics in our monthly MFI XLS spreadsheet. We also track MNAV, or "market NAVs" in our MFI Daily product. We will add these daily website disclosures to MFI Daily is other funds follow JPMAM's lead, or once they become final rules at some point in 2014. (E-mail firstname.lastname@example.org for a sample.)
Below, we again look at the SEC's Proposed Rules on "Money Market Fund Reform, in particular the section on "Standby Liquidity Fees and Gates (starting on page 153)." Given previous feedback following the November 2010 President's Working Group Report on Money Market Fund Reform and the November 2012 Financial Stability Oversight Council's "Proposed Recommendations Regarding Money Market Mutual Fund Reform", we again expect near unanimous opposition to any floating NAV and widespread support of the liquidity fees and gates option (we expect the fees and gates proposal to be the one eventually adopted too). (Note that comments have begun appearing on the SEC's Proposed Rule page, though none substantial, even though the SEC proposal has yet to be published in the Federal Register. Interested parties will have 90 days following this publication to comment on the current proposal.)
The SEC writes on emergency liquidity fees and gates, "As an alternative to the floating NAV proposal discussed above, we are proposing to continue to allow money market funds to transact at a stable share price under normal conditions but to (1) require money market funds to institute a liquidity fee in certain circumstances and (2) permit money market funds to impose a gate in certain circumstances. In particular, this fees and gates alternative proposal would require that if a money market fund's weekly liquid assets fell below 15% of its total assets (the "liquidity threshold"), the fund must impose a liquidity fee of 2% on all redemptions unless the board of directors of the fund (including a majority of its independent directors) determines that imposing such a fee would not be in the best interest of the fund. The board may also determine that a lower fee would be in the best interest of the fund."
They explain, "We also are proposing that when a money market fund's weekly liquid assets fall below 15% of total assets, the money market fund board would also have the ability to impose a temporary suspension of redemptions (also referred to as a "gate") for a limited period of time if the board determines that doing so is in the fund's best interest. Such a gate could be imposed, for example, if the liquidity fees were not proving sufficient in slowing redemptions to a manageable level."
The proposal continues, "Under this option, rule 2a-7 would continue to permit money market funds to use the penny rounding method of pricing so long as the funds complied with the conditions of the rule, but would not permit use of the amortized cost method of valuation. We would eliminate the use of the amortized cost method of valuation for money market funds under the fees and gates alternative for the same reasons we are proposing to do so under the retail and government exemptions to the floating NAV alternative. We do not believe that allowing continued use of amortized cost valuation for all securities in money market funds' portfolios is appropriate given that these funds will already be valuing their securities using market factors on a daily basis due to new website disclosure requirements and given that penny rounding otherwise achieves the same level of price stability."
It adds, "As previously discussed, the financial crisis of 2007-2008 exposed contagion effects from heavy redemptions in money market funds that had significant impacts on investors, funds, and the markets. We have designed the fees and gates alternative to address certain of these issues. Although it is impossible to know what exactly would have happened if money market funds had operated with fees and gates at that time, we expect that if money market funds were armed with such tools, they would have been able to better manage the heavy redemptions that occurred and to limit the spread of contagion, regardless of the reason for the redemptions."
The proposal states, "Based on the level of redemption activity that occurred during the crisis, we expect that many money market funds would have faced liquidity pressures sufficient to cross the liquidity thresholds we are proposing today that would trigger the use of fees and gates. If funds therefore had imposed fees, this might have caused some investors to choose not to redeem because the direct costs of the liquidity fee may have been more tangible than the uncertain possibility of potential future losses. In addition, funds that imposed fees would likely have been able to better manage the impact of the redemptions that investors submitted, and any contagion effects may have been limited, because the fees would have helped offset the costs of the liquidity provided to redeeming shareholders, and any excess could have been used to repair the NAV of the fund, if necessary. Regardless of the incentives to redeem, a liquidity fee would make redeeming investors pay for the costs of liquidity and, even if investors redeem from a fund, gates can directly respond to a run by halting redemptions."
It tells us, "If a fund had been able to impose a redemption gate at the time, it also would have been able to stop mounting redemptions and possibly generate additional internal liquidity in the fund while the gate was in place. However, fees and gates do not address all of the factors that may lead to heavy redemptions in money market funds. For example, they do not eliminate the incentive to redeem in times of stress to receive the $1.00 stable share price before the fund breaks the buck, or prevent investors from seeking to redeem to obtain higher quality securities, better liquidity, or increased transparency. Nonetheless, for the reasons discussed above, they provide tools that should serve to address many of the types of issues that arose during the crisis by allocating more explicitly the costs of liquidity and stopping runs."
Finally, the Commission's proposal says, "As discussed in section III.C, we also request comment on whether we should combine this option with our floating NAV alternative. This reform would be intended to achieve our goals of preserving the benefits of stable share price money market funds for the widest range of investors and the availability of short-term financing for issuers, while enhancing investor protection and risk transparency, making funds more resilient to mass redemptions, and improving money market funds' ability to manage and mitigate potential contagion from high levels of redemptions, as further discussed below."
Crane Data released its June Money Fund Portfolio Holdings earlier this week, and our collection for the month ended May 31, 2013, shows Repurchase Agreements (repos), the largest segment of money fund holdings, falling, while CDs, Time Deposits (listed among "Other" in the SEC's categorization scheme) and CP all rose sharply last month. Money market securities held by Taxable U.S. money funds overall increased by $25.8 billion in May (after falling $9.9 billion in April and $34.6 billion in March) to $2.376 trillion. (Note that our Portfolio Holdings collection is a separate series from our monthly Money Fund Intelligence XLS and daily MFI Daily universes.) Most segments rose in May (Agencies, CDs, CP, Other, and VRDNs) except for Repo and Treasuries. Repo remains the largest holding among taxable money funds, followed by CDs, Treasuries, CP, Agencies, Other, and VRDNs. Money funds' European-affiliated holdings (including repo) continued rising to over 31%. Below, we review our latest portfolio holdings aggregates.
Repurchase agreement (repo) holdings decreased by $10.0 billion to $513.7 billion, or 21.6% of fund assets.. Certificates of Deposit (CD) holdings increased by $14.2 billion to $480.4 billion, or 20.2% and Treasury holdings decreased by $12.8 billion to $430.4 billion (18.1% of holdings). Commercial Paper (CP) remained the fourth largest segment, rising by $9.9 billion to $410.6 billion (17.3% of holdings). Government Agency Debt rose by $5.2 billion; it now totals $324.0 billion (13.6% of assets). Other holdings, which include Time Deposits, rose by $14.8 billion to $155.4 billion (6.5% of assets). VRDNs, which are primarily purchased by tax-exempt funds (not listed here) but sometimes purchased by taxable funds) rose by $4.4 billion to $61.9 billion (2.6% of assets).
European-affiliated holdings rose by $20.0 billion in May to $744.5 billion; their share of holdings rose to 31.3%. Eurozone-affiliated holdings rose to $396.4 billion in May; they now account for 16.7% of overall taxable money fund holdings. Asia & Pacific related holdings rose by $6.9 billion to $290.2 billion (16.7% of the total), while Americas related holdings inched lower to $1.341 trillion (56.4% of holdings), primarily a result of lower Treasury holdings.
The Repo totals were made up of: Government Agency Repurchase Agreements (down $16.2 billion to $260.0 billion, or 10.9% of total holdings), Treasury Repurchase Agreements (up $3.7 billion to $180.1 billion, or 7.6% of assets), and Other Repurchase Agreements (up $2.6 billion to $73.5 billion, or 3.1% of holdings). The Commercial Paper totals were comprised of Financial Company Commercial Paper (up $7.2 billion to $238.0 billion, or 10.0% of assets), Asset Backed Commercial Paper (down $4.3 billion to $97.4 billion, or 4.1%), and Other Commercial Paper (up $7.1 billion to $75.2 billion, or 3.2%).
The 20 largest Issuers to taxable money market funds as of May 31, 2013, include the US Treasury (18.1%, $430.4 billion), Federal Home Loan Bank (7.0%, $166.3 billion), Deutsche Bank AG (3.2%, $77.1B), BNP Paribas (2.7%, $64.1B), JP Morgan (2.7%, $63.6B), Federal National Mortgage Association (2.6%, $61.8B), Federal Home Loan Mortgage Co (2.5%, $60.3B), Bank of America (2.4%, $57.1B), Societe Generale (2.4%, $56.1B), Bank of Nova Scotia (2.4%, $56.0B), RBC (2.4%, $55.9B), Barclays Bank (2.3%, $54.7B), Bank of Tokyo-Mitsubishi UFJ Ltd (2.3%, $53.6B), Sumitomo Mitsui Banking Co (2.2%, $52.7B), Credit Suisse (2.2%, $52.2B), Credit Agricole (2.0%, $48.5B), Citi (2.0%, $46.5B), Mizuho Corporate Bank Ltd (1.5%, $34.7B), Toronto-Dominion Bank (1.4%, $33.9B), and DnB NOR Bank ASA (1.4%, $32.4B).
The 10 largest Repo issuers (dealers) (with the amount of repo outstanding and market share among the money funds we track) include: Deutsche Bank ($52.9B, 10.3%), Bank of America ($50.1B, 9.8%), BNP Paribas ($43.7B, 8.5%), Societe Generale ($37.0B, 7.2%), Barclays Bank ($36.3B, 7.1%), RBS ($28.4B, 5.5%), Citi ($27.8B, 5.4%), Credit Suisse ($27.1B, 5.3%), JP Morgan ($24.9B, 4.9%), and RBC ($24.8B, 4.8%).
The 10 largest issuers of CDs (with the amount of CDs issued to our universe and market share include: Sumitomo Mitsui Banking Co ($45.3B, 9.4%), Bank of Tokyo-Mitsubishi UFJ Ltd ($38.5B, 8.0%), Bank of Nova Scotia ($30.0B, 6.3%), Bank of Montreal ($25.7B, 5.4%), Toronto-Dominion Bank ($25.3B, 5.3%), Mizuho Corporate Bank Ltd ($21.3B, 4.4%), National Australia Bank Ltd ($20.9B, 4.4%), RBC ($15.8B, 3.3%), Deutsche Bank ($15.6B, 3.3%), and Credit Suisse ($15.3B, 3.2%).
The 10 largest issuers of CP (owned by money funds) as of May 31 include: JP Morgan ($25.2B, 7.1%), Westpac Banking Co ($19.5B, 5.5%), Commonwealth Bank of Australia ($17.6B, 5.0%), FMS Wertmanagement ($13.7B, 3.9%), Barclays Bank ($12.0B, 3.4%), Lloyds TSB Bank PLC ($12.0B, 3.4%), Australia & New Zealand Banking Group Ltd ($11.6B, 3.3%), General Electric ($10.2B, 2.9%), NRW.Bank ($9.7B, 2.8%), and HSBC ($8.9B, 2.5%).
The largest increases among Issuers of money market securities (including Repo) in May were shown by: Federal Home Loan Bank (up $11.4B to $166.3B), BNP Paribas (up $7.9B to $64.1B), DnB NOR Bank ASA (up $5.6B to $32.4B), JPMorgan (up $4.4B to $63.6B), and Canadian Imperial Bank of Commerce (up $4.4B to $17.5B). The largest decreases among Issuers included: US Treasury (down $12.8B to $430.4B), Federal National Mortgage Association (down $5.7B to $61.8B), Goldman Sachs (down $4.5B to $21.3B), and Societe Generale (down $4.2B to $56.1B).
The United States is still by far the largest segment of country-affiliations with 47.3%, or $1.124 trillion. France increased again and moved into second place (9.2%, $219.1B) ahead of Canada (9.1%, $215.4B). Japan was again fourth (7.0%, $165.9B) and the UK (6.3%, $150.2B) remained fifth. Germany (5.0%, $119.9B) was sixth, followed by Australia (4.5%, $106.5B) 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. All money market securities must be U.S. dollar-denominated.) Sweden (3.7%, $87.4B), Switzerland (3.3%, $77.4B), and the Netherlands (2.3%, $54.3B) continued to round out the top 10.
As of May 31, 2013, Taxable money funds held 22.8% of their assets in securities maturing Overnight, and another 15.0% maturing in 2-7 days (37.8% total in 1-7 days). Another 18.4% matures in 8-30 days, while 25.8% matures in the 31-90 day period. The next bucket, 91-180 days, holds 13.1% of taxable securities, and just 5.0% 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 Saturday (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.
Bingham writes in a recent "Legal Alert" entitled, "SEC Proposes Money Market Fund Reform," "On June 5, 2013, the U.S. Securities and Exchange Commission voted unanimously to propose significant changes to the regulation of money market funds. The SEC's proposal, which is lengthy and extremely detailed, includes two key alternative changes along with a number of other reforms. The SEC asks for comment on a large number of issues raised by the proposal. With the proposal the SEC may well have consolidated its position as the primary regulator of money market funds. It also appears that the SEC Commissioners, formerly divided as to whether further money market reforms are needed, have now united around the need for further action, making the adoption of some version of the proposal more likely."
The law firm says, "The proposal suggests two alternative amendments to the rule governing money market funds, Rule 2a-7 under the Investment Company Act of 1940. Each alternative could be adopted alone or in combination with the other. Under either alternative, all money market funds would be prohibited from using the amortized cost method to value their investments (except as permitted for all mutual funds in the case of securities maturing within 60 days). Instead, each money market fund would be required to calculate its net asset value per share ("NAV") using market prices on a daily basis and to disclose this information on its website."
They continue, "The first alternative ("Alternative 1") would require a non-government institutional money market fund to round to the nearest 1/100th of a penny ("basis point round") its market-based NAV (e.g., to $1.0004 or $0.9997). Alternative 1 would effectively require these funds to float their NAVs. However, "government" and "retail" money market funds could continue to round to the nearest penny ("penny round") under Alternative 1. The market-based NAVs of government and retail money market funds could drop up to one-half of one penny (50 basis points) and still round to an NAV of $1.00. This would allow shareholders of government and retail money market funds to continue to make purchases and redemptions at a constant $1.00 under normal circumstances -- currently a key feature of money market funds."
Bingham adds, "The second alternative ("Alternative 2") would require a non-government money market fund whose "weekly liquid assets" fall below 15% of the fund's total assets to impose a liquidity fee of 2% on all future redemptions. Under Alternative 2, the board of a fund whose assets fall below this threshold may decide to impose a smaller liquidity fee, or no liquidity fee, if the board determines that doing so would be in the best interest of the fund. In addition, when the fund falls below the 15% threshold the board would have the ability to temporarily suspend redemptions if the board determines that doing so would be in the best interest of the fund."
Finally, they say, "The proposal makes clear that the SEC will also consider implementing both Alternative 1 and Alternative 2 together. In addition, the proposal would make certain other changes to existing regulations regardless of the alternative adopted." Note that Crane Data's Peter Crane will be moderating a webinar for Board IQ at 11:30am Thursday morning featuring Jay Baris from Morrison & Foerster LLP and Stuart Fross of K&L Gates LLP. The recent SEC Proposals will also of course be a major topic at next week's Money Fund Symposium, which will be hosted by Crane Data June 19-21 at the Baltimore Hyatt.
In other news, J.P. Morgan Securities published its latest "Update on prime money fund holdings for May 2013" yesterday afternoon. Alex Roever & Co. write, "Prime MMFs continued to be active in their asset and sector allocation decisions in May, balancing liquidity needs with the search for yield. Funds increased their non-US bank holdings, particularly Eurozone banks. They also increased their municipal and corporate holdings while reducing their holdings of US Treasuries, US agencies, US banks, and ABCP."
The report continues, "Prime MMF total bank holdings increased by $15bn in May according to our estimates based on fund holdings reports, driven by increases in unsecured CP, CD, and time deposit holdings. Eurozone bank holdings grew by $12bn, led by growth in French bank CD and time deposit holdings. Non-Eurozone European bank holdings grew by $10bn, much of the increase driven by unsecured CP and time deposit holdings. On the other hand, Canadian and US bank holdings shrunk by $8bn and $3bn, respectively."
Roever adds, "Repo holdings declined by $15bn in May. At about $185bn, the current balance of prime MMF repo holdings is the lowest it has been since April 2011 when repo rates averaged in single digits when the new FDIC deposits insurance fee assessments became effective. We continue to think repo rates will struggle to break above single digits in the near term for any prolonged periods but we also think there isn't much room for prime MMFs to further cut their repo holdings, especially given the drop in VRDN yields as of late."
Finally, the report says, "Asset backed CP holdings continued to decline in May, dropping by $4bn on the month. Year-to-date, ABCP holdings are down by about $16bn. As we noted in our 2013 outlook, ABCP supply continues to be constrained due to regulatory pressures from Basel III's LCR. We've certainly seen this pressure on the repo front as MMFs have extended maturities on their repo holdings as dealers have been forced to extend maturities in order to become more LCR compliant. But as ABCP holdings have declined, collateralized CP holdings have risen. Year-to-date, CCP holdings have increased by about $5bn, offsetting about a third of the decline in ABCP holdings. As one of the rare sources of new supply, CCP has been a relatively popular product among liquidity investors and since CCP is set up to be LCR-compliant, it has been a popular funding vehicle for dealers as well. As of the end of 1Q13, we estimate total CCP outstandings to be about $26bn. We think that this figure could grow to about $36bn by the end of the year."
Note too: Crane Data's May 31 Money Fund Portfolio Holdings were sent out earlier this week and our Money Fund Portfolio Laboratory has been updated. But our Reports & Pivot Tables" were delayed and should be sent out later this morning.
We continue trying to make our way through the Securities & Exchange Commission's massive 698-page "Money Market Fund Reform Proposal." While the summary "Fact Sheet" made it seem like the proposal was a welcome compromise, we're beginning to have second thoughts on the measure. The disclosure and new transparency requirements alone could overwhelm funds with costs and drown investors in information. The Proposal's "Amendments to Disclosure Requirements" explains (on page 314), "We are proposing amendments to rule 2a-7 and Form N-1A that would require money market funds to provide additional disclosure in certain areas to provide greater transparency regarding money market funds, so that investors have an opportunity to better evaluate the risks of investing in a particular fund and that the Commission and other financial regulators obtain important information needed to administer their regulatory programs. As discussed in more detail below, these amendments would require enhanced registration statement and website disclosure about: (i) any type of financial support provided to a money market fund by the fund's sponsor or an affiliated person of the fund; (ii) the fund's daily and weekly liquidity levels; and (iii) the fund's daily current NAV per share, rounded to the fourth decimal place in the case of funds with a $1.0000 share price or an equivalent level of accuracy for funds with a different share price (e.g., $10.000 or $100.00 per share)."
They write, "In addition, we are considering whether to require more frequent disclosure of money market funds' portfolio holdings. We are also proposing amendments to rule 2a-7 that would require stable price money market funds to calculate their current NAV per share (rounded to the fourth decimal place in the case of funds with a $1.0000 share price or an equivalent level of accuracy for funds with a different share price) daily, as a corollary to the proposed requirement for money market funds to disclose their daily current NAV per share. In addition, we are proposing a new rule that would require money market funds to file new Form N-CR with the Commission when certain events (such as instances of portfolio security default, sponsor support of funds, and other similar significant events) occur."
Under "Financial Support Provided to Money Market Funds, Proposed Disclosure Requirements," the proposal tells us, "Throughout the history of money market funds, and in particular during the 2007-2008 financial crisis, money market fund sponsors and other fund affiliates have, on occasion, provided financial support to money market funds. Indeed, one study estimates that during the period from 2007 to 2011, direct sponsor support to money market funds totaled at least $4.4 billion, for 78 of the 314 funds the study reviewed. We continue to believe that sponsor support will provide fund sponsors with the flexibility to protect shareholder interests."
It adds, "Additionally, if we ultimately adopt the liquidity fees and gates alternative, sponsor support would allow sponsors the flexibility to prevent a money market fund from breaching the 15% weekly liquid asset threshold that would otherwise require the board to impose a liquidity fee (absent a board finding that doing so would not be in the fund's best interest) and permit the board to impose a gate. However, we believe that if money market fund investors do not understand the nature and extent that the fund's sponsor has discretionarily supported the fund, they may not fully appreciate the risks of investing in the fund. For these reasons, we propose requiring money market funds to disclose current and historical instances of sponsor support."
The SEC comments, "Accordingly, we are proposing amendments to Form N-1A that would require money market funds to provide SAI disclosure regarding historical instances in which the fund has received financial support from a sponsor or fund affiliate. Specifically, the proposed amendments would require each money market fund to disclose any occasion during the last ten years on which an affiliated person, promoter, or principal underwriter of the fund, or an affiliated person of such person, provided any form of financial support to the fund."
They then discuss "Daily Disclosure of Daily Liquid Assets and Weekly Liquid Assets," saying, "We are proposing amendments to rule 2a-7 that would require money market funds to disclose prominently on their websites the percentage of the fund's total assets that are invested in daily and weekly liquid assets, as well as the fund's net inflows or outflows, as of the end of the previous business day. The proposed amendments would require a fund to maintain a schedule, chart, graph, or other depiction on its website showing historical information about its investments in daily liquid assets and weekly liquid assets, as well as the fund's net inflows or outflows, for the previous 6 months, and would require the fund to update this historical information each business day, as of the end of the preceding business day. These amendments would complement the proposed requirement, as discussed elsewhere in this Release, for money market funds to provide on their monthly reports on Form N-MFP the percentage of total assets invested in daily liquid assets and weekly liquid assets broken out on a weekly basis."
The release explains, "We believe that daily disclosure of money market funds' daily liquid assets and weekly liquid assets would promote transparency regarding how money market funds are managed, and thus may permit investors to make more efficient and informed investment decisions. Additionally, we believe that this enhanced disclosure may impose external market discipline on portfolio managers, in that it may encourage fund managers to carefully manage their daily and weekly liquid assets, which may decrease portfolio risk and promote stability in the short-term financing markets."
Regarding "Daily Website Disclosure of Current NAV per Share, the SEC writes, "We are proposing amendments to rule 2a-7 that would require each money market fund to disclose daily, prominently on its website, the fund's current NAV per share, rounded to the fourth decimal place in the case of a fund with a $1.0000 share price of an equivalent level of accuracy for funds with a different share price (the fund's "current NAV") as of the end of the previous business day. The proposed amendments would require a fund to maintain a schedule, chart, graph, or other depiction on its website showing historical information about its daily current NAV per share for the previous 6 months, and would require the fund to update this historical information each business day as of the end of the preceding business day. If we were to adopt the floating NAV alternative, the proposed amendments would effectively require a money market fund to publish historical information about the sale and redemption price of its shares each business day as of the end of each preceding business day."
They add, "Whether we adopt either of the proposed reform alternatives, we believe that daily disclosure of money market funds' current NAV per share would increase money market funds' transparency and permit investors to better understand money market funds' risks. While Form N-MFP information about money market funds' month-end shadow prices is currently publicly available with a 60-day lag, the proposed amendments would permit shareholders to reference funds' current NAV per share in near real time to assess the effect of market events on their portfolios."
The "Disclosure of Portfolio Holdings discuss the "Harmonization of Rule 2a-7 and Form N-MFP Portfolio Holdings Disclosure Requirements," saying, "Money market funds are currently required to file information about the fund's portfolio holdings on Form N-MFP within five business days after the end of each month, and to disclose much of the portfolio holdings information that Form N-MFP requires on the fund's website each month with 60-day delay. We are proposing amendments to rule 2a-7 in order to harmonize the specific portfolio holdings information that rule 2a-7 currently requires funds to disclose on the fund's website with the corresponding portfolio holdings information proposed to be reported on Form N-MFP pursuant to proposed amendments to Form N-MFP. We believe that these proposed amendments would benefit money market fund investors by providing additional, and more precise, information about portfolio holdings information, which could allow investors better to evaluate the current risks of the fund's portfolio investments."
They tell us, "Specifically, we are proposing amendments to the categories of portfolio investments reported on Form N-MFP, and are therefore also proposing amendments to the categories of portfolio investments currently required to be reported on a money market fund's website. We are also proposing an amendment to Form N-MFP that would require funds to report the maturity date for each portfolio security using the maturity date used to calculate the dollar-weighted average life maturity, and therefore we are also proposing amendments to the current website disclosure requirements regarding portfolio securities' maturity dates." The SEC also has a long list of additional information on portfolio securities. (Note that Crane Data collects and publishes monthly and weekly Money Fund Portfolio Holdings, and that we plan on adapting to the final disclosure rules once they're approved and implemented, probably late in 2014.)
The SEC adds, "Because certain money market funds have high portfolio turnover rates, the monthly disclosure requirement described above may not permit fund investors to fully understand a fund's portfolio composition and its attendant risks. For this reason, during times of stress, uncertainty regarding portfolio composition could increase investors' incentives to redeem in between reporting periods, as they would not be able to determine if their fund is exposed to certain stressed assets. We are considering whether to require more frequent disclosure of money market funds' portfolio holdings on a fund's website."
Finally, they say, "We also propose to require that funds disclose the total percentage of shares outstanding, to the nearest tenth of one percent, held by the twenty largest shareholders of record. This information would help us (and investors) identify funds with significant potential redemption risk stemming from shareholder concentration, and evaluate the likelihood that a significant market or credit event might result in a run on the fund or the imposition of a liquidity fee or gate, if we were to adopt that aspect of our proposal. Investors may avoid overly concentrated funds and this preference may incentivize some funds to avoid becoming too concentrated."
Last week, the Securities & Exchange Commission posted its "Money Market Fund Reform Proposal. Today, we begin highlighting what we consider to be important pieces of the proposal. The "Discussion" of the new proposal starts on page 45. It says, "We are proposing alternative amendments to rule 2a-7, and related rules and forms, that would either (i) require money market funds (other than government and retail money market funds)125 to "float" their NAV per share or (ii) require that a money market fund (other than a government fund) whose weekly liquid assets fall below 15% of its total assets be required to impose a liquidity fee of 2% on all redemptions (unless the fund's board determines that the liquidity fee is not in the best interest of the fund). Under the second alternative, once the money market fund crosses this threshold, the fund's board also would have the ability to temporarily suspend redemptions (or "gate") the fund for a limited period of time if the board determines that doing so is in the fund's best interest. We discuss each of these alternative proposals in this section, along with potential tax, accounting, operational, and economic implications. We also discuss a potential combination of our floating NAV proposal and liquidity fees and gates proposal, as well as the potential benefits, drawbacks, and operational issues associated with such a potential combination. We also discuss various alternative approaches that we have considered for money market fund reform."
The SEC's Proposal explains, "In addition, we are proposing a number of other amendments that would apply under either alternative proposal to enhance the disclosure of money market fund operations and risks. Certain of our proposed disclosure requirements would vary depending on the alternative proposal adopted (if any) as they specifically relate to the floating NAV proposal or the liquidity fees and gates proposal. In addition, we are proposing additional disclosure reforms to improve the transparency of risks present in money market funds, including daily website disclosure of funds' daily and weekly liquid assets and market-based NAV per share and historic instances of sponsor support. We also are proposing to establish a new current event disclosure form that would require funds to make prompt public disclosure of certain events, including portfolio security defaults, sponsor support, a fall in the funds' weekly liquid assets below 15% of total assets, and a fall in the market-based price of the fund below $0.9975."
It continues, "We are proposing to amend Form N-MFP to provide additional information relevant to assessing the risk of funds and make this information public immediately upon filing. In addition, we are proposing to require that a large liquidity fund adviser that manages a private liquidity fund provide security-level reporting on Form PF that are substantially the same as those currently required to be reported by money market funds on Form N-MFP. Our proposed amendments also would tighten the diversification requirements of rule 2a-7 by requiring consolidation of certain affiliates for purposes of the 5% issuer diversification requirement, requiring funds to presumptively treat the sponsors of asset-backed securities ("ABSs") as guarantors subject to rule 2a-7's diversification requirements, and removing the so-called "twenty-five percent basket." Finally, we are proposing to amend the stress testing provision of rule 2a-7 to enhance how funds stress test their portfolios and require that money market funds stress test against the fund's level of weekly liquid assets falling below 15% of total assets."
The SEC adds, "We note finally that we are not rescinding our outstanding 2011 proposal to remove references to credit ratings from two rules and four forms under the Investment Company Act, including rule 2a-7 and Form N-MFP, under section 939A of the Dodd-Frank Act, and on which we welcome additional comments. The Commission intends to address this matter at another time and, therefore, this Release is based on rule 2a-7 and Form N-MFP as amended and adopted in 2010."
On the "Floating Net Asset Value" (see page 47), the Commission writes, "Our first alternative proposal -- a floating NAV -- is designed primarily to address the incentive of money market fund shareholders to redeem shares in times of fund and market stress based on the fund's valuation and pricing methods, as discussed in section II.B.1 above. It should also improve the transparency of pricing associated with money market funds. Under this alternative, money market funds (other than government and retail money market funds) would be required to "float" their net asset value. This proposal would amend 132 rule 2a-7 to rescind certain exemptions that have permitted money market funds to maintain a stable price by use of amortized cost valuation and penny-rounding pricing of their portfolios. As a result, the money market funds subject to this reform would sell and redeem shares at prices that reflect the value using market-based factors of their portfolio securities and would not penny round their prices. In other words, the daily share prices of these money market funds would "float," which means that each fund's NAV would fluctuate along with changes, if any, in the value using market-based factors of the fund's underlying portfolio of securities. Money market funds would only be able to use amortized cost valuation to the extent other mutual funds are able to do so -- where the fund's board of directors determines, in good faith, that the fair value of debt securities with remaining maturities of 60 days or less is their amortized cost, unless the particular circumstances warrant otherwise."
They tell us, "Under this approach, the "risk limiting" provisions of rule 2a-7 would continue to apply to money market funds. Accordingly, mutual funds that hold themselves out as money market funds would continue to be limited to investing in short-term, high-quality, dollar-denominated instruments. We would, however, rescind rule 2a-7's provisions that relate to the maintenance of a stable value for these funds, including shadow pricing, and would adopt the other reforms discussed in this Release that are not related to the discretionary standby liquidity fees and gates alternative, as discussed in section III.B below. We also propose to require that all money market funds, other than government and retail money market funds, price their shares using a more precise method of rounding. The proposal would require that each money market fund round prices and transact in its shares at the fourth decimal place in the case of a fund with a $1.00 target share price (i.e., $1.0000) or an equivalent level of precision if a fund prices its shares at a different target level (e.g., a fund with a $10 target share price would price its shares at $10.000). Depending on the degree of fluctuation, this precision would increase the observed sensitivity of a fund's share price to changes in the market values of the fund's portfolio securities, and should better inform shareholders of the floating nature of the fund's value."
The Proposal says, "Finally, we propose a relatively long compliance date of 2 years to provide time for money market funds converting to a floating NAV on a permanent basis to make system modifications and time for funds to respond to redemption requests. The extended compliance date would also allow shareholders time to understand the implications of any reforms, determine if a floating NAV money market fund is an appropriate investment, and if not, redeem their shares in an orderly fashion."
The June issue of Crane Data's Money Fund Intelligence newsletter was e-mailed to subscribers Friday morning. It features the articles: "SEC Issues MMF Reform Proposal; Is Floating Out?," which talks about the recently-issued 700-page proposed regulations; "British Portal Invasion: MyTreasury's Meadows," which interviews ICAP's Justin Meadows; and, "Ultra-Short Space Getting Uncomfortably Warm," which excerpts from recent articles on activity in the enhanced cash and the space beyond money funds. We've also updated our Money Fund Wisdom database query system with May 31, 2013, performance statistics and rankings, and our MFI XLS was also sent out Friday a.m. Our May 31 Money Fund Portfolio Holdings are scheduled to go out tomorrow, June 11. Note that we're also making final preparations for next week's Crane's Money Fund Symposium, which will be held June 19-21, 2013, in Baltimore, Md. Registrations ($750). We hope to see many of you in Baltimore!
Our SEC Issues piece says, "The U.S. Securities & Exchange Commission, the primary regulator of money market mutual funds, issued its long-awaited Money Market Fund Reform Proposal earlier this week following a unanimous vote to release it at an Open Meeting on Wednesday. The Commission pleasantly surprised money fund managers and investors with a downright reasonable proposal, relegating the floating NAV option to one of two alternatives and limiting it to just Prime Institutional funds. They also included an alternative option of liquidity fees plus "gates", which should gather broad support from fund providers."
MFI explains, "The SEC's Proposal says, "The Securities and Exchange Commission is proposing two alternatives for amending rules that govern money market mutual funds under the Investment Company Act of 1940. The two alternatives are designed to address money market funds' susceptibility to heavy redemptions, improve their ability to manage and mitigate potential contagion from such redemptions, and increase the transparency of their risks, while preserving, as much as possible, the benefits of money market funds. The first alternative proposal would require money market funds to sell and redeem shares based on the current market based value of the securities in their underlying portfolios, rounded to the fourth decimal place (e.g., $1.0000), i.e., transact at a "floating" net asset value per share ("NAV"). The second alternative proposal would require money market funds to impose a liquidity fee (unless the fund's board determines that it is not in the best interest of the fund) if a fund's liquidity levels fell below a specified threshold and would permit the funds to suspend redemptions temporarily, i.e., to "gate" the fund under the same circumstances. Under this proposal, we could adopt either alternative by itself or a combination of the two alternatives."
MFI writes in its monthly "profile," "This month's Money Fund Intelligence interviews Justin Meadows, CEO of the U.K.-based online money market fund trading "portal" MyTreasury. The company recently entered the U.S. market, and hired money fund veteran Paul Rice as Managing Director, Americas. We discuss the portal's history, recent initiatives and other major money fund issues in Europe and the U.S. with Meadows below."
The article on Ultra-Short Bond Funds explains, "The sectors just beyond money market funds, enhanced cash and ultra-short bond funds, are once again seeing a resurgence eerily familiar to 1993 and 2004. When a number of mutual fund companies launch similar products, it's time to get a little nervous. Ultra-short bond funds have been in the news a little too much lately." See the latest issue and future excerpts for more, or contact us to request the latest issue.
While we're just starting to read through the recently released 698-page "Money Market Fund Reform Proposal released by the SEC and posted yesterday (see the SEC's Proposed Regulations page here, we wanted to spend a little more time covering the Commissioner's opening statements before we dive into the gory details. In particular, we wanted to highlight Commissioner Troy Paredes "Statement at Open Meeting Regarding a Rule Proposal on Money Market Fund Reform," which contains a withering attack on the floating NAV option. He says, "The Commission, given its experience, expertise, and mission, is best positioned to shape the regulation of money market funds. The Commission has continued to consider additional money market fund reforms beyond those we adopted in 2010 before Dodd-Frank was even enacted. We have made good progress since last summer because of the hard work of the Commission staff, and I believe that the Commission would have moved forward with a rulemaking even without FSOC's intervention."
Paredes comments, "I join my colleagues in thanking the staff — most notably those from the Division of Investment Management and the Division of Risk, Strategy, and Financial Innovation ("RSFI") -- for your professionalism and dedication. I am especially pleased that the robust study that the economists in RSFI undertook to answer a series of questions that were posed has revealed new insights and allowed us to better root this rulemaking in economics and data. This economic study facilitates the kind of rigorous cost-benefit analysis that is needed to determine the regulatory approach that will most effectively lessen the susceptibility of money market funds to heavy redemptions during a period of market stress, halt a run if one starts, and preserve the benefits of money market funds."
He explains, "Two alternatives are at the core of the proposal before us. Either alternative could be adopted by itself, or a combination of the two could be adopted. The first alternative would require institutional prime money market funds to float their net asset value (their "NAV"). The second alternative would permit money market funds to continue transacting at a stable $1 share price, but would require a fund to impose a liquidity fee on redeeming investors if the fund's weekly liquid assets drop below 15% of its total assets, unless the fund's board determines that imposing the fee is not in the fund's best interest. Under the second alternative, a fund's board would also be permitted to suspend redemptions temporarily -- that is, to "gate" the fund -- if the 15% liquidity threshold is crossed."
Paredes tells us, "Each alternative calls for several significant disclosure enhancements, such as requiring a fund to disclose any sponsor support it receives, to disclose its liquidity in more detail, and to disclose additional information about its portfolio holdings. Other disclosures would explicitly warn that investors can lose money when investing in a money market fund. Under the fees and gates alternative, although a fund's NAV would not float, a fund would have to disclose its market-based "shadow" NAV on a daily basis, a practice that many funds have already begun."
He continues, "I support the staff's recommendation. That said, to be clear, at present, I remain unconvinced that floating the NAV is justified on a cost-benefit basis. But floating the NAV is just one of the proposed alternatives. It is particularly important to me that liquidity fees and gates are being proposed as a separate, standalone alternative so that, if appropriate, this alternative can be adopted by itself without requiring money market funds to float their NAVs. Indeed, Commissioner Gallagher and I have pressed for gates since last year, but it was not until this recommendation took shape that gates were included on a standalone basis in a proposal for the Commission to consider."
Paredes states, "Because the proposing release is so thorough, instead of engaging the proposal's many details, the balance of my remarks this morning will summarize my current take on the two proposed alternatives, realizing, of course, that the Commission will receive many thoughtful comments. In evaluating each alternative, I have tried to keep my eye on a simple question: "What are we solving for and does the alternative solve for it at an acceptable cost?" An alternative that does not sufficiently reduce the incentive to redeem at a time of stress, such as during the recent financial crisis, may not be worth pursuing, especially if the alternative could jeopardize the benefits that money market funds afford both investors and issuers."
He says, "This takes me to the first alternative, requiring institutional prime money market funds to float their NAV. The animating purpose behind floating the NAV is to address the incentive to redeem that the stable $1 share price can create. Simply put, an investor may be motivated to exit a fund if the investor can get out at $1 when the fund's shadow price is less than $1. If the NAV floats, then by definition there can be no deviation between a fund's NAV and its shadow price for an investor to take advantage of by selling ahead of others."
Paredes explains, "The floating NAV alternative is also designed to make the risk of money market funds more transparent. The proposing release explains, "Our floating NAV proposal is designed to increase the transparency of risks present in money market funds. By making gains and losses a more regular and observable occurrence in money market funds, a floating NAV could alter investor expectations by making clear that money market funds are not risk free and that the funds' share price will fluctuate based on the value of the funds' assets." The release continues, "Investors in money market funds with floating NAVs should become more accustomed to, and tolerant of, fluctuations in money market funds' NAV and thus may be less likely to redeem shares in times of stress.""
But he adds, "Even if floating the NAV would affect investors in these ways, would it be enough to solve for the kind of widespread redemptions that came about during the upheaval of the financial crisis? As the proposing release acknowledges, money market fund investors may redeem for many reasons that are unrelated to the stable NAV. These other incentives to redeem -- which persist even if a money market fund's NAV floats -- can result in flights to liquidity, transparency, and quality that manifest as heavy redemptions. Flights to liquidity, transparency, and quality stem from a common source: investors' need or desire to avoid losses. Because investors routinely use money market funds as cash management vehicles, a loss of any size may be intolerable. The bottom line under a floating NAV, then, is that when investors see signs of stress, they will have an incentive to redeem sooner rather than later before the NAV floats downward. At a time of stress, even investors that are accustomed to seeing a fund's NAV fluctuate may redeem if they expect the fund's price to fall."
Paredes tells the Open Meeting, "We do not know for sure why investors left money market funds during the financial crisis. The data we do have, however, is consistent with the view that investors predominantly left in search of safety and that investors would have done so even if NAVs floated. First, European floating value money market funds experienced significant redemptions during the financial crisis. Second, U.S. ultra-short bond funds also saw heavy redemptions. Third, even as institutional investors exited from prime money market funds in 2008, significant sums flowed into institutional government money market funds, further suggesting that investors were reallocating their investments to the highest quality assets they could find."
He says, "All of this is to say that the floating NAV alternative suffers from a fundamental limitation. Because money market fund investors will always prefer to exit at a higher price instead of a lower one, even if NAVs float, plenty of reasons will remain for investors to redeem, particularly during a period of financial turmoil when investors seek out quality and as much certainty as they can find. Moreover, if a run does start, a floating NAV is unable to stop it. If, in fact, floating the NAV does not stave off heavy redemptions, then one has to question whether abandoning the stable NAV is justified given the significant costs and burdens that investors and issuers would have to bear if a floating NAV undercuts the usefulness of money market funds as a cash management vehicle. In this case, what would the Commission have solved by floating the NAV?"
Paredes adds, "Let me now turn to make four observations about the fees and gates alternative, which I favor. First, regardless of the reasons investors might redeem, liquidity fees can discourage them from doing so. By requiring redeeming investors to pay for the liquidity they take, liquidity fees reduce the incentive to redeem, whether the incentive is created by the stable NAV or an overarching desire to avoid risk and any chance of loss. Investors may stay put when they have to internalize at least some of the fund's liquidity costs. If some investors nonetheless opt to exit, then the liquidity fees they pay can help shore up the fund's net asset value to the benefit of the remaining investors. The result, according to the proposing release, is that "[the] explicit pricing of liquidity costs in money market funds could offer significant benefits to such funds and the broader short-term financing market in times of potential stress by lessening both the frequency and effect of shareholder redemptions.""
Finally, he says, "As Commissioner Aguilar has emphasized many times, to the extent investors withdraw from money market funds because the funds become less useful, we have to concern ourselves with where the money will go. To my mind, it would be regrettable if we instituted costly regulatory changes only to find out that the changes do not reduce systemic risk. If that were the result, what would we have solved for? It would be even more regrettable if systemic risk actually increased. The sum effect of these observations leads me to think that the fees and gates alternative would more fully accomplish the goals of this rulemaking."
As expected, the Securities & Exchange Commission unanimously approved a proposal on "Reforming Money Market Funds" (see yesterday's "News"). The SEC's press release says, "The Securities and Exchange Commission today voted unanimously to propose rules that would reform the way that money market funds operate in order to make them less susceptible to runs that could harm investors. The SEC's proposal includes two principal alternative reforms that could be adopted alone or in combination. One alternative would require a floating net asset value (NAV) for prime institutional money market funds. The other alternative would allow the use of liquidity fees and redemption gates in times of stress. The proposal also includes additional diversification and disclosure measures that would apply under either alternative. The SEC began evaluating the need for money market fund reform after the Reserve Primary Fund "broke the buck" at the height of the financial crisis in September 2008." "Our goal is to implement effective reform that decreases the susceptibility of money market funds to runs and prevents events like what occurred in 2008 from repeating themselves," said Mary Jo White, Chair of the SEC. The public comment period for the proposal will last for 90 days after its publication in the Federal Register." (Note: The SEC has also now released the full 698-page text of its "Money Market Fund Reform" Proposal.)
While we await the release of the actual 500+-page document to see specifics, we excerpt from some of the Commissioner's speeches. Chairman White's "Opening Statement at the SEC Open Meeting" says, "It has been a journey to get to this point. Commission staff has spent literally years studying different reform alternatives and performing extensive economic analysis in arriving at these recommendations. These proposals are important in and of themselves and because they advance the public debate that will shape the final rules to address one of the most prominent events arising from the financial crisis. Today's proposal contains two alternative reforms that could be adopted separately or combined into a single reform package to address run risk in money market funds."
She explains, "The first proposed alternative would require that all institutional prime money market funds operate with a floating net asset value (NAV). That is, they could no longer value their entire portfolio at amortized cost and they could not round their share prices to the nearest penny. The set "dollar" would be replaced by a share price that actually fluctuates, reflecting the changing values in these money market funds. This floating NAV proposal specifically targets the funds where the problems during the financial crisis occurred: institutional, prime money market funds. Retail and government money market funds - which have not historically faced runs in even the worst of times - would be exempt from the proposed floating NAV requirement."
White comments, "This approach would thus preserve the stable value fund product for those retail investors who have found it to be convenient and beneficial. It also would allow municipal and corporate investors to have access to government money market funds - a stable value product - if they need it, although it would be a product that holds federal government securities as opposed to the higher-yielding investments of a prime fund. We are soliciting commenters' views regarding the impact of targeting the floating NAV reform to institutional prime funds and whether government and retail money market funds also should operate with a floating NAV, as well as commenters' views regarding whether today's proposal would effectively differentiate retail funds from institutional funds by imposing a $1 million redemption limit. These and other important questions are specifically posed in the proposal."
She adds, "I believe the floating NAV reform proposal is important for a number of reasons: First, by eliminating the ability of early redeemers to receive $1.00 - even when the fund has experienced a loss and its shares are worth somewhat less - this proposal should reduce incentives for shareholders to redeem from institutional prime money market funds in times of stress. Second, the proposal increases transparency and highlights investment risk because shareholders would experience price changes as an institutional prime money market fund's value fluctuates. And, third, the proposal is targeted, by focusing reform on the segment of the market that experienced the run in the financial crisis."
White also says on "Fees & Gates," "The second proposed alternative seeks to directly counter potentially harmful redemption behavior during times of stress. Under this alternative, non-government money market funds would be required to impose a 2 percent liquidity fee if the fund's level of weekly liquid assets fell below 15 percent of its total assets, unless the fund's board determined that it was not in the best interest of the fund. That determination would be subject to the board's fiduciary duty, and we believe it would be a high hurdle. After falling below the 15 percent weekly liquid assets threshold, the fund's board would also be able to temporarily suspend redemptions in the fund for up to 30 days - or "gate" the fund."
She explains, "This "fees and gates" alternative potentially could enhance our regulation in several ways: First, it could more equitably allocate liquidity risk by assigning liquidity costs in times of stress (when liquidity is expensive) to redeeming shareholders - the ones who create the liquidity costs and disruption. Second, this alternative would provide new tools to allow funds to better manage redemptions in times of stress, and thereby potentially prevent harmful contagion effects on investors, other funds, and the broader markets. If the beginning of a run or significantly heightened redemptions occur, they would no longer continue unchecked, potentially spiraling into a crisis. The imposition of liquidity fees or gates would be an available tool to directly counteract a run. And, third, this approach also is targeted, focusing the potential limitations on a money market fund investor's experience to times of stress when unfettered liquidity can have real costs."
White tells us, "The two alternative approaches in today's proposal target the common goal of reducing the incentive to redeem in times of stress, albeit in different ways. Accordingly, the proposal requests comment on whether a better reform approach would be to combine the two alternatives into a single reform package - requiring that prime institutional funds have a floating NAV and be able to impose fees and gates in times of stress, and that retail funds be able to impose fees and gates. We specifically solicit and I am interested in commenters' views on this combined approach."
She explains the "Greater Diversification, Disclosure and Reporting portion," "Importantly, the staff's recommendations also contain a number of other significant reform proposals - tightening diversification requirements, enhancing disclosure requirements, strengthening stress testing and improving reporting on both money market funds and unregistered liquidity funds that could serve as alternatives to money market funds for some investors. These proposed reforms should further enhance the resiliency and transparency of this important product and are significant complements to the other proposals."
White says, "Today's proposal is the product of very hard work by all those who have sought to meaningfully reform this investment product that is such a critical piece of the nation's financial fabric. There have been important and thoughtful comments throughout this process, including suggestions and recommendations from investors, the industry, and fellow regulators. We have given them all very careful consideration and they have proven invaluable to us formulating the important proposals we are voting on today. In this regard I especially would like to thank all of my fellow Commissioners for their contributions and the spirit of cooperation in which we worked leading up to today's meeting."
Finally, she adds, "I want to reiterate that our goal is to implement an effective reform that decreases the susceptibility of money market funds to run risk and prevents money market fund events similar to those that occurred in 2008 from repeating themselves. With this goal in mind, I very much look forward to the comments and am very pleased that, with my fellow Commissioners, we are moving this reform process forward."
The Securities & Exchange Commission, hosted an "Open Meeting Wednesday morning (click here for archived webcast) on "Reforming Money Market Funds," and released a "Fact Sheet" on the topic (which was embargoed until 10am Eastern). It says, "The Securities and Exchange Commission today will consider whether to propose rules that would reform the way that money market funds operate." The "Background" explains, "The History of Money Market Funds – Money market funds are a type of mutual fund developed in the 1970s as an option for investors to purchase a pool of securities that generally provided higher returns than interest-bearing bank accounts. They have since grown significantly and currently hold more than $2.9 trillion in assets, the majority of which is in institutional funds." (See the SEC Commissioner Speeches and statements here.)
It continues, "Under Investment Company Act Rule 2a-7, these funds must limit their portfolio investments to high-quality, short-term debt securities. Unlike other mutual funds, money market funds seek to maintain a stable share price (typically $1.00) through the use of certain valuation and pricing methods permitted under Rule 2a-7. The typical experience for a money market fund investor is that when they invest a dollar, they are able to get back a dollar on demand (plus the yield that was earned during the course of the investment). As a result, money market funds have become popular cash management vehicles for retail and institutional investors."
The release says, "When a money market fund's market-based value deviates more than 0.5 percent ($0.005) from its stable $1.00 share price, a money market fund generally re-prices at its market value. At these times, investors will no longer get back their full dollar -- a phenomenon known as "breaking the buck." There are many kinds of money market funds, including ones that invest primarily in government securities, tax-exempt municipal securities, or corporate debt securities. Money market funds that primarily invest in corporate debt securities are referred to as prime funds. Funds are often structured to cater to different types of investors. Some funds are marketed to individuals and intended for retail investors, while other funds that typically require very high minimum investments are intended for institutional investors."
The SEC tells us about "The Financial Crisis," "At the height of the financial crisis in September 2008, a money market fund named the Reserve Primary Fund "broke the buck" and re-priced its shares below its $1.00 stable share price, leading many investors to pull their money out of the fund. That same week, prime institutional money market funds experienced rapid heavy redemptions, with investors withdrawing approximately $300 billion (14 percent of their assets). These redemptions, which halted after the U.S. Treasury provided a government guarantee, prompted the SEC to evaluate the need for money market fund reform."
They add, "In March 2010, the Commission adopted a series of amendments to its rules on money market funds. The amendments were designed to make money market funds more resilient by reducing the interest rate, credit, and liquidity risks of their portfolios. Although these reforms improved money market fund resiliency, the Commission said at the time that it would continue to consider whether further, more fundamental changes to money market fund regulation might be warranted.... In December 2012, staff from the SEC's Division of Risk, Strategy, and Financial Innovation published a study relating to money market funds."
The SEC writes, "The study contained, among other things, a detailed analysis of the possible causes of investor redemptions in prime money market funds during the 2008 financial crisis, certain characteristics of money market funds before and after the Commission's 2010 reforms, and how future reforms of money market fund regulation might affect investor demand for money market funds and alternative investments. The study indicated that government money market funds generally are not susceptible to heavy redemptions or runs due to the nature of their portfolio assets. Retail investors have historically been less likely to redeem heavily from such funds in times of financial stress. The study informed the Commission's consideration of the risks that may be posed by money market funds and provided a foundation for this proposal."
The release says of "The Proposal," "The Commission is considering a proposal that would include two principal alternative reforms that could be adopted alone or in combination. The proposal also includes additional diversification and disclosure measures that would apply under either alternative. The proposed reforms are designed to: Mitigate money market funds' susceptibility to heavy redemptions during times of stress. Improve money market funds' ability to manage and mitigate potential contagion from high levels of redemptions. Preserve as much as possible the benefits of money market funds for investors and the short-term financing markets. Increase the transparency of risk in money market funds."
It explains, "Alternative One: Floating NAV – Under the first alternative, prime institutional money market funds would be required to transact at a floating net asset value (NAV), not at a $1.00 stable share price. The floating NAV alternative is designed primarily to address the heightened incentive shareholders have to redeem shares in times of financial stress. It also is intended to improve the transparency of money market fund risks through more visible valuation and pricing methods."
The SEC's release continues, "Floating the NAV - Prime institutional money market funds would no longer be able to use amortized cost to value their portfolio securities except to the limited extent all mutual funds are able to do so. Daily share prices of these money market funds would fluctuate along with changes, if any, in the market-based value of their portfolio securities. Showing Fluctuations in Price – Under the first alternative, prime institutional money market funds would be required to price their shares using a more precise method so that investors are more likely to see fluctuations in value. Currently, money market funds "penny round" their share price to the nearest one percent (to the nearest penny in the case of a fund with a $1.00 share price). Under the floating NAV proposal, prime institutional money market funds instead would be required to "basis point round" their share price to the nearest 1/100th of one percent (the fourth decimal place in the case of a fund with a $1.0000 share price)."
It explains, "Exempting Government and Retail Money Market Funds – Government and retail money market funds would be allowed to continue using the penny rounding method of pricing and maintain a stable share price. A government money market fund would be defined as any money market fund that holds at least 80 percent of its assets in cash, government securities, or repurchase agreements collateralized with government securities. A retail money market fund would be defined as a money market fund that limits each shareholder's redemptions to no more than $1 million per business day."
The SEC writes, "Alternative Two: Liquidity Fees and Redemption Gates – Under the second alternative, money market funds would continue to transact at a stable share price, but would be able to use liquidity fees and redemption gates in times of stress. Liquidity Fees - If a money market fund's level of "weekly liquid assets" were to fall below 15 percent of its total assets (half the required amount), the money market fund would have to impose a 2 percent liquidity fee on all redemptions. However, such a fee would not be imposed if the fund's board of directors determines that such a fee is not in the best interest of the fund or that a lesser liquidity fee is in the best interest of the fund. Weekly liquid assets generally include cash, U.S. Treasury securities, certain other government securities with remaining maturities of 60 days or less, and securities that convert into cash within one week."
They explain, "Redemption Gates – Once a money market fund had crossed this threshold, its board of directors also would be able to impose a temporary suspension of redemptions (or "gate"). A money market fund that imposes a gate would need to lift that gate within 30 days, although the board of directors could determine to lift the gate earlier. Money market funds would not be able to impose a gate for more than 30 days in any 90-day period. Prompt Public Disclosure - Money market funds would be required to promptly and publicly disclose the fund crossing of the 15 percent weekly liquid asset threshold, the imposition and removal of any liquidity fee or gate, and a discussion of the board’s analysis in determining whether or not to impose a fee or gate. Exemption for Government Money Market Funds - Government money market funds would be exempt from the fees and gates requirement. However, these funds could voluntarily opt into this new requirement."
The Commission also says, "Potential Combination of Both Proposals – The Commission is considering whether to combine the floating NAV and the liquidity fees and gates proposals into a single reform package. If adopted in that form, prime institutional money market funds would be required to transact at a floating NAV and all non-government money market funds would be able to impose liquidity fees or gates in certain circumstances. The Commission requests public comments on the benefits and drawbacks of a single reform approach."
They add, "Enhanced Disclosure Requirements – In addition to requiring certain disclosures relating to the floating NAV and fees and gates proposals, the proposal seeks to improve the transparency of money market fund operations and risks by: Website Disclosure - Money market funds would be required to disclose on their website, on a daily basis, their levels of daily and weekly liquid assets and market-based NAVs per share. New Material Event Disclosure - Money market funds would be required to promptly disclose certain events on a new form (Form N-CR). These events would include the imposition or lifting of fees or gates, portfolio security defaults, sponsor support, and - for funds that would continue to maintain a stable share price under either alternative - a fall in the fund's market based NAV per share below $0.9975."
The SEC release continues, "Disclosure of Sponsor Support – Money market funds would be required to disclose historic instances of sponsor support for money market funds (in addition to the current event disclosures required on Form N-CR). Immediate Reporting of Fund Portfolio Holdings – Money market funds currently report detailed information about their portfolio holdings to the SEC each month on Form N-MFP. Under the proposal, Form N-MFP would be amended to clarify existing requirements and require reporting of additional information relevant to assessing money market fund risk. In addition, the proposal would eliminate the current 60-day delay on public availability of the information filed on the form and would make it public immediately upon filing."
It adds, "Improved Private Liquidity Fund Reporting – To better monitor whether substantial assets migrate to liquidity funds in response to money market fund reforms, the proposal would amend Form PF, which private fund advisers use to report information about certain private funds they advise. The proposed changes would require a "large liquidity fund adviser" (a liquidity fund adviser managing at least $1 billion in combined money market fund and liquidity fund assets) to report substantially the same portfolio information on Form PF as registered money market funds would report on Form N-MFP. A liquidity fund is essentially an unregistered money market fund."
The SEC continues, "Stronger Diversification Requirements – The proposal includes the following proposed changes to the diversification requirements of money market funds' portfolios: Aggregation of Affiliates – Money market funds would be required to aggregate affiliates for purposes of determining whether they are complying with money market funds' 5 percent concentration limit. Under this limitation, a fund may not invest any more than 5 percent of its assets in any one issuer. Removal of the 25 Percent Basket – All of a money market fund's assets would need to meet the concentration limits for guarantors and 'put' providers, thereby removing the so-called 25 percent basket that permitted a single guarantor to guarantee 25 percent of a money market fund's assets."
It says, "Asset-Backed Securities – Money market funds would need to aggregate all of the asset-backed securities vehicles sponsored by the same entity for purposes of the 10 percent guarantor diversification limit. However, this would not be necessary if a money market fund's board of directors determines the fund is not relying on the sponsor’s strength or structural enhancements of the asset-backed security in determining the quality or liquidity of the asset-backed security. Enhanced Stress Testing – Under the proposal, the stress testing requirements adopted by the Commission in 2010 would be further enhanced. In particular, a money market fund would be required to stress test against the fund's level of weekly liquid assets falling below 15 percent of total assets. In addition, the Commission is proposing to strengthen how money market funds stress test their portfolios and report the result of their stress tests to their boards of directors."
Finally, they write, "What's Next? The public comment period for the proposal will last for 90 days after its publication in the Federal Register." We expect the full proposal to be released in about a week, but we'll keep you posted.
The Securities & Exchange Commission has posted its "Open Meeting Agenda for tomorrow's meeting to vote on a new money market funds reform proposal. The meeting, on Wednesday, June 5, 2013, at 10:am (see the Webcast here) will discuss "Money Market Fund Reform; Amendments To Form PF. Participants will include Division of Investment Management Staff: Norm Champ, Diane Blizzard, Sarah ten Siethoff, Thoreau Bartmann, Brian Johnson, Adam Bolter, Amanda Wagner, Kay-Mario Vobis, Craig Lewis, and Woodrow Johnson. The agenda says , "The Commission will consider a recommendation to propose amendments to certain rules under the Investment Company Act that govern the operation of money market funds and related amendments to Form PF under the Investment Advisers Act. For further information on the rules, please contact Sarah ten Siethoff, Division of Investment Management, (202) 551-6792." Watch for more details here following the 10am start of the Webcast.
As we wrote in our May 30 News "SEC Announces June 5 Open Meeting to Release Money Fund Reforms", the SEC's Sunshine Act notice announcing the meeting said, "Notice is hereby given, pursuant to the provisions of the Government in the Sunshine Act, Pub. L. 94-409, that the Securities and Exchange Commission will hold an Open Meeting on Wednesday, June 5, 2013 at 10:00 a.m., in the Auditorium, Room L-002. The subject matters of the Open Meeting will be: The Commission will consider a recommendation to propose amendments to certain rules under the Investment Company Act that govern the operation of money market funds and related amendments to Form PF under the Investment Advisers Act."
As we said last week, Bloomberg wrote in "SEC to Vote June 5 on Floating Share for Riskier Money Funds," "The U.S. Securities and Exchange Commission will vote next week on a proposal that would require a floating-share value for the riskiest type of money-market mutual funds, two people briefed on the matter said. The floating-share proposal would apply only to funds that buy corporate debt and cater to institutional clients, said the people, who asked not to be named because details of the proposal haven't been made public. The commission announced in a notice posted on its website today that it would meet on June 5 to consider rules governing money-market funds."
The Wall Street Journal also wrote in "SEC to Vote Next Week on Money-Market Fund Rules," "U.S. securities regulators plan to vote next week on new rules for a $2.6 trillion corner of the mutual-fund industry that would target money-market funds catering to large institutional investors, who bolted out of such funds during the financial crisis. The Securities and Exchange Commission plans to vote next Wednesday on a draft proposal that would require certain types of money funds whose shares are held by corporations and other institutional investors to abandon their fixed $1 share price and allow the price to float as it does with other mutual funds, according to people familiar with the draft. The rule would apply to prime money funds, which invest in short-term corporate debt. SEC officials expect the measure to sail through the five-member commission, but it faces a long path to implementation, including a lengthy comment period and a second SEC vote before its provisions can go into effect."
The Investment Company Institute commented, "ICI Chief Public Communications Officer Mike McNamee issued the following statement in response to the Securities and Exchange Commission notice of an open meeting scheduled for June 5 to consider money market fund regulation: "We look forward to seeing the rule proposal on money market funds that the Commission plans to consider at next week's meeting. We expect this proposal will reflect the extensive research and discussion among commissioners and staff since last summer. As Chairman White has said repeatedly, the goals of any reform must include preserving the economic benefits of money market funds -- both for investors and for the businesses and state and local governments that rely upon these funds for financing."
Watch for more coverage on the pending proposals later this morning.... Finally, note that we expect the pending proposal to be a major topic of discussion at Crane's Money Fund Symposium, which begins in two weeks (June 19-21) at the Baltimore Hyatt. The event will start with a Q&A with Paul Schott Stevens, President of the Investment Company Institute and will end with a "Regulatory Roundtable: Pending & Potential with John McGonigle, Vice Chairman of Federated Investors, Jack Murphy, Partner of Dechert LLP and Sarah ten Siethoff, Senior Special Counsel of the SEC. We hope to see you in Baltimore later this month!
Federated Investors most recent "Month in Cash is entitled, "Overnight accommodations at low rates." Global Money Market CIO Deborah Cunningham writes, "Repo and overnight markets spent much of the last month mired in low territory, at rates not seen for close to two years. These shortest-term instruments were financing, at times, at just 2 to 3 basis points, and expectations were that rates would remain low in the face of continued downward pressures on market supply. Bill issuance dipped late in the month as the Treasury prepared for the reinstallation of the debt ceiling, and although issuance then returned to previous levels, it was not enough -- rates were expected to push up only into the high single digits. This low-rate environment for repos and overnights is likely to continue until there is some more relief on the supply front."
She explains, "That relief might be temporary -- Fannie Mae and Freddie Mac are both in the black now that the housing market is making such a strong showing. As a result, the Treasury will soon be receiving $59.4 billion in dividends from Fannie Mae, and then $7 billion from Freddie Mac, and with that influx of cash the Treasury will have less need for financing from the markets. The ongoing sequestration plays a role, as well. While it has not had the impact on the recovery that had been feared, until it is resolved it continues to hang like a cloud over the prospects for growth for the rest of the year."
Cunningham adds, "The most recent appearance of Federal Reserve Chairman Ben Bernanke and the release of minutes from the previous month's Federal Open Market Committee (FOMC) meeting revealed the beginnings of Fed discussions on how and when to scale back its monthly quantitative-easing purchases of $85 billion of Treasury bonds and agency mortgage-backed securities. In his prepared testimony before Congress late in the month, Bernanke pointedly avoided details on the timing of any unwinding of QE, even reiterating the FOMC still had the option of increasing measures if warranted. However, in the question-and-answer session that followed, Bernanke admitted the Fed might in fact start tapering purchases in its "next few meetings.""
In other news, Fitch Ratings distributed a press release entitled, "Fitch: Corporate Cash Managers' Fresh Look at Structured Finance," which tells us, "Persistently low yields have led corporate cash managers and corporate treasury consultants to think more creatively about how to achieve higher returns without taking excessive risk and maintaining appropriate liquidity, according to Fitch Ratings."
Fitch explains, "Cash managers seek safety of principal and liquidity while optimizing yield to the extent possible. Increasingly, this involves dividing a corporation's liquidity needs into several 'buckets' based on when the cash is needed and the accuracy of their cash forecasting process. This more focused analysis of liquidity needs has led some cash managers to invest a portion of their companies' cash for longer time horizons in order to maximize yield."
The release says, "In certain cases, cash may be held for longer term strategic reasons and, therefore, may be invested in longer dated high quality securities offering higher yields than money market funds, demand deposits, or other short-term instruments. We understand that highly rated structured finance (SF) securities are increasingly being considered as part of this shift."
Finally, Fitch adds, "We have seen a growing interest in the money market tranches of SF securities on the part of corporate cash managers. These securities, which showed steady performance during the financial crisis, are designed to be 2a-7 eligible investments for money market funds with final legal maturities of 397 days or less. Approximately 95% of the structures that match assets to liabilities, rather than rely on third-party liquidity, have paid in full and the balances affirmed at 'F1+' by Fitch. This is the predominant structure in the U.S. market today."
ICI's latest "Trends in Mutual Fund Investing, April 2013" was released late last week, showing that money fund assets dropped by $24.5 billion, or 0.9%, in April, after falling $57.6 billion in March, $31.7 billion 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 rebound in holdings of Repurchase Agreements and an increase in Commercial Paper during April. (See Crane Data's May 13 News, "Repo Regains No. 1 Spot in April 30 Portfolio Holdings, CDs Again 2nd.") Money fund assets rebounded in May though. Month-to-date through 5/30, our MFI Daily shows assets rebounded by $36.4 billion, or 0.3%.
ICI's April "Trends" says, "The combined assets of the nation's mutual funds increased by $179.6 billion, or 1.3 percent, to $13.856 trillion in April, 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 $12.13 billion in April, compared with an inflow of $16.11 billion in March.... Money market funds had an outflow of $24.48 billion in April, compared with an outflow of $58.25 billion in March. Funds offered primarily to institutions had an outflow of $10.52 billion. Funds offered primarily to individuals had an outflow of $13.95 billion."
ICI's Portfolio Holdings for April 2013 show that Repos rose by $49.9 billion, or 10.4%, to $529.3 billion (22.9% of assets) after falling sharply in March; they regained their lead as the largest segment of taxable money fund portfolio holdings after being in a 3-way tie with CDs and Treasuries in March. Holdings of Certificates of Deposits, the second largest position, decreased by $26.5 billion to $453.0 billion (19.6%). Treasury Bills & Securities, the third largest segment, decreased by $42.2 billion to $436.9 billion (18.9%).
Commercial Paper remained the fourth largest segment ahead of U.S. Government Agency Securities; CP holdings rose by $18.3 billion to $375.8 billion (16.3% of assets) and Agencies fell by $14.4 billion to $317.2 billion (13.7% of taxable assets). Notes (including Corporate and Bank) fell fractionally again (down $2.8 billion) to $102.1 billion (4.4% of assets), and Other holdings rose by $6.1 billion to $86.4 billion (3.7%).
The Number of Accounts Outstanding in ICI's Holdings series for taxable money funds increased by 26,678 to 24.555 million, while the Number of Funds fell by 3 to 394. The Average Maturity of Portfolios remained flat for the third month in a row at 49 days in April. Over the past year, WAMs of Taxable money funds have lengthened by 4 days.
Finally, note that the archived version of our Money Fund Intelligence XLS monthly spreadsheet -- see our Content Page to download -- has Portfolio Composition and Maturity Distribution totals and final data corrections updated as of April 30, 2013 earlier today. We revise these following the monthly publication of our final Money Fund Portfolio Holdings data.