News Archives: January, 2014

ICI's latest "Trends in Mutual Fund Investing, December 2013" shows that money fund assets increased by $45.1 billion in December, after increasing $4.8 billion in November and decreasing $11.5 billion in October. (MMFs increased for 3 straight months prior to this, up $46.7 billion in September, $20.4 billion in August and $26.8 billion in July.) For calendar 2013, ICI shows money fund assets up by $25.0 billion, or 0.9%. The Institute's December asset totals show a continued rebound in stock fund assets and continued outflows from bond funds (down $34.2 billion in Dec.). (Bond fund assets declined by $124.4 billion in 2013.) Money fund assets have declined in 3 out of 4 weeks in 2014, falling by $13.0 billion month-to-date through Jan. 29 and by $1.8 billion in the week through Wednesday. ICI also released its latest "Month-End Portfolio Holdings of Taxable Money Funds," which confirmed a jump in Repo, Agencies and Treasuris, and a drop in CDs. (See Crane Data's January 13 News, "Govt Agency and Treasuries Jump; Fed Repo Holdings Skyrocket in Dec..")

ICI's December "Trends" says, "The combined assets of the nation's mutual funds increased by $188.6 billion, or 1.3 percent, to $15.010 trillion in December, according to the Investment Company Institute's official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI.... Bond funds had an outflow of $25.09 billion in December, compared with an outflow of $18.24 billion in November." Money funds represent 18.1% of all mutual fund assets.

It adds, "Money market funds had an inflow of $44.10 billion in December, compared with an inflow of $5.08 billion in November. Funds offered primarily to institutions had an inflow of $31.39 billion. Funds offered primarily to individuals had an inflow of $12.71 billion." ICI's "Liquid Assets of Stock Mutual Funds" dipped to 3.5% from 3.8% as stock funds reduced their already razor thin reserves of cash.

ICI's latest weekly "Money Market Mutual Fund Assets" says, "Total money market mutual fund assets decreased by $1.82 billion to $2.706 trillion for the week ending Wednesday, January 29, the Investment Company Institute reported today. Taxable government funds increased by $5.65 billion, taxable non-government funds decreased by $4.71 billion, and tax-exempt funds decreased by $2.76 billion." YTD, Institutional assets have been flat (down $1 billion) while Retail assets have declined by $12 billion.

ICI's Portfolio Holdings for Dec. 2013 show that Repos rebounded by $43.0 billion, or 9.4%, (after falling $23.7 billion in Nov. and $15.1 billion in Oct.) to $501.7 billion (20.5% of assets). Thanks to a massive shift into the Fed's new reverse repo program, repo reclaimed the largest segment of taxable money fund portfolio holdings according to ICI's data series (behind Treasuries and CDs). Treasury Bills & Securities remained the second largest segment with an increase of $18.7 billion to $495.9 billion (20.3%). Holdings of Certificates of Deposits plunged $25.9 billion to $529.8 billion (20.2%) and moved into third place among composition segments.

Commercial Paper, which fell by $10.2 billion, or 2.8%, declined to the fifth largest segment behind U.S. Government Agency Securities. CP holdings totaled $357.9 billion (14.6% of assets) while Agencies rose by $22.3 billion to $367.3 billion (15.0%). Notes (including Corporate and Bank) rose by $11.2 billion to $103.8 billion (4.2% of assets), and Other holdings fell by $7.8 billion to $78.0 billion (3.2%). (The latter was likely due to the decline in Time Deposits as money funds utilized the Fed's repo program instead of their normal shift from dealer repo to TDs at quarter-end.)

The Number of Accounts Outstanding in ICI's Holdings series for taxable money funds increased by 138,116 to 24.113 million, while the Number of Funds fell by 3 to 382. In 2013, the number of accounts fell by over 1.1 million and the number of funds declined by 18. The Average Maturity of Portfolios declined by 2 days to 47 days in Dec. Over the past year, WAMs of Taxable money funds have extended by two days.

Finally, note that Crane Data has begun producing a new "Holdings Reports Issuer Module," which allows subscribers to choose a series of Portfolio Holdings and Issuers and to see a full listing of which money funds own this paper. (Visit our Content Center and the latest Money Fund Portfolio Holdings download page to access the first version of this new file.) We also have updated our January MFI XLS to reflect the 12/31 composition data and maturity breakouts for our entire fund universe.

The Federal Reserve Bank of New York released a "Statement to Revise Terms of Overnight Fixed-Rate Reverse Repurchase Agreement Operational Exercise", which extended its trial repo program with money funds and cash investors by a year and which increased the allotments for investors to $5 billion from $3 billion. The NY Fed says, "As noted in the October 19, 2009, Statement Regarding Reverse Repurchase Agreements, the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York (New York Fed) has been working internally and with market participants on operational aspects of tri-party reverse repurchase agreements (RRPs) to ensure that this tool will be ready to support the monetary policy objectives of the Federal Open Market Committee (Committee). RRPs are a tool that can be used for managing money market interest rates, and are expected to provide the Federal Reserve with greater control over short-term rates."

They explain, "In further support of this goal, the Committee has authorized the Desk to continue the exercise established in September 2013 of offering daily overnight RRPs and to modify the terms. Specifically, the authorization to conduct this exercise was extended one year, through January 30, 2015. Effective with the operation to be announced tomorrow, Thursday, January 30, 2014, the maximum allotment cap will be increased to $5 billion per counterparty per day from its current level of $3 billion per counterparty per day. It is expected that, over the coming months, the maximum allotment cap may be increased further."

The Fed statement continues, "The fixed rate for these auctions continues to be authorized between 0 and 5 basis points. The current fixed rate for the operations will be maintained at 0.03 percent (three basis points). All other terms of the operations will remain the same. The operations will remain open to all eligible RRP counterparties, will use Treasury collateral, will settle same-day, and will have an overnight tenor. The RRP operations will continue to be held from 12:45 pm to 1:15 pm (Eastern Time). Future changes to the maximum bid amount and rate for these RRP operations, or any other key parameter, will be announced with at least one business day prior notice on the New York Fed's website."

They add, "Like earlier operational readiness exercises, this work is a matter of prudent advance planning by the Federal Reserve. These operations do not represent a change in the stance of monetary policy, and no inference should be drawn about the timing of any change in the stance of monetary policy in the future. The results of these operations will be posted on the public website of the New York Fed, together with the results for other temporary open market operations. The outstanding amounts of RRPs are reported as a factor absorbing reserves in Table 1 in the Federal Reserve's H.4.1 statistical release, their remaining maturity is reported in table 2 of that release, and they are reported as liability items in Tables 8 and 9 of that release."

In other news, the Federal Reserve also announced a continuation of its "tapering" and its zero-rate interest policy. The Fed's Statement says, "Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the Committee continues to see the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in February, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $30 billion per month rather than $35 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $35 billion per month rather than $40 billion per month."

The Fed adds, "To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent."

As we mentioned yesterday, new SEC Commissioner Michael Piwowar spoke Monday at the Chamber of Commerce on "Advancing and Defending the SEC's Core Mission". He tells the Chamber, "By way of example, and as I will discuss further, money market fund reform presents an opportunity to both advance and defend the SEC's mission. I have not yet reached any conclusions on the substance of money market reform, but I do want to preview how I am approaching the issue.... As if the SEC does not already have enough to do to advance our core mission, we are also faced with the need to defend it. Currently, I see two outside forces that are threatening our ability to effectively protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation."

Piwowar says, "The first threat is special interests, from all parts of the political spectrum, that are trying to co-opt the SEC's corporate disclosure regime to achieve their own objectives. The Commission, therefore, should carefully consider whether any additional disclosures benefit investors or whether they enable the agenda of special interests to the detriment of investors. With simply our current disclosure requirements, I worry that investors are already suffering from what former SEC Commissioner Troy Paredes calls "information overload." Commissioner Paredes points out that "[i]ronically, if investors are overloaded, more disclosure actually can result in less transparency and worse decisions, in which case capital is allocated less efficiently and market discipline is compromised.""

He continues, "The second threat to our core mission is banking regulators trying to impose their bank regulatory construct on SEC-regulated investment firms and investment products. Yet the Commission -- not the banking or prudential regulators -- is responsible for regulating markets. My concern is that the banking regulators, through the Financial Stability Oversight Council (FSOC or Council), are reaching into the SEC's realm as market regulator. Therefore, one of my first acts as a Commissioner was to request that I be afforded an observational role at FSOC meetings.... The FSOC, within which the banking and prudential regulators exert substantial influence, represents an existential threat to the SEC and the other member agencies."

Piwowar explains, "Last September, the Department of Treasury's Office of Financial Research (OFR) published a study -- and I use the term "study" loosely -- prepared for the FSOC on the asset management industry. The study sets the groundwork for the regulation of asset managers by the FSOC. Among the Council members, only the SEC solicited public feedback regarding the study. I applaud Chair White for doing so. In response, the Commission has received more than 30 comment letters, including one from the Chamber. I vehemently believe that before the FSOC decides whether further study or action is warranted, the collective voices of the public and the SEC should be heard by the members of the Council. This is all the more important because the vast majority of asset management firms are SEC-regulated entities."

He comments, "Another issue on which the SEC has ceded ground to the FSOC and banking regulators is money market fund reform. One of the most shocking decisions in the 80-year history of the SEC was the wholesale abdication of the Commission's responsibility to the FSOC on money market funds. This choice has been widely criticized by former chairmen, commissioners, and SEC senior staff as threatening the independence of the SEC and the other independent financial services regulatory agencies. I am in complete agreement. The only somewhat coherent systemic risk argument about money market funds that I have heard articulated is that a run on money market funds could lead to banks failing because they cannot rollover short-term debt. The moral of that story is not that money market funds have "structural vulnerabilities." It is that banks are too reliant on short-term funding. The banking regulators have the ability to address such a bank regulatory shortcoming directly. Nothing in the Dodd-Frank Act weakened or repealed that authority."

Under a section entitled, "Money Market Fund Reform -- Advancing and Defending the SEC's Core Mission," Piwowar tells us, "I thought I would end with some words on how I am thinking about whether additional money market fund reforms are needed, and, if so, how I will be evaluating each alternative. As an economist, one of the first questions I ask in the context of any rulemaking is "What is the baseline?" In other words, what is the starting point from which I will evaluate the costs and benefits of any proposed regulatory change? In the case of money market funds, it is tempting to start with a baseline of September 2008, when the Reserve Primary Fund "broke the buck." However, the Commission adopted a number of new money market fund regulations in 2010. The stated objectives of those rules were to "increase the resilience of money market funds to economic stresses and reduce the risks of runs on the funds.""

He adds, "Therefore, the proper baseline from which to evaluate any additional money market fund rule proposals is the current regulatory framework, which includes the 2010 reforms. From a cost-benefit perspective, the next relevant questions are "What are the marginal benefits of additional regulations"; and "what are the marginal costs of those additional regulations?" <b:>`_ In order to answer those questions, we need to understand how effective the 2010 regulations were. The Commission's Division of Economic and Risk Analysis ("DERA") has done an excellent job providing the answers to those questions in their 2012 staff report "Response to Questions Posed by Commissioners Aguilar, Paredes, and Gallagher," and in the economic analysis in the Commission's 2013 proposing release for additional money market fund reforms."

Piwowar explains, "After carefully reading both of those documents and engaging in numerous discussions with Commission staff and money market fund participants, I have concluded that the 2010 money market fund regulations were, in economist-speak, "necessary, but not sufficient." They provided much-needed investor protection improvements in the areas of disclosure, liquidity, credit quality, and operations. However, the reforms were not sufficient to address remaining investor protection concerns in at least two areas. Namely, more should be done to mitigate the first mover-advantage enjoyed by investors who run during times of heavy redemptions. There also remains a need to provide investors with more timely information about funds' holdings, including the value of those holdings."

Finally, he says, "I have not reached any conclusions on which alternatives in the Commission's outstanding rule proposal best address these investor protection concerns while preserving the benefits of money market funds for investors and the short-term funding markets. I will be working with Commission staff over the coming weeks and months to evaluate the marginal benefits of the various alternatives -- floating NAV, fees, gates, additional disclosures, etc. -- and their associated costs."

SEC Chair Mary Jo White spoke on "The SEC in 2014" early Monday at the "41st Annual Securities Regulation Institute. She discussed "Money Market Funds" in one segment, saying, "Even when a product is not as new as an over-the-counter derivative, the use of the product may reveal previously unanticipated risks that suggest an evolution in our regulatory approach is warranted. The recent financial crisis provided an unwelcome laboratory for a number of these products. Money market funds, for example, have for decades been an important part of the financial marketplace. As we saw in the financial crisis, however, they can be exposed to substantially heightened redemptions if investors believe that a fund is about to lose value. The resulting instability in their value can harm investors as well as the entities that turn to money market funds for financing."

White continues, "In 2010, the SEC took a first step to address this heightened redemption risk by making the funds more resilient. The rule amendments adopted by the Commission in 2010 were designed to reduce the interest rate, credit, and liquidity risks of money market fund portfolios. The Commission said at the time that it would continue to consider whether further, more fundamental changes to money market fund regulation is warranted."

She tells us, "Currently, the Commission is considering two significant proposals for additional reform that were put out for comment last June. One is a floating NAV for prime institutional money market funds -- the type of fund that experienced problems during the financial crisis. The other proposal would require money market funds under certain circumstances to impose a liquidity fee and permit the imposition of redemption gates. This proposal is designed to stop a "run" and limit the resulting instability. These proposals could be adopted alone or together."

Finally, White explains, "We have received hundreds of letters on the proposals with a wide range of differing views that we are reviewing closely. Completing these reforms with a final rule is a critical priority for the Commission in the relatively near term of 2014."

Another SEC Commissioner, new member Michael Piwowar, also commented on money funds Monday at a Chamber of Commerce event. Fox Business News reports in "Tighter Money Market Funds Regulation Needed: SEC Member", writes, "Money market funds still remain vulnerable to runs by investors, and should be subject to further regulation to reduce such risks, one of the newest members of the U.S. Securities and Exchange Commission said Monday."

They quote Piwowar, "More should be done to mitigate the first mover-advantage enjoyed by investors who run during times of heavy redemptions.... There also remains a need to provide investors with more timely information about funds' holdings, including the value of those holdings." (See the full Piwowar speech "Advancing and Defending the SEC's Core Mission" here and watch for more excerpts tomorrow.)

In other news, Federated Investors' CEO Chris Donahue spoke Friday on the company's latest earnings call (see the Seeking Alpha transcript here). He comments, "On the regulatory front, the SEC continues to digest the voluminous comments filed in response to their money market fund proposals, with 98% of the commenters opposed to the fluctuating NAV for money funds, including leading organizations of government and private sector financial professionals, business representatives, state and municipal leaders and many others. It is clear that money market issuers and investors understand the negative impact and the lack of benefits from the floating NAV."

He adds, "Additionally, approximately 90% of the commenters supported Alternative Two, which is the voluntary gating and fees concept, as proposed with some modifications, which would provide fund boards with the tools to deal with regulators' stated goal: stopping runs. Congress is also monitoring money market fund regulations. In fact, consideration of the concerns of money market fund stakeholders and the negative consequences of impairing, restricting the use of money funds, was specifically listed as an expectation of Congress in the conference report to the large spending bill just recently signed into law."

The Securities & Exchange Commission posted a paper entitled, "The Economic Implications of Money Market Fund Capital Buffers (Working Paper by Craig M. Lewis)," last week under the "What's New" section of its website (and under the "Comments on Proposed Rule: Money Market Fund Reform" page), we learned from Stradley Ronon's Joan Swirsky and John Baker. The SEC paper's Abstract says, "This paper develops an affine term structure for the valuation of money market funds. This valuation framework is then used to consider the economic implications of funds that are supported by a capital buffer. The main findings are twofold. First, relatively small capital buffers are capable of absorbing daily fluctuations between a fund's shadow price and its amortized cost. For example, a fund with a capital buffer of 60 basis points can absorb most day-to-day price risk. The ability to absorb large scale defaults, however, would require a significantly larger and more costly buffer. Second, because a buffer is designed to absorb credit risk, capital providers demand compensation for bearing this risk. The analysis shows that, after compensating capital buffer investors for absorbing credit risk, the returns available to money market fund shareholders are comparable to default free securities, which would significantly reduce the utility of the product to investors."

Lewis, of the SEC's Division of Economic and Risk Analysis, writes in the "Introduction, "U.S. money market funds are open-end investment management companies that are registered under the Investment Company Act of 1940. The principal regulation underlying money market funds is rule 2a-7 under the Investment Company Act, which was promulgated in 1983 and most recently amended in 2010. A mutual fund chooses whether or not to comply with rule 2a-7. A fund that does so may represent itself as a money market fund, rather than, for example, an ultra-short-term bond fund. All other funds are prohibited from suggesting that they are money market funds. Under rule 2a-7, a money market fund must satisfy constraints on portfolio holdings related to liquidity, maturity, and portfolio composition, as well as satisfy a number of operational requirements."

It continues, "Compliant funds also are permitted to use amortized cost accounting when valuing their portfolios rather than market-based valuations. Using amortized cost valuation allows a money market fund to value its assets at acquisition cost, adjusting for any premium or discount over the bond's life. A fund also must calculate its mark-to-market value on a per-share basis, which is commonly referred to as the "shadow price." The price per share of a money market fund share can be rounded to $1.00 provided the shadow price is within one half penny of $1.00. The ability to price at a stable $1.00 is an important distinguishing feature of money market funds compared to other mutual funds."

The SEC report says, "The opportunity for investors to sell assets at amortized cost provides them with an embedded put option to sell assets for $1. That is, since redeeming shareholders settle at amortized cost, any capital losses or liquidity discounts are borne by the remaining investors rather than those redeeming their shares. This wealth transfer to liquidating from remaining shareholders creates an incentive to be the first to redeem shares when asset values drop. Financial turmoil in 2007 and 2008 put money market funds under considerable pressure, which culminated the week of September 15, 2008 when Lehman Brothers Holdings Inc. (Lehman Brothers) declared bankruptcy.... The capital loss associated with the failure of Lehman Brothers caused the [Reserve] Primary Fund to "break the buck."

It explains, "During the week of September 15, 2008, investors withdrew approximately $300 billion from prime (taxable) money market funds, or 14 percent of all assets held in those funds. The heaviest redemptions generally came from institutional funds, which placed widespread pressure on fund share prices as credit markets became illiquid. A Study by the U.S. Securities and Exchange Commission's Division of Economic and Risk Analysis (DERA Study) documents that most of these assets were reinvested in institutional government funds. The DERA Study concludes that this behavior is consistent with a number of alternative explanations that include flights to quality, transparency, liquidity, and performance. It also discusses the possibility that redemption activity may have been partially caused by shareholders exercising the redemption put associated with stable dollar pricing."

The paper comments, "The SEC's response to the market events of 2008 was to initially propose (June 2009) and later adopt (February 2010) amendments to Rule 2a-7. The amendments tightened the risk-limiting conditions of Rule 2a7 by, among other things, requiring funds to maintain a portion of their portfolios in instruments that can be readily converted to cash, reducing the maximum weighted average maturity of portfolio holdings, and improving the quality of portfolio securities. Against this backdrop, the U.S. Securities Exchange Commission is considering additional options to further reform the MMF industry to address potential problems associated with investor tendencies to redeem shares during periods of stress. Concerns about the effect of heavy redemptions on short-term funding markets have prompted the Financial Stability Oversight Council (FSOC) to recommend a number of regulatory alternatives in a report issued in November 2012, which include, among other items, a floating net asset value alternative and two capital buffer alternatives. The first capital buffer alternative recommends a stand-alone 3.0% buffer; the second recommends a 1.0% buffer plus a minimum balance at risk requirement."

It adds, "In June 2013, the Commission proposed a rule that considers two separate reform options. The first is the so-called floating net asset value option which requires funds to price securities at their market values but permits "basis point" rounding (round to $1.0000) at the portfolio level. The second option recommends the use of liquidity fees and redemption gates once certain liquidity thresholds are breached. Additionally, the proposal recommends enhanced diversification disclosures, and stress testing requirements, as well as reporting in Forms N-MFP and PF. The release also considers the two capital buffer alternatives suggested by FSOC and concludes that they are too costly relative to the proposed alternatives. The purpose of this paper is to illustrate the economic effects of requiring a money market fund to be supported by a capital buffer."

Lewis tells us, "Specifically, I document the risk and return characteristics of MMFs associated with a capital buffer, assess the differences between market and amortized cost valuations, and characterize the economic implications of capital buffers. Section 2 describes the valuation of fixed income securities. Section 3 describes the econometric approach used to estimate the stochastic properties of interest rates and credit risk. It also describes the data used to perform these estimates and provides parameter estimates. Section 4 explains my valuation model. In Section 5, I provide Monte Carlo simulation evidence of how MMFs perform under the current regulatory baseline. Section 6 considers the economic implications of a capital buffer. Section 7 offers conclusions."

The paper's Conclusion says, "The topic of money market regulation is the subject of much debate. The objective of this paper is to illustrate the economic effects of requiring a money market fund to be supported by a capital buffer. To put my findings into context, it is important to understand that a capital buffer can be designed to satisfy different potential objectives. One possible objective is to design a buffer so that it is able absorb day-to-day variations in market value relative to the amortized cost of the underlying portfolio assets. My examination of this design strategy demonstrates that a 60 basis point buffer would be sufficient to provide price stability under normal market conditions. Although a 60 basis point buffer is able to withstand most day-to-day price variation, it would most likely fail if a concentrated position, of say 5%, were to default."

It continues, "A larger buffer could protect shareholders from losses related to defaults in concentrated positions, such as the one experienced by the Reserve Primary Fund following the Lehman Brothers bankruptcy. However, if complete loss absorption is the objective, a substantial buffer would be required. For example, a 3% buffer would accommodate all but extremely large losses. A limitation of a large buffer is that the cost of providing this protection would be borne at all times even though it is likely to be significantly depleted only rarely. While a capital buffer would make a money market fund more resilient to deviations between the shadow price and amortized cost, it may be a costly mechanism from the perspective of the opportunity cost of capital. Those contributing to the buffer deploy valuable scarce resources that could be used elsewhere. Moreover, because the capital buffer absorbs fluctuations in the value of the portfolio, much of the yield of the fund will be diverted to funding the capital buffer, which, in turn, will reduce fund yield. Put another way, to the extent that the capital buffer absorbs default risk, those contributing to a capital buffer will demand a rate of return that compensates them for bearing this risk. Since, by construction, a capital buffer absorbs defaults until it is fully depleted, money market funds will allocate that portion of the returns associated with credit risk to capital buffer "investors" and only will be able to offer MMF shareholders returns that mimic those available for government securities. This effectively converts MMFs into "synthetic" Treasury funds."

Finally, Lewis' paper adds, "My findings may have broader implications for capital formation. Many investors are attracted to money market funds because they provide stability but offer higher rates of return than government securities. Since these higher rates of return are intended to compensate for exposure to credit risk and to the extent that fund managers are unable to pass through enhanced yields to MMF shareholders, fund managers may be less willing to invest in risky securities such as commercial paper or short-term municipal securities, particularly if these securities increase the probability that a buffer is depleted. An inability to materially differentiate fund performance on the basis of yield would significantly reduce, but not necessarily eliminate, the utility of money market funds to investors."

A press release entitled, "Federated Investors, Inc. Reports Fourth Quarter and Full-Year 2013 Earnings tells us, "Federated Investors, Inc. (NYSE: FII), one of the nation's largest investment managers, today reported earnings per diluted share (EPS) of $0.39 for Q4 2013 compared to $0.44 for the same quarter last year on net income of $41.1 million for Q4 2013 compared to $49.6 million for Q4 2012. Federated reported 2013 EPS of $1.55 compared to $1.79 for 2012 on 2013 net income of $162.2 million compared to $188.1 million for 2012." (Federated will host its earnings conference call at 9 a.m. Eastern on Jan. 24, 2014. Call 877-407-0782 prior to the 9 a.m. start time to listen in or visit

Federated's release explains, "Money market assets in both funds and separate accounts were $276.0 billion at Dec. 31, 2013, down $8.7 billion or 3 percent from $284.7 billion at Dec. 31, 2012 and up $5.7 billion or 2 percent from $270.3 billion at Sept. 30, 2013. Money market mutual fund assets were $240.0 billion at Dec. 31, 2013, down $15.7 billion or 6 percent from $255.7 billion at Dec. 31, 2012 and up $2.1 billion or 1 percent from $237.9 billion at Sept. 30, 2013. Revenue decreased by $30.1 million or 12 percent due primarily to an increase in voluntary fee waivers related to certain money market funds in order for those funds to maintain positive or zero net yields and a decrease in revenue due to lower average money market and fixed-income assets. The decrease was partially offset by an increase in revenue from higher average equity assets. See additional information about voluntary fee waivers in the table at the end of this financial summary."

It continues, "During Q4 2013, Federated derived 63 percent of its revenue from equity and fixed-income assets (40 percent from equity assets and 23 percent from fixed-income assets), 36 percent from money market assets and 1 percent from other products and services. Operating expenses decreased $6.7 million or 4 percent primarily due to a decrease in distribution expenses associated with increased fee waivers related to the low-yield environment for money market funds, partially offset by an increase in compensation and related expense. Revenue decreased by $67.3 million or 7 percent primarily due to an increase in voluntary fee waivers and was partially offset by an increase in revenue due to higher average equity assets."

Federated's release adds, "During 2013, Federated derived 60 percent of its revenue from equity and fixed-income assets (37 percent from equity assets and 23 percent from fixed-income assets), 39 percent from money market assets and 1 percent from other products and services. Operating expenses decreased by $6.5 million or 1 percent primarily due to a decrease in distribution expenses related to the low-yield environment."

Finally, the release says, "Fee waivers to maintain positive or zero net yields and the resulting negative impact of these waivers could vary significantly in the future as they are contingent on a number of variables including, but not limited to, changes in assets within the money market funds, available yields on instruments held by the money market funds, actions by the Federal Reserve, the U.S. Department of the Treasury, the Securities and Exchange Commission, the Financial Stability Oversight Council and other governmental entities, changes in expenses of the money market funds, changes in the mix of money market customer assets, changes in the distribution fee arrangements with customers, Federated's willingness to continue the fee waivers and changes in the extent to which the impact of the waivers is shared by third parties."

Below, we excerpt from our most recent Money Fund Intelligence "Profile." The latest is entitled, "Treasury Partners' Klein on Portals, Separate Accounts." It says: This month, we interview Jerry Klein, Managing Director/Partner of Treasury Partners, and discuss the online money market fund trading portal business, as well as recent trends in separately managed accounts and cash investing. Our Q&A follows. (Note: Crane Data hosts its 4th annual Money Fund University "basic training" conference starting today and running through Friday at the Providence Renaissance Hotel. See for details; registrations are still being accepted.)

MFI: How long have you been involved with money funds? Klein: Richard Saperstein, Treasury Partners CIO, has been involved in the money markets since the 1980s. That's when he established and ran the Corporate Cash Management Group at Oppenheimer & Company. I joined him there in 1996. At the time, we were primarily focused on separately managed corporate accounts. In the '90s, many small- to mid-cap publicly traded companies were raising large stockpiles of cash, but didn't have the internal resources, meaning treasury departments, to manage that cash. So, Richard assembled a team and launched a platform that enabled companies to fully outsource their cash management requirements by providing investment policy compliance, credit monitoring and analysis, portfolio management, and FASB 115 reporting.

In addition to separately managed portfolios, we've always offered money market funds as an investment option for clients who want to maintain a liquid balance. In 2003, we joined Bear Stearns and built the Bear Stearns money market portal from scratch. After J.P. Morgan acquired Bear in 2008, we decided to spin out and regrouped under a new name, Treasury Partners, in early 2009.

MFI: How many funds are on your portal? Klein: We offer our Portal clients access to approximately 25 fund families representing 150 funds. Although we work primarily with publicly traded companies headquartered in the U.S., many of these clients have offshore subsidiaries that require multiple currencies, so funds are denominated in US Dollar, Euro, GBP, Canadian Dollar, Aussie, and Yen. The number of funds on the Portal has actually decreased slightly over the past five or six years as a result of consolidation in the industry.

MFI: What's the biggest challenge in getting investors onto the portal? Klein: Clearly, the biggest challenge is the interest rate environment. Understandably, when yields on money market funds are in the 0% range, corporate treasurers are spending appreciably less time on fixed income investments. MFI: What types of investors are the biggest users? Klein: We work primarily with corporations, but our client base also includes other types of investors, such as municipalities, hedge funds, and universities.

MFI: What are you working on now? Klein: Actually, we were quite busy during 2013 from a development standpoint. This past summer, we rolled out a mobile platform that enables clients to enter trades from their smart phones. And, clients who want to trade in a dual-user mode, can approve trades from their phones. We included this feature for clients who often had difficulty tracking down "approvers" as deadlines were approaching. Now, with the dual-user mode, senior people in the treasury department can approve a trade instantly, regardless of where they are or whatever else they might be involved in at the time.

We've also been working on a very significant upgrade to our investment policy compliance system, and we anticipate going live with this upgrade later this month. Among the new system's extensive capabilities, it will allow clients to run compliance rules down to the CUSIP-level holdings within the funds. For example, if a client has exposure to Citibank in a bank deposit, they may want to limit that exposure within their investment portfolio. So they'll be able to program a predetermined limit and, when they enter orders to purchase, let's say, a BlackRock or Goldman Sachs fund, the system will check the holdings in those funds and either allow the trade to go through or block it based on the underlying Citibank exposure. They can enter in similar restrictions on country exposures, asset classes, and other characteristics of money market funds. Ultimately, it will give our Portal clients much greater control over how their cash is actually invested within the funds.

The Investment Company Institute posted a new "Viewpoint" comment entitled, "ICI's New Data Release: Further Enhancing the Transparency of Money Market Funds." Written by Senior Economist Chris Plantier, it says, "The 2010 reforms to money market mutual funds greatly enhanced the transparency of these funds, giving regulators, analysts, and investors greater insight into important elements of funds' holdings and operations. The reforms required funds to disclose their entire portfolio holdings to the public on their company websites five business days after the end of each month. Money market funds also are required to file a more detailed disclosure -- SEC Form N-MFP -- with the Securities and Exchange Commission directly. The SEC releases this more detailed data to the public 60 days after it's filed. The SEC does not, however, summarize the data, leaving the public with no non-commercial access to a broad look at holdings across the industry." See the ICI's inaugural "Money Market Fund Holdings, December 2013" here. (Note: Crane Data also collects and publishes Money Fund Portfolio Holdings via our Money Fund Wisdom product.)

ICI's post explains, "To further enhance the transparency and public understanding of money market funds, ICI has decided to release a monthly compilation and summary of taxable money market fund data. Historical data on end-of-month holdings back to December 2010 has been posted on the ICI website, and we will release new data each month going forward. We hope this new data summary will be useful to investors, industry experts, financial analysts, and policymakers, and will help shed light on how the SEC's 2010 money market fund reforms have made the funds' portfolios more robust and resilient."

They continue, "What do money market fund holdings data show? In 2010, the SEC undertook significant reforms to money market fund regulation. One of these reforms required funds to increase the amount of disclosure that they provide to investors and the SEC about their portfolio holdings. Rule 30b1-7 of the Investment Company Act of 1940 requires that money market funds report monthly on every security they hold, as well as certain other portfolio statistics, directly to the SEC on Form N-MFP. These requirements include the following data items: Types of securities held -- title of the issue, CUSIP number (an identifier), and other details Issuer of the securities held, which can be used to examine the geographical distribution of the parent companies of the issuers of the securities held by money market funds; Final legal maturity of each security held, including any "maturity shortening" provisions, such as a demand feature; Daily and weekly liquidity ratios; and, Maturities of overall money market fund portfolios."

Plantier writes in an "Overview of the summary money market fund holdings tables," This section briefly discusses the nine ICI summary tables on taxable money market fund holdings. Table 1 displays the percentage of government and prime money market fund portfolios held in various types of short-term dollar-denominated securities. Table 1 shows that more than 99 percent of government money market funds are invested in Treasury debt, agency debt, or repurchase agreements backed by Treasury or agency debt as of December 2013. By contrast, prime money market funds hold predominately certificates of deposit, commercial paper, and repurchase agreements."

He continues, "Tables 2 and 3 categorize government and prime money market fund holdings by country of issuer, based on the ultimate parent company of the issuer. For example, if a U.S. subsidiary of a German bank enters into a repurchase agreement (backed by U.S. Treasuries) with a government money market fund, this would be counted under the Germany category in Table 2. Table 4 examines the asset-weighted average maturity profile of government and prime money market funds, based on two measures: the weighted-average maturity (WAM), and the weighted-average life (WAL). The SEC's 2010 money market fund reforms require a money market fund's WAM to be 60 days or less, and its WAL to be 120 days or less. Please refer to ICI's list of frequently asked questions about N-MFP data for detailed definitions of WAM and WAL."

The piece adds, "Table 5 reports the daily and weekly liquidity ratios of government and prime money market funds. The SEC's 2010 money market fund reforms require taxable funds to hold at least 30 percent of their assets in securities that are deemed to be liquid within five business days ("weekly liquidity") and at least 10 percent of their assets in securities that are deemed to be liquid in one business day ("daily liquidity"). Government money market funds hold very high levels of weekly liquidity (more than 80 percent on average) because most of their holdings are Treasury debt, short-dated agency debt, or repurchase agreements. Prime money market funds also typically have high weekly and daily liquidity ratios (more than 36 percent and 23 percent, respectively), well above the minimum SEC requirements."

ICI's update also says, "The last four tables provide even greater detail on the maturity structure of taxable money market fund portfolios. Tables 6 and 7 show the maturity distribution of government and prime money market fund holdings by type of security held, respectively, so one can easily see how the short-dated nature of the average money market fund portfolio varies by the type of security. Tables 8 and 9 document the maturity distribution of government and prime money market fund holdings by home country of the issuer's parent."

ICI tells us, "Typically, the percentages of money market funds' portfolios dedicated to various types of securities (e.g., commercial paper vs. repurchase agreements) vary little from month to month. When significant changes do occur, however, further analysis often is required to determine whether those changes reflect supply or demand factors. For example, banks and broker/dealers may be less willing than normal to enter into repurchase agreements at year-end. These entities may prefer to hold Treasuries on their books at the end of the year, rather than temporarily sell them to money market funds via an overnight repurchase agreement. In this case, money market funds do not choose to lend less to banks; rather, banks decide not to borrow as much via repurchase agreements and, hence, from money market funds."

Finally, they say, "This kind of year-end effect appears to have been particularly large at the end of 2013 compared with earlier years. Money market funds managed to find another counterparty to take the place of banks -- namely, the Federal Reserve. In 2013, the Federal Reserve began engaging in a new program of fixed-rate, full-allotment, overnight reverse-repurchase agreements. Money market funds are among the counterparties to this new program. Late last year, the Federal Reserve increased the effective size of its fixed-rate reverse-repo operations, allowing each counterparty to lend the Fed up to $3 billion overnight. On December 31, 2013, $197.8 billion was allotted in the Federal Reserve's reverse repo operations, of which at least $135 billion was allotted to money market funds, according to N-MFP data."

Dechert LLP's Financial Services Group published a brief entitled, "FSB and IOSCO to Consider Standards for Treating Investment Funds and Asset Managers as Global Systemically Important Financial Institutions." It says, "The Financial Stability Board (FSB), in consultation with the International Organization of Securities Commissions (IOSCO), issued "Assessment Methodologies for Identifying Non-Bank Non-Insurer Global Systemically Important Financial Institutions: Proposed High-Level Framework and Specific Methodologies" (Assessment Report) on January 8, 2014. It was prepared at the request of the G20 Leaders, who asked for methodologies to identify systemically important non-bank non-insurer (NBNI) financial entities. This effort is parallel to, and likely to impact, the U.S. Financial Stability Oversight Council (FSOC), which is also considering the extent to which systemic prudential regulation should be applied to a larger group of non-bank financial companies."

Dechert's "Summary of the Assessment Report," explains, "The Assessment Report looks at the systemic risks that may be posed by finance companies, broker/dealers and asset managers. It identifies three channels where financial distress of an NBNI is most likely to be transmitted to other financial firms and markets so as to threaten global financial stability: (i) the exposures of creditors, counterparties, investors, and other market participants to the NBNI; (ii) the liquidation of assets by the NBNI financial entity, which could trigger a decrease in asset prices, significantly disrupt trading or funding in key financial markets, or cause significant losses or funding problems for other firms; and (iii) the inability or unwillingness of the NBNI financial entity to provide a critical function or service relied upon by market participants or clients (e.g., borrowers), for which there are no ready substitutes."

The brief continues, "To measure systemic stability threats, the basic set of impact factors the Assessment Report suggests are: (i) Size – the importance of a single entity for the stability of the financial system is assumed to increase with the scale of financial activity that the entity undertakes. (ii) Interconnectedness – systemic risk can arise through direct and indirect inter-linkages between entities within the financial system so that individual failure or distress can have repercussions throughout the financial system. (iii) Substitutability – the systemic importance of a single financial entity is assumed to increase in cases where it is difficult for other entities in the system to provide the same or similar services in a particular business line or segment of the global market in the event of a failure. (iv) Complexity – the systemic impact of a financial entity's distress or failure is expected to be positively related to its overall complexity (i.e., its business, structural and operational complexity). The more complex a financial entity, the more difficult, costly and time-consuming it will be assumed that company's resolution will be. (v) Global activities (cross-jurisdictional activities) – the global impact from a financial entity's distress or failure will be presumed to vary in line with its share of cross-border assets and liabilities. The greater the global reach of a financial entity, the more widespread the spill-over effects from its failure."

Dechert tells us, "The quantitative information derived from these indicators may be supplemented with qualitative information incorporated through supervisory judgment. The Assessment Report states that a key challenge in assessing the global systemic importance of NBNI financial entities is the difficulty in obtaining appropriate and consistent data/information. The Assessment Report sets forth thresholds for systemic significance. Based on a preliminary analysis of NBNI financial entities, the FSB, in consultation with IOSCO, decided to set the materiality threshold as follows: (i) For finance companies and for market intermediaries (broker-dealers), the threshold is set at USD 100 billion in "balance sheet total assets" for determining the firms that will be assessed in detail by the relevant assessment methodology. (ii) For investment funds, the threshold is set at USD 100 billion in net assets under management (AUM). Alternatively, the FSB and IOSCO are seeking comments on whether size should be evaluated by looking at a family of funds, an asset manager on a stand-alone basis or asset managers and their funds collectively."

Finally, the brief explains, "The FSB and IOSCO have requested comments on the Assessment Report, which must be filed by April 7, 2014. Parties that may potentially be impacted by FSB and IOSCO actions and related FSOC actions should consider commenting.... As noted, in the United States, the FSOC is engaged in an ongoing process of considering how asset managers and asset management entities should be evaluated for purposes of potential designation as systemically important financial institutions. As part of this process, the Department of the Treasury's Office of Financial Research in October 2013 issued a report on Asset Management and Financial Stability, as to which the U.S. Securities and Exchange Commission requested comments. See Dechert OnPoint U.S. Office of Financial Research Issues Report on Asset Management.

The ICI released its latest "Market Mutual Fund Assets" report yesterday, which showed money fund assets declining for the second straight week in 2014. Assets clung to the $2.7 trillion level, but they've declined by $18 billion since the start of the year after climbing during December and throughout the second half of 2013. ICI's release says, "Total money market mutual fund assets decreased by $14.02 billion to $2.701 trillion for the week ending Wednesday, January 15, the Investment Company Institute reported today. Taxable government funds increased by $3.53 billion, taxable non-government funds decreased by $15.77 billion, and tax-exempt funds decreased by $1.79 billion." During 2013, money fund assets increased by $14 billion, or 0.5%, after rising incrementally in 2012 too (up $10 billion, or 0.4%).

The release continues, "Assets of retail money market funds decreased by $6.27 billion to $925.07 billion. Taxable government money market fund assets in the retail category decreased by $1.40 billion to $198.26 billion, taxable non-government money market fund assets decreased by $3.37 billion to $529.87 billion, and tax-exempt fund assets decreased by $1.50 billion to $196.94 billion." Retail money funds account for 34.3% of all money fund assets with non-govt (Prime) retail MMFs accounting for 19.6% of total assets, government retail MMFs accounting for 7.3%, and tax exempt retail 7.3%.

ICI adds, "Assets of institutional money market funds decreased by $7.76 billion to $1.775 trillion. Among institutional funds, taxable government money market fund assets increased by $4.93 billion to $752.42 billion, taxable non-government money market fund assets decreased by $12.40 billion to $947.68 billion, and tax-exempt fund assets decreased by $290 million to $75.36 billion." Institutional money funds account for 65.7% of all money fund assets with non-govt (Prime) institutional MMFs accounting for 35.1% of total assets, government inst MMFs accounting for 27.9%, and tax exempt inst 2.8%.

In other news, BlackRock CEO Larry Fink hosted the company's Q4 conference call (see the transcript from Seeking Alpha) yesterday, but the discussion barely even mentioned money market funds. Fink commented, "The interest rate environment led many liquidity-oriented investors to sell long-duration assets, which made up more than 70% of our iShares fixed income book. As a result, we saw more than $7 billion of fixed income outflows this year, a sizable reversal for the iSharesBond business from a strong 2012. Helping to offset the pressure on the long-duration side, our short-duration fixed income suite gathered nearly $9 billion this year, led by our floating rate bond fund. BlackRock is focused on strengthening our offerings for clients, seeking protection in a rising rate environment, by offering expanding product set that includes 4 new U.S. funds, including short duration versions of our flagship high-yield and our investment-grade credit products and short maturity and liquidity income funds."

Later Fink was asked about SIFIs, IOSCO and the FSB. He comments, "Well, I thought the IOSCO Financial Stability Board's paper on a framework was a good framework. We actually agree with their framework.... Their framework really spoke about products and how they need to look at products. This is something that we've been discussing here in the United States. As I've said repeatedly, it was not the largest institutions [in] asset management that created any of the real problems. With Long-Term Capital in the late '90s, that would not have been a large-scale platform. You had Bear Stearns Asset Management with a leveraged mortgage fund that created the beginning of the crisis here in the United States. And the money market crisis was created by the #9 largest money market fund that was reaching for yield, which plays into this whole concept. As you look at where risk may lie, risk is going to be lying in products. So we need to make sure that products are going to be analyzed in making sure people understand the systemic risk around products and the leverage associated with those products. Clearly, I think the IOSCO plan [indicated that plain] vanilla mutual funds probably don't create those types of systemic risks."

Finally, Fink says on the bubble in bonds, "I have always believed Retail has overly invested in fixed income. I think this is one of the tragedies that we have in America today, that so many individual investors have been so panicked by the media, by the economic conditions, by job conditions. Much of it is reasonably understood. And as a result, so many individuals have kept their money safe as a thought and overinvested in fixed income as a safe haven. Well, obviously, if you believe interest rates are going up, it's not a safe place to be anymore. [But] you're going to have long-term trends that are going to be constructive for fixed income. So despite the views that we may have systematically higher rates in the future, it is going to produce more demand for fixed income. And this is one of the reasons why we had such a large credit rally and why we believe that will persist. And this is why we have not been totally afraid of the realities of ... the changing realities of the Federal Reserve and the manner in which they are handling their monetary policy."

Yesterday, U.S. Securities & Exchange Commission Commissioner Dan Gallagher spoke on "The Philosophies of Capital Requirements," and discussed bank regulators' recent "disturbing fascination with imposing bank-theory capital requirements on non-bank institutions". He comments, "[T]here's been a great deal of attention paid to regulatory capital recently, including new Dodd-Frank requirements, Basel III implementation (or non-implementation) issues, and even bipartisan Congressional efforts to raise capital requirements for large banks. Almost all of that attention has naturally centered on the question of how much capital a financial institution should be required to hold. What's missing from the conversation, however -- and what I'd like to focus on today -- is a proper understanding of the theories behind capital requirements, both for banks and for non-bank financial institutions."

Gallagher explains, "Bank capital requirements serve as an important cushion against unexpected losses. They incentivize banks to operate in a prudent manner by placing the bank owners' equity at risk in the event of a failure. They serve, in short, to reduce risk and protect against failure, and they reduce the potential that taxpayers would be required to backstop the bank in a time of stress. Capital requirements for broker-dealers, however, serve a different purpose. In the capital markets, we want investors and institutions to take risks -- informed risks that they freely choose in pursuit of a return on their investments. Eliminate the risk of an investment, and you eliminate the opportunity for a return as well. Capital markets, in short, are predicated on risk."

He tells us, "These two models of capital requirements, in other words, differ in fundamental ways -- it's certainly not a matter of comparing apples to apples. Applying bank-based capital requirements to non-bank financial entities, in fact, is rather like trying to manage an orange grove using apple orchard techniques -- it's the equivalent of trying to determine how best to grow oranges to be used in orange pie, orangesauce, and, as a special treat, delicious caramel oranges on a stick.... In order to fully understand the danger of imposing bank capital requirements on non-bank institutions, it's helpful to take a bit of a detour to review the actions of the Federal Reserve during the height of the financial crisis, which leads us to that dreaded word: bailouts.... As you may recall me noting, I'm starkly against bailouts. But offering access to the discount window to illiquid, but not insolvent, banks against good collateral comports with the traditional role of a central bank as the lender of last resort and falls outside even an expansive definition of the dreaded concept of a bailout. Indeed, it falls squarely within the traditional understanding of a central bank's paramount purpose."

Gallagher continues, "So what does all of this have to do with capital? To answer that question requires a better understanding of the recent and disturbing fascination with imposing bank-theory capital requirements on non-bank institutions. Here, the recent FSOC intervention in the money market mutual fund space is quite instructive. In August 2012, a lack of consensus among the Commission on the best way to proceed with proposing reforms to our money market fund rules led to an ill-advised abdication of the issue to FSOC, which enthusiastically took up the cause, leading to an unprecedented -- albeit invited -- incursion into the regulatory purview of an independent regulator. The result was the issuance, in November 2012, of a report entitled "Proposed Recommendations Regarding Money Market Mutual Fund Reform," in which FSOC floated -- pun intended -- the concept of a "NAV buffer," that is, a capital requirement for money market funds."

He says, "As I delved into the issue of money market fund reform following my return to the SEC as a Commissioner, it quickly became apparent to me that, perhaps in the hopes of staving off more stringent regulation, the industry was coalescing behind a capital buffer requirement of approximately 50 basis points, to be phased in over a several year period. For the largest money market funds, this would have resulted in an approximately 1 to 200 ratio -- a $500 million buffer to support $100 billion in investments. This would amount to chicken feed in any serious capital adequacy determinations. The ostensible reasoning behind a capital buffer for money market funds is that it would serve to mitigate the risk of investor panic leading to a run on a fund. Common sense, however, belies this notion. Do we really believe that investor panic would be assuaged by the comforting knowledge that for every one dollar they had on deposit, the money market fund had set aside half a penny?"

Gallagher adds, "Common sense also leads to the conclusion that there is no reason to assume that this view of capital requirements as a panacea to mitigate run risk is limited to money market funds. Indeed, the now notorious "Asset Management and Financial Stability" report issued by Treasury's Office of Financial Research last September featured similar reasoning, as reflected in its implied support for "liquidity buffers" for asset managers. As I noted in my statement at last June's open meeting at which the Commission voted to propose reforms to our money market fund rules, which by the way thankfully did not include a capital buffer, "It became clear to me early on in this process that the only real purpose for the proposed buffer was to serve as the price of entry into an emergency lending facility that the Federal Reserve could construct during any future crisis -- in short, the "buffer" would provide additional collateral to facilitate a Fed bailout for troubled MMFs.""

He continues, "Indeed, some Fed officials and academics have suggested as much. In a speech delivered last February, New York Fed President Bill Dudley, while expressing support for the FSOC-proposed money market fund reform mechanisms of a NAV buffer and a "minimum balance at risk," explained his concern that "even after such reforms, we would still have a system in which a very significant share of financial intermediation activity vital to the economy takes place in markets and through institutions that have no direct access to an effective lender of last resort backstop." He went on to raise the possibility of expanding access to the lender of last resort to additional entities in exchange for "the right quid pro quo -- the commensurate expansion in the scope of prudential oversight." Arguing that "[s]ubstantial prudential regulation of entities -- such as broker-dealers -- that might gain access to an expanded lender of last resort would be required to mitigate moral hazard problems," he concluded, "Extension of discount window-type access to a set of nonbank institutions would therefore have to go hand-in-hand with prudential regulation of these institutions.""

Gallagher tells us, "Fed Governor Daniel Tarullo, on the other hand, indicated his discomfort with extending access to the discount window to non-bank entities in a speech last November, noting that he was "wary of any such extension of the government safety net." In the context of addressing the "vulnerabilities" of short-term wholesale funding, he stated that he "would prefer a regulatory approach that requires market actors using or extending short-term wholesale funding to internalize the social costs of those forms of funding" -- that is, an increased capital charge."

He states, "All of this adds up to a terribly muddled situation. Is the Fed seeking to impose bank-based capital charges on non-bank entities in conjunction with granting them access to the discount window at the cost of submitting to prudential regulation, as Mr. Dudley suggests? Or is the situation just the opposite, as Governor Tarullo implies -- would those additional capital charges be intended to prevent non-prudentially regulated financial entities from ever relying upon, as Governor Tarullo puts it, an extension of the "government safety net" the discount window provides? Put another way, is the goal to expand the Fed's role by making it the lender of last resort to non-bank entities such as money market funds and broker dealers, or is it to use its Bank Holding Company Act authority and its role in FSOC to dictate capital requirements to non-bank entities in order to prevent those entities from ever gaining access to the discount window?"

Gallagher adds, "These are more than purely semantic questions, although semantics play a role: one man's expansion of the Fed's role as the lender of last resort is another man's institutionalization of bailouts for failing financial institutions. In my opinion, both Governor Tarullo and Mr. Dudley raise very good points that warrant a healthy debate. The issues they raise, however, as well as the more general issue of how much capital is enough in the banking and capital markets, create a degree of confusion about the Fed's role as the lender of last resort. Should the Fed still perform that role? If so, when and for what entities? Does such lending, in fact, constitute a bailout? All of these questions require answers as we debate questions of capital adequacy. If we are to assume that the Fed will not, or cannot, expand its role as the lender of last resort to non-bank entities, including non-bank subsidiaries of bank holding companies, would it ever be possible to set capital requirements at a level that would guarantee avoidance of 2008-type scenarios? I think not, even if we were to impose capital requirements of 100%. To me, therefore, capital markets regulators simply cannot stray from the theory of capital as a tool to facilitate the unwinding of a failed firm with the goal of returning customer assets."

Finally, he comments, "[R]egulatory capital requirements play a tremendous role in incentivizing financial institutions' holdings. All the more important, therefore, that regulators use the right tool for the right job. We rightly take great pride in our capital markets, the deepest and safest in the world. We're an entrepreneurial nation, and taking risks, whether with respect to investments or otherwise, is as American as apple pie. Superimposing upon those markets a capital regime based on the safety-and-soundness banking paradigm, on the other hand, would be as sensible as orange pie."

Fitch Ratings weighed in on the global regulatory debate over SIFIs, or systematically important financial institutions with a statement entitled, "FSB's Nonbank SIFI Rules Will Have Narrow Impact." The comment explains, "A proposed methodology for the identification of nonbank, noninsurance financial institutions that pose systemic risks to the global economy appears unlikely to affect a large number of institutions, according to Fitch Ratings. The framework, outlined by the Financial Stability Board (FSB) in a consultative paper last week, includes preliminary sector-specific criteria for designation as a systemically important financial institution (SIFI) that would likely affect only a small number of nonbank institutions (finance companies, securities firms, regulated funds and hedge funds) with total assets exceeding very high thresholds. However, the proposed treatment of large asset managers (as opposed to their funds), stands out as an area where additional clarity from global regulators will be required before a full understanding of the FSB methodology is possible."

By way of background, last week the Financial Stability Board issued a release entitled, "Proposed Assessment Methodologies for Identifying Non-Bank Non-Insurer Global Systemically Important Financial Institutions." It says, "The Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO) are publishing today for public consultation Assessment Methodologies for Identifying Non-bank Non-insurer Global Systemically Important Financial Institutions (NBNI G-SIFIs). Systemically important financial institutions (SIFIs) are institutions whose distress or disorderly failure, because of their size, complexity and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity."

Fitch's update tells us, "The paper included specific proposed guidelines for the identification of institutions whose large size, complexity or interconnectedness may pose risks for the broader financial system in the event of the firm's failure. Specific size thresholds were proposed to serve as an initial filter to identify finance companies (fincos), broker-dealers, traditional asset managers and hedge funds that warrant additional consideration. In addition, other indicators include use of leverage, complexity, counterparty risk, substitutability and cross-jurisdictional issues."

They continue, "We see little or no future impact from the SIFI designation framework among the largest firms in the U.S., where the number of institutions with assets exceeding the $100 billion threshold is very small. Among the institutions that meet the size threshold are Fannie Mae and Freddie Mac, which are under government conservatorship and unlikely to be named SIFIs. GE Capital, already deemed to be a SIFI, along with American Express and Ally Financial (both reviewed under the bank SIFI framework) are also among the largest institutions.... Aside from Goldman Sachs and Morgan Stanley, already designated as global SIFIs, no other securities firms are expected to meet the proposed size and complexity standards outlined by the FSB."

Fitch adds, "With respect to the asset management sector, the FSB proposal appears to be primarily focused at the fund level, which appears different from a prior comment by the U.S. Treasury Department's Office of Financial Research (OFR), which focused on systemic risk at the asset management company level. That said, the FSB will explore whether the focus should apply more broadly at the fund family or asset manager level. We estimate that there are only 14 U.S. funds that would exceed the threshold, and thus attract additional examination of their potential systemic importance. However, if the focus is at the asset manager level, the number of U.S. firms that could potentially be impacted would be materially higher. Regardless of whether the focus is ultimately on asset management companies or their funds under management, there will likely be active discussion among regulators and market participants as to the extent to which either introduces systemic risk or simply transmits the views and acts of their investors."

Finally, Fitch adds, "In our view, regulated open-end and closed-end funds do not present a significant source of systemic risk based on the indicators the FSB cited as potential signals of heightened systemic risk. Regulated open-end funds do not use excessive leverage, net counterparty exposures are minimal, and, for most asset classes, substitutability does not appear to be an issue.... On the other hand, certain large and leveraged hedge funds could pose broader systemic risk in times of market stress and are an appropriate area of focus. The FSB worked together with the International Organization of Securities Commissions (IOSCO) to develop the proposal. The methodology is open for public comment until April 7."

According to Crane Data's Money Fund Intelligence XLS, only three money market mutual funds are over $100 billion in (total portfolio) assets -- Vanguard Prime MMF (VMMXX) with $131.2 billion, Fidelity Cash Reserves (FDRXX) with $120.6B, and JPMorgan Prime MM (CJPXX) with $115.6B. If we look at money fund managers, nine managers currently run over $100 billion (in US MMFs) -- Fidelity ($428.3B), JPMorgan ($251.8B), Federated ($229.1B), BlackRock ($208.2B), Vanguard ($175.7B), Dreyfus ($169.3B), Schwab ($166.7B), Goldman Sachs ($141.7B), and Wells Fargo ($123.3B). (Note: For more on the ongoing discussion over potential SIFIs, see also our Oct. 13, 2011, News, "FSOC Lays Out Framework for Determining SIFIs Among Nonbanks".)

The Federal Reserve Bank of New York issued a "Statement to Revise Terms of Overnight Fixed-Rate Reverse Repurchase Agreement Operational Exercise" yesterday, and its release summarized, "The terms of the daily, fixed-rate overnight reverse repo operational exercise have been revised, effective Wednesday, January 15, 2013. The timing of the operations will move an hour and half later in the day, to 12:45–1:15pm (Eastern Time)." This marks the seventh time the Fed has changed the terms of its demo program, which attracted a stunning $139.2 billion from money funds in the month ended Dec. 31, 2013, according to our most recent Money Fund Portfolio Holdings collection (see yesterday's "News"). The Fed has increased the rate several times (and decreased it once; it's now 3 bps), it has raised the limit funds may invest a couple of times (now $3B), and now has expanded the time window for the program.

The Fed's latest Statement explains, "As noted in the October 19, 2009, Statement Regarding Reverse Repurchase Agreements, the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York (New York Fed) has been working internally and with market participants on operational aspects of tri-party reverse repurchase agreements (RRPs) to ensure that this tool will be ready to support the monetary policy objectives of the Federal Open Market Committee (Committee). RRPs are a tool that can be used for managing money market interest rates, and are expected to provide the Federal Reserve with greater control over short-term rates."

It continues, "The Desk continues to enhance operational readiness and increase its understanding of the impact of RRPs through technical exercises. As per the September 20, 2013, Statement Regarding Overnight Fixed-Rate Reverse Repurchase Agreement Operational Exercise, the Committee instructed the Desk to further examine how a potential overnight, fixed-rate full-allotment RRP facility might work and how it might affect short-term interest rates."

The NY Fed continues, "In further support of this goal, the Desk will be changing the timing of these operations, effective Wednesday, January 15. The operation time will move one and a half hours later, to 12:45-1:15 pm (Eastern Time). All other terms of the operations remain the same."

Finally, the NY Fed adds, "Like earlier operational readiness exercises, this work is a matter of prudent advance planning by the Federal Reserve. These operations do not represent a change in the stance of monetary policy, and no inference should be drawn about the timing of any change in the stance of monetary policy in the future. The results of these operations will be posted on the public website of the New York Fed, together with the results for other temporary open market operations. The outstanding amounts of RRPs are reported as a factor absorbing reserves in Table 1 in the Federal Reserve's H.4.1 statistical release, their remaining maturity is reported in table 2 of that release, and they are reported as liability items in Tables 8 and 9 of that release."

Crane Data's MF Portfolio Holdings collection shows 74 money funds reporting holdings of the Fed's repos, with 14 of the 20 largest money funds buying major slices and 17 funds maxing out the $3 billion limit. The 10 largest fund portfolios (and portfolio asset totals) with Fed repo holdings include: Fidelity Cash Reserves ($119.0B), JP Morgan Prime MM ($116.1B), Western Asset Inst Lq Res ($79.6B), Fidelity Inst MM MMkt ($71.2B), BlackRock Lq TempFund ($57.0B), JP Morgan US Govt ($55.5B), Federated Prm Oblg ($42.9B), Wells Fargo Adv Hrtg ($40.4B), Prudential Core Taxable MMkt ($40.1B), and Schwab Cash Reserves ($39.4B). Each of these bought $3 billion, except Fidelity Cash ($2.95B), Wells Adv ($1.45B), and Pru Core ($700M). Large funds not participating included Vanguard Prime, BlackRock Cash Inst, some Dreyfus funds and some 100% Treasury funds.

J.P. Morgan Securities most recent "Prime money market fund holdings update: December 2013" comments, "The total allotment of the year-end FARRP across MMF counterparties totaled more than $155bn across 82 of the 94 eligible counterparties for an average of about $1.9bn per counterparty. 25 of the 82 funds that we counted were allotted the maximum per counterparty amount of $3bn while 38 of the funds took in between $1bn and $2.95bn.... 19 funds took in between $50mn to $1bn. Prime MMFs that participated accounted for about $85bn of the total, which represented about 7% of year-end assets for those funds. Government MMFs that participated accounted for $72bn, which represented a more significant 13% of year-end assets."

It adds, "The large usage of FARRP by MMFs was not surprising given the typical tight supply conditions going into year-end as banks and dealers manage their balance sheets, while cash investment needs typically increase. But the confluence of bank balance sheet management and reduced dealer financing needs into this past year-end combined to keep supply tighter than usual. Repo outstanding alone declined by about $370bn in a span of about 1 month heading into year-end (between 11/27/13 and 1/1/14), about $240bn of which were Treasury collateral. The average year-end decline in total repo outstanding from 2009 to 2012 was about $280bn and about $150bn for Treasury collateral only. Such a large decline in supply forced MMFs and other liquidity investors to seek alternatives, mainly the FARRP."

Crane Data released its January Money Fund Portfolio Holdings data Friday, and our latest collection of taxable money market securities, with data as of Dec. 31, 2013, shows a jump in Agencies, Repo and Treasuries, and a huge increase in repo purchased through the Federal Reserve Bank of New York's reverse repo program. CDs were flat while CP and Other (primarily Time Deposits) holdings dropped sharply. Money market securities held by Taxable U.S. money funds overall (those tracked by Crane Data) increased by $55.5 billion in December to $2.507 trillion. (The asset increase occurred primarily in Government and Treasury funds; last month assets had shifted into Prime funds on the heels of the Treasury debt ceiling scare.) Portfolio assets declined by $10.7 billion in November and by $9.4 billion in October, but rose by $55.3 billion in Sept., $1.1 billion in August and $68.9 billion in July. CDs remained the largest holding among taxable money funds, followed by Treasuries, Repo, CP, Agencies, Other, and VRDNs. Money funds' European-affiliated holdings plummeted on the Repo shift into the Fed from dealer balance sheets and is now 23.3% of holdings (down from 30.0% last month). Below, we review our latest portfolio holdings statistics.

Among all taxable money funds, Certificates of Deposit (CD) holdings were flat, decreasing $447 million to $535.3 billion, or 21.4% of holdings. Treasury holdings, the second largest segment, increased by $28.3 billion to $505.1 billion (20.2% of holdings). Repurchase agreement (repo) holdings jumped $48.5 billion to $501.9 billion, or 20.0% of fund assets. (If you exclude the NY Fed’s massive $139.2 billion in repo, though, holdings would have plunged.) Government Agency Debt jumped by $49.0 billion and into fourth place among composition segments; agencies now total $391.3 billion (15.6% of assets). Commercial Paper (CP) fell to the fifth largest segment; it declined by $30.7 billion to $381.7 billion (15.2% of holdings). Other holdings, which includes Time Deposits, plunged $35.5 billion to $148.4 billion (5.9% of assets). VRDNs held by taxable funds dropped by $3.7 billion to $43.3 billion (1.7% of assets). (Crane Data's Tax Exempt fund data will be released in a separate series Tuesday and our “offshore” holdings will be released Wednesday.)

Among Prime money funds, CDs still represent about one-third of holdings, or 34.1% (almost the same as the 34.2% of a month ago), followed by Commercial Paper (24.31%, down from 26.3%). The CP totals are primarily Financial Company CP (14.2% of holdings) with Asset-Backed CP making up 6.2% and Other CP (non-financial) making up 4.0%. Prime funds also hold 7.8% in Agencies (up from 6.8%), 6.0% in Treasury Debt (down from 6.3%), 2.4% in Other Instruments, and 4.8% in Other Notes. Prime money fund holdings tracked by Crane Data total $1.570 trillion (up from $1.567T), or 62.6% (down from 63.9%) of taxable money fund holdings' total of $2.507 trillion. Government fund portfolio assets totaled $453.8 billion, up strongly from $439.9 billion last month, while Treasury money fund assets totaled $483.4 billion, up sharply from the $444.3 billion in November.

European-affiliated holdings plummeted by $151.1 billion in December to $583.5 billion (among all taxable funds and including repos); their share of holdings plunged to 23.3%. Eurozone-affiliated holdings also plummeted (down $94.8 billion) to $336.7 billion in Dec.; they now account for 13.4% of overall taxable money fund holdings. Asia & Pacific related holdings grew by $1.6 billion to $314.0 billion (12.5% of the total), while Americas related holdings skyrocketed $205.9 billion to $1.609 trillion (64.2% of holdings).

The Repo totals were made up of: Government Agency Repurchase Agreements (down $14.6 billion to $192.7 billion, or 7.7% of total holdings), Treasury Repurchase Agreements (up $60.4 billion to $231.2 billion, or 9.2% of assets and Other Repurchase Agreements (up $2.8 billion to $78.0 billion, or 3.1% of holdings). The Commercial Paper totals were comprised of Financial Company Commercial Paper (down $24.4 billion to $222.0 billion, or 8.9% of assets), Asset Backed Commercial Paper (up $1.0 billion to $97.2 billion, or 3.9%), and Other Commercial Paper (down $7.3 billion to $62.4 billion, or 2.5%).

The 20 largest Issuers to taxable money market funds as of Dec. 31, 2013, include: the US Treasury ($505.1 billion, or 20.2%), Federal Home Loan Bank ($236.1B, 9.4%), Federal Reserve Bank of New York ($139.2B, 5.6%), Bank of Tokyo-Mitsubishi UFJ Ltd ($65.7B, 2.6%), Sumitomo Mitsui Banking Co ($63.0B, 2.5%), Federal National Mortgage Association ($61.3B, 2.4%), Bank of Nova Scotia ($59.6B, 2.4%), JP Morgan ($59.0B, 2.4%), Federal Home Loan Mortgage Co ($58.3B, 2.3%), BNP Paribas ($57.3B, 2.3%), Citi ($53.3B, 2.1%), RBC ($52.6B, 2.1%), Credit Suisse ($45.1B, 1.8%), Credit Agricole ($42.5B, 1.7%), Bank of America ($42.4B, 1.7%), Wells Fargo ($42.2, 1.7%), Deutsche Bank AG ($42.0B, 1.7%), Barclays Bank ($38.8B, 1.6%), Toronto-Dominion Bank ($37.7B, 1.5%) and Natixis ($36.5B, 1.5%).

In the repo space, the Federal Reserve took over issuance of more than an entire quarter of the repo market held by money funds; its RPP program issuance (held by MMFs) jumped by a spectacular $122.9 billion to $139.2B. The 10 largest Repo issuers (dealers) (with the amount of repo outstanding and market share among the money funds we track) include: Federal Reserve Bank of New York ($139.2B, 27.7%), Bank of America ($33.7B, 6.7%), BNP Paribas ($33.6B, 6.7%), Citi ($25.4B, 5.1%), Goldman Sachs ($23.7B, 4.7%), Barclays ($23.2B, 4.6%), Credit Suisse ($19.6B, 3.9%), RBC ($19.3B, 3.8%), Morgan Stanley ($19.2B, 3.8%), and Deutsche Bank ($18.8B, 3.7%).

The 10 largest CD issuers include: Sumitomo Mitsui Banking Co ($55.9B, 10.5%), Bank of Tokyo-Mitsubishi UFJ Ltd ($42.5B, 8.0%), Bank of Nova Scotia ($33.4B, 6.3%), Toronto-Dominion Bank ($31.8B, 6.0%), Bank of Montreal ($28.7B, 5.4%), Rabobank ($24.0B, 4.5%), Mizuho Corporate Bank Ltd ($23.3B, 4.4%), Credit Suisse ($20.1B, 3.8%), Wells Fargo ($18.0B, 3.4%), and Citi ($18.0B, 3.4%).

The 10 largest CP issuers include: JP Morgan ($27.1B, 8.1%), Westpac Banking Co ($17.5B, 5.2%), Commonwealth Bank of Australia ($16.5B, 4.9%), FMS Wertmanagement ($12.3B, 3.4%), Skandinaviska Enskilda Banken AB ($12.0B, 3.6%), RBC ($11.9B, 3.5%), Toyota ($10.6B, 3.1%), Nordea Bank ($10.4B, 3.1%), Societe Generale ($10.2B, 3.0%), and HSBC ($10.0B, 3.0%).

The largest increases among Issuers of money market securities (including Repo) in December were shown by: the Federal Reserve Bank of New York (up $122.9B to $139.2B), Federal Home Loan Bank (up $31.3B to $236.1B), the US Treasury (up $28.3B to $505.1B), Federal National Mortgage Association (up $18.5B to $61.3B), and Natixis (up $9.4B to $36.5B). The largest decreases among Issuers were primarily Repo dealers (who normally see quarter-end outflows, but they were unusually large in Dec.) and include: Deutsche Bank (down $27.5B to $42.0B), Societe Generale (down $20.6B to $31.3B), BNP Paribas (down $17.7B to $57.3B), DnB NOR Bank ASA (down $15.5B to $14.5B), Barclays (down $12.7B to $38.8B), and Credit Agricole (down $11.0B to $42.5B).

The United States substantially increased its position as the largest segment of country-affiliations and now represents 64.2% of holdings, or $1.388 trillion. Canada moved into second place (8.7%, $219.2B) and Japan (7.7%, $191.8B) moved into third place, ahead of now-fourth place ` France <b:>`_ (7.3%, $182.8B). Australia (3.8%, $96.4B) jumped up to fifth place, while the UK (3.5%, $86.7B) and Sweden (3.4%, $86.2B) dropped to sixth and seventh place among affiliated issuers. The Netherlands (3.0%, $74.4B), Germany (2.9%, $73.5B), which dropped sharply on the plunge in DB repo, and Switzerland (2.4%, $58.9B) continued to round out the top 10. (Note: Crane Data attributes Treasury and Government repo to the dealer's parent country of origin, though money funds themselves "look-through" and consider these U.S. government securities. All money market securities must be U.S. dollar-denominated.)

As of Dec. 31, 2013, Taxable money funds held 22.0% of their assets in securities maturing Overnight, and another 10.8% maturing in 2-7 days (32.8% total in 1-7 days). Another 21.7% matures in 8-30 days, while 27.7% matures in the 31-90 day period. The next bucket, 91-180 days, holds 14.1% of taxable securities, and just 3.7% matures beyond 180 days.

Crane Data's Taxable MF Portfolio Holdings (and Money Fund Portfolio Laboratory) were updated Friday and over the weekend, and our MFI International "offshore" Portfolio Holdings will be updated Wednesday (the Tax Exempt MF Holdings will be released tomorrow). 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.

Crane Data published its most recent monthly Money Fund Intelligence Family & Global Rankings earlier this week, which ranks the asset totals and market share of managers of money funds in the U.S. and globally. (It's available to Money Fund Wisdom subscribers.) The latest reports show asset gains by the majority of major money fund complexes in December and in the 4th quarter. Goldman, Federated, Invesco and Schwab showed the largest gains in December, rising by $10.5 billion, $8.0 billion, $4.6 billion and $4.1 billion, respectively, while BlackRock, Goldman, Dreyfus, and JPMorgan also led in Q4 rising by $62.0B, $13.3B, $7.1B and $7.0B. (BlackRock's totals, and our overall totals, were inflated by the addition of $48 billion in securities lending classes in October.) Money fund assets overall rose by $35.6 billion in December, after rising by $14.7 billion in November and $40.5 billion in October (according to our Money Fund Intelligence XLS); they rose a total of $90.8 billion in Q4.

Our latest domestic U.S. money fund Family Rankings show that Fidelity Investments remained the largest money fund manager with $428.3 billion, or 16.4% of all assets (down $1.7 billion in Dec., down $4.4B over 3 mos. and up $3.2B over 12 months), followed by JPMorgan's $251.8 billion, or 9.6% (up $1.8B, up $7.0B, and up $8.8B for 1-month, 3-months and 12-months, respectively). Federated Investors ranks third with $229.1 billion, or 8.7% of assets (up $8.0B, up $2.6B, and down $13.7B), BlackRock ranks fourth with $208.2 billion, or 8.0% of assets (up $3.2B, $62.0B, and $49.4B), and Vanguard ranks fifth with $175.7 billion, or 6.7% (up $541M, down $281M, and up $7.3B).

The sixth through tenth largest U.S. managers include: Dreyfus ($169.3B, or 6.5%), Schwab ($166.7B, 6.4%), Goldman Sachs ($142.6B, or 5.4%), Wells Fargo ($123.3B, or 4.7%), and Morgan Stanley ($97.0B, or 3.7%). The eleventh through twentieth largest U.S. money fund managers (in order) include: SSgA ($79.8B, or 3.0%), Northern ($74.1B, or 2.5%), Invesco ($66.5B, or 2.5%), BofA ($51.2B, or 2.0%), UBS ($44.6B, or 1.7%), Western Asset ($42.0B, or 1.6%), First American ($38.0B, or 1.5%), DB Advisors ($35.2B, or 1.3%), RBC ($20.6B, or 0.8%), and Franklin ($18.8B, or 0.7%). Crane Data currently tracks 73 managers, down one from last quarter. (Hartford liquidated its money fund in September.)

Over the past year, Dreyfus showed the largest asset increase (up $12.3B, or 8.1%), followed by Wells Fargo (up $10.1B, or 9.1%) and SSgA (up $9.0B, or 13.0%). Other big gainers since Dec. 31, 2012, include: JPMorgan (up $8.8B, or 3.8%), Invesco (up $8.7B, or 2.5%), Morgan Stanley (up $8.5B, or 9.9%), and Vanguard (up $7.3B, or 4.5%). The biggest declines over 12 months include: `Federated (down $13.7B, or 5.8%), UBS (down $11.5B, or 22.2%) and DB Advisors (down $8.2B, or 18.0%). (Note that money fund assets are very volatile month to month.)

When "offshore" money fund assets -- those domiciled in places like Dublin, Luxembourg, and the Cayman Island -- are included, the top 10 managers match the U.S. list, except for BlackRock moving up to No. 3, Goldman moving up to No. 5, and Western Asset appearing on the list at No. 9. (displacing Morgan Stanley from the Top 10). Looking at these largest Global Money Fund Manager Rankings, the combined market share assets of our MFI XLS (domestic U.S.) and our MFI International ("offshore), we show these families: Fidelity ($433.1 billion), JPMorgan ($377.3 billion), BlackRock ($305.5 billion), Federated ($238.8 billion), and Goldman ($208.7 billion). Dreyfus ($196.6B), Vanguard ($175.7B), Schwab ($166.7B), Western ($134,6B), and Wells Fargo ($124.2B) round out the top 10. These totals include offshore US dollar funds, as well as Euro and Sterling funds converted into US dollar totals.

In other news, our January 2014 MFI and MFI XLS show net yields remained at record lows and gross yields inched higher in the month ended Dec. 31, 2013. Our Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 836), remained at a record low of 0.01% for both the 7-Day and 30-Day Yield (annualized, net) averages. (The Gross 7-Day Yield moved up one bps to 0.14%.) Our Crane 100 Money Fund Index shows an average yield (7-Day and 30-Day) of 0.02%, also a record low, and down from 0.05% at the start of 2013. (The Gross 7- and 30-Day Yields for the Crane 100 were flat at 0.17%.) For calendar 2013, our Crane MF Average returned a record low of 0.02% and our Crane 100 returned 0.03%.

Our Prime Institutional MF Index yielded 0.3% (7-day), the Crane Govt Inst Index yielded 0.02%, and the Crane Treasury Inst, Treasury Retail, Govt Retail and Prime Retail Indexes all yielded 0.01%. The Crane Tax Exempt MF Index also yielded 0.01%. (The Gross Yields for these indexes were: Prime 0.19%, Govt 0.10%, Treasury 0.07%, and Tax Exempt 0.15% in Dec.) The Crane 100 MF Index returned on average 0.00% for 1-month, 0.01% for 3-month, 0.03% for YTD, 0.03% for 1-year, 0.05% for 3-years (annualized), 0.11% for 5-year, and 1.66% for 10-years.

Earlier this week, the Investment Company Institute released its latest data on "Worldwide Mutual Fund Assets and Flows (Third Quarter 2013," which shows that money market mutual fund assets rebounded strongly in Q3 2013. (ICI began publishing their Worldwide statistics in 2004.) The latest data show worldwide money market mutual fund assets rising by $197.9 billion, led by large increases in U.S., Australian, and Chinese MMFs, in Q3'13, and by $53.7 billion over the past year (through 9/30/13) to $4.692 trillion. Crane Data excerpts from ICI's release and analyzes the money fund portion of the ICI's latest global statistics, and we also quote from an ICI Global statement on the FSB's issuance of a "consultation on Global SIFIs below.

ICI's latest Worldwide release says, "Mutual fund assets worldwide increased 5.2 percent to $28.87 trillion, an all-time high, at the end of the third quarter of 2013. Worldwide net cash flow to all funds was $208 billion in the third quarter, compared to $115 billion of net inflows in the second quarter of 2013. Flows into long-term funds decreased to $100 billion in the third quarter from an inflow of $213 billion in the previous quarter. Equity funds worldwide had net inflows of $81 billion in the third quarter, up from $45 billion of net inflows in the second quarter. Outflows from bond funds totaled $49 billion in the third quarter, the first outflow recorded since the fourth quarter of 2008, and down from net inflows of $54 billion in the second quarter. Inflows into money market funds were $108 billion in the third quarter of 2013, reversing the $99 billion outflow recorded in the second quarter of 2013."

The quarterly statement adds, "The Investment Company Institute compiles worldwide statistics on behalf of the International Investment Funds Association, an organization of national mutual fund associations <b:>`_. The collection for the third quarter of 2013 contains statistics from 44 countries."

ICI continues, "Money market funds worldwide experienced a net inflow of $108 billion in the third quarter of 2013 after recording a net outflow of $99 billion in the second quarter of 2013. The global inflow from money market funds in the third quarter was driven by inflows of $91 billion in the Americas and $28 billion in the Asia and Pacific region. Money market funds in Europe registered outflows of $12 billion in the third quarter."

According to Crane Data's analysis of ICI's data, the U.S. maintained its position as the largest money fund market in Q3'13 with $2.681 trillion (down to 57.1% of all worldwide MMF assets); assets increased by $95.1 billion in Q3'13 (they were up by $129.2B in the past year). France remained a distant No. 2 (though it rebounded in Q3) to the U.S. with $442.6 billion (9.4%, up $10.2 billion in Q3, down $38.4B over 1 year and down a shocking $250.6 billion since the end of 2009). This was followed by Ireland ($362.9 billion, or 7.7% of total assets, up $15B in Q3 and down $22.3B over 12 months). Australia rose to 4th place in the latest quarter with a jump of $48.2 billion in the quarter and $2.4B in the past year to $344.4B (7.3%), while Luxembourg fell to 5th place, ($321.6B, 6.9% of the total, down $2.4B in Q3 and down $31.0B for 1 year).

China, which saw assets jump ($79.9B, up $30.4B in Q3 and up $22.7 billion in 12 months, moved ahead of Korea ($68.9B, up $7.7B and up $9.2B on the quarter and year, respectively), Mexico ($55.9B, down $1.1B and down $139M), and Brazil ($50.8B, up $294M and up $6.3B), into sixth place. Canada rounded out the 10 largest countries with money funds (moving ahead of Taiwan and India). Ireland and Luxembourg's totals are primarily "offshore" money funds marketed to global multinationals, while most of the other countries in the survey have primarily domestic money fund offerings. (Crane Data believes that some of these countries, like France and Italy, do not have true "money market funds" due to their lack of strict guidelines and "accumulating" NAVs instead of stable NAVs. Contact us if you'd like a copy of our "Largest Money Market Funds Markets Worldwide" spreadsheet based on ICI's data.)

In other news, a statement entitled, "ICI and ICI Global Respond to Financial Stability Board's Consultation on Global Systemically Important Financial Institutions," explains, "Today, Dan Waters, Managing Director of ICI Global, and Karrie McMillan, General Counsel of the Investment Company Institute, made the following statement about the Financial Stability Board's (FSB) issuance of a consultation on Global Systemically Important Financial Institutions (G-SIFIs): "As the FSB's consultative document recognises, asset managers act as agents on behalf of investment funds and other clients. Unlike banks and insurance companies, asset managers do not invest on a principal basis and do not take on balance sheet risk. Thus, a fund's portfolio results -- whether positive or negative -- belong solely to the fund's shareholders, and do not flow through to any other fund, to the asset manager, or to the financial markets at large. ICI and ICI Global continue to maintain that, as a result of their structure, operations, and regulation, regulated funds and their managers have not been and are highly unlikely to be a source of systemic risk."

The January issue of Crane Data's Money Fund Intelligence was sent out to subscribers this morning. The latest edition of our flagship monthly newsletter features the articles: "Reviewing Highlights of '13; More Regs & Rates in '14," which reviews the major stories of 2013 and gives an outlook for the coming year; "Treasury Partners' Klein on Portal, Separate Accounts," which interviews one of the principals of a major online money market trading "portal"; and, "Top MMFs of 2013; Our 5th Annual MFI Awards," which reviews the top-performing money funds of 2013 and of the past 5 and 10 years. We've also updated our Money Fund Wisdom database query system with Dec. 31, 2013, performance statistics and rankings, and will be sending out our MFI XLS spreadsheet shortly. (MFI, MFI XLS and our Crane Index products are available to subscribers at our Content center.) Our December 31 Money Fund Portfolio Holdings data are scheduled to go out on Friday, Jan. 10.

The "profile" with Treasury Partner's Klein says, "This month, we interview Jerry Klein, Managing Director/Partner of Treasury Partners, and discuss the online money market fund trading portal business, as well as recent trends in separately managed accounts and cash investing. Our Q&A follows." (Watch for excerpts of this interview later this month, or write us to request the full article.)

Our article on the MFI Awards explains, "In this issue, we once again recognize some of the top-performing money funds, ranked by total returns, for calendar 2013, as well as the top-ranked funds for the past 5-year and past 10-year periods. We present the following funds with our annual Money Fund Intelligence Awards. On page 7, we show a table with the winners. These include the No. 1-ranked funds based on 1-year, 5-year and 10-year returns, through Dec. 31, 2013, in each of our major fund categories (our "Type") -- Prime Institutional, Government Institutional, Treasury Institutional, Prime Retail, Government Retail, and Treasury Retail."

MFI says, "The top-performing Taxable fund overall in 2013 and top among Prime Institutional funds was BlackRock Cash Inst MMF Inst (BGIXX), which returned 0.15%. (We excluded BlackRock Cash's SL class due to its limited availability.) Among Prime Retail funds, Meeder Money Market Fund Retail (FFMXX) again had the best return in 2013 (0.14%). (It previously was named Flex-fund.) Western Asset Inst Govt MM A (INGXX) won the Top Government Institutional fund over a 1-year period with a return of 0.05%, while Davis Government MMF A (RPGXX) won the MFI Award for Government Retail Money Funds (1-year return). Morgan Stanley Inst Liq Treas Inst (MISXX) ranked No. 1 in the Treasury Institutional class, and Morgan Stanley Inst Liq Treas Cash Mgt (MREXX) ranked tops among Treasury Retail funds."

On the "Top Funds Over Past Five Years, we write, "For the 5-year period through Dec. 31, 2013, Touchstone Inst MMF (TINXX) again took top honors for the best-performing money fund with a return of 0.34%. Meeder Money Market Fund Retail ranked No. 1 among Prime Retail with an annualized return of 0.23%. Western Asset Inst Govt MM A ranked No. 1 among Govt Institutional funds, while Vanguard Federal Money Mkt Fund (VMFXX) and Weitz Government Money Mkt (WGMXX) both ranked No. 1 among Treasury Retail funds over the past 5 years. Vanguard Admiral Treasury MM (VUSXX) ranked No. 1 in 5-year performance among Treasury Inst money funds, and Northern Trust Treasury Money Mkt (NITXX) ranked No. 1 among Treasury Retail funds.

We awarded the "Best Money Funds of the Decade titles to, "The highest-performers of the past 10 years include: DWS Daily Assets Fund Inst (DAFXX), which returned 1.94% (No. 1 overall and first among Prime Inst); Fidelity Select MM Portfolio (FSLXX), which returned 1.78% (the highest among Prime Retail); American Beacon US Govt Select (AAOXX), which returned 1.74%, (No. 1 among Govt Inst funds); and, Vanguard Federal Money Market Fund (VMFXX), which ranked No. 1 among Govt Retail funds (1.67%). Milestone Treasury Obligs Fin (MIL01) returned the most among Treasury Institutional funds over the past 10 years; and, Goldman Sachs FS Trs Obl Sel (GSOXX) ranked No. 1 among Treasury Retail money funds."

MFI adds, "See our additional rankings tables on pages 9-11, and see our Money Fund Intelligence XLS for more detailed listings, percentiles, and rankings. Look for more details in coming days on the website too ( Winners will receive a letter and certificate stating their No. 1 ranking and the criteria used."

Finally, we're look forward to seeing some of you at our "basic training" conference event, Crane's Money Fund University, in just over 2 weeks (Jan. 23-24, 2014) in Providence, Rhode Island. Our 4th annual MFU will contain a heavier focus on money fund regulations, and will, as always, cover the basics of money funds, interest rates, and overviews of various money markets. Our next main event, Crane's Money Fund Symposium, will take place June 23-25, 2014, in Boston, and our second annual "offshore" event, European Money Fund Symposium, will take place Sept. 23-24 in London. Registrations and sponsorships are now being accepted for our 2014 Symposium, and the preliminary agenda is being finalized. (Watch for the agenda late this week or next.)

Wells Fargo Advantage Funds' latest "Portfolio Manager Commentary" reviews their major monthly stories of 2013 and discusses what's "On the horizon" for 2014. The latter section says, "As we prepare to close the books on 2013, we look forward to 2014 and the challenges that await us. New types of instruments, a shift in Fed policy away from asset purchases in favor of strengthened forward guidance, new regulations, and continuing developments on the credit front will all present their unique challenges." We excerpt from the "Overview, strategy and outlook" piece below.

Wells writes, "What seems unlikely to change is one of the foremost challenges facing money market investors -- extraordinarily low interest rates. We see a number of factors that could affect money market yields over the next year. On balance, they tend to suggest even lower rates to begin the year, with rates perhaps rising gradually by the end of the year but all within the near-zero rate range that has wearied investors for the past five years. That's right -- it's been five years since the Fed lowered its target rate to a range of 0 bps to 25 bps, on December 16, 2008. Even as the economy shows signs of life, money market investors are halfway to their own lost decade."

They explain, "Looking to the demand side, government securities will continue to be sought to collateralize over-the-counter derivative transactions, while the Basel III liquidity coverage ratio and other similar regulatory requirements will drive banks to hold more liquid securities, including government debt. Banks currently meet much of their liquid securities requirements with reserves held at the Fed, but as the Fed balance sheet potentially tops out later this year with the end of its asset purchases, the banks' needs for government securities should grow."

The comment continues, "On the supply side, 2014 will start with a reduction in T-bills outstanding, as the Treasury will issue fewer T-bills to make room for its new floating-rate notes, due to debut at the end of January. This net T-bill pay-down should squeeze rates early, as the timing will coincide with the debt ceiling reset in early February, but it should be relatively short-lived, persisting only until the debt ceiling is once again lifted. A more pervasive weight on rates will be the ongoing drain of repo collateral by the Fed as it continues buying securities via its QE program, potentially through most of 2014. Even though it has begun to taper its purchases, if the Fed reduces them gradually throughout the year, it will still stand to buy between another $400 billion and $500 billion in 2014. When (if?) QE finally winds down, repo rates could rebound a few basis points as the market attempts to find a new equilibrium."

Wells tells us, "The financial crisis, gone but not forgotten, will continue to be felt in the form of increased regulation on a number of fronts, with various impacts on rates. Banks have been and will be pressured to continually reduce their reliance on wholesale funding and increase the term of their liabilities, leaving them with a reduced need to finance their balance sheets in the repo market. The supplementary leverage ratio looks to be one of the primary levers to that end, as it would encourage banks to shrink their assets and liabilities, a task most easily accomplished by cutting their repo books. This has already taken place to varying degrees, and it's hard to see the process abating. Whether regulatory authorities have correctly diagnosed the problem, much less prescribed the right medicine, remains to be seen and will no doubt provide ample material for countless future Ph.D. candidates."

They add, "Regulatory and accounting changes are also expected to continue to compress the supply in the asset-backed commercial paper market, with supply of municipal variable-rate demand notes and tender option bonds also being eroded. Reduced supply leaves investors with fewer options, weighing on rates."

The Commentary says, "The two wild cards in the short end are both held by the Fed. They're potentially related, and either could significantly change the functioning of the money markets. First, the Fed could lower the interest rate it pays on excess reserves (IOER) from its current level of 25 bps. Depending on the degree of the change, such a move could materially change the willingness of banks to borrow through the repo and time deposit markets and park the proceeds at the Fed, a practice that currently drives a significant portion of money market activity. Such a move would obviously push rates lower, perhaps even below zero. The second big unknown is whether and how the Fed will use its fledgling RRP facility. Currently in a test phase through January, declaring the facility as permanent and full allotment could effectively establish a floor on rates, perhaps offsetting the effect of a cut in IOER. On the other hand, the Fed could just as easily declare the test a success and shutter the program until it's needed to control rates more closely during a tightening cycle."

Finally, Wells adds, "Overall, a Fed that is very committed to being very easy for a very long time, combined with regulations tending to increase demand and reduce supply, point to another year of low money market rates. Only a percolating economy and resulting nervous bond market wary of inflation seem to be risks to this view, but even then the Fed seems sufficiently steadfast that 2014 would be too early for it to move in nearly any circumstance. Our aim is to continue to assess the possibilities and developments in the markets, and their risks and rewards, and construct money market fund portfolios that will be resilient in the face of these challenges."

On Friday, Federal Reserve Chairman Ben Bernanke gave his last address as Fed chief, a speech entitled, "The Federal Reserve: Looking Back, Looking Forward." Discussing "financial stability and financial reform," Bernanke says, "For the U.S. and global economies, the most important event of the past eight years was, of course, the global financial crisis and the deep recession that it triggered. As I have observed on other occasions, the crisis bore a strong family resemblance to a classic financial panic, except that it took place in the complex environment of the 21st century global financial system. Likewise, the tools used to fight the panic, though adapted to the modern context, were analogous to those that would have been used a century ago, including liquidity provision by the central bank, liability guarantees, recapitalization, and the provision of assurances and information to the public."

He continues, "The immediate trigger of the crisis, as you know, was a sharp decline in house prices, which reversed a previous run-up that had been fueled by irresponsible mortgage lending and securitization practices.... [T]he bursting of the housing bubble helped trigger the most severe financial crisis since the Great Depression. It did so because ... it interacted with critical vulnerabilities in the financial system and in government regulation that allowed what were initially moderate aggregate losses to subprime mortgage holders to cascade through the financial system. In the private sector, key vulnerabilities included high levels of leverage, excessive dependence on unstable short-term funding, deficiencies in risk measurement and management, and the use of exotic financial instruments that redistributed risk in nontransparent ways. In the public sector, vulnerabilities included gaps in the regulatory structure that allowed some systemically important firms and markets to escape comprehensive supervision, failures of supervisors to effectively use their existing powers, and insufficient attention to threats to the stability of the system as a whole."

Bernanke explains, "The Federal Reserve responded forcefully to the liquidity pressures during the crisis in a manner consistent with the lessons that central banks had learned from financial panics over more than 150 years and summarized in the writings of the 19th century British journalist Walter Bagehot: Lend early and freely to solvent institutions. However, the institutional context had changed substantially since Bagehot wrote. The panics of the 19th and early 20th centuries typically involved runs on commercial banks and other depository institutions. Prior to the recent crisis, in contrast, credit extension had progressively migrated outside of traditional banking to so-called shadow banking entities, which relied heavily on short-term wholesale funding that proved vulnerable to runs. Accordingly, to help calm the panic, the Federal Reserve provided liquidity not only to commercial banks, but also to other types of financial institutions such as investment banks and money market funds, as well as to key financial markets such as those for commercial paper and asset-backed securities. Because funding markets are global in scope and U.S. borrowers depend importantly on foreign lenders, the Federal Reserve also approved currency swap agreements with 14 foreign central banks."

He tells us, "Providing liquidity represented only the first step in stabilizing the financial system. Subsequent efforts focused on rebuilding the public's confidence, notably including public guarantees of bank debt by the Federal Deposit Insurance Corporation and of money market funds by the Treasury Department, as well as the injection of public capital into banking institutions.... The subsequent efforts to reform our regulatory framework have been focused on limiting the reemergence of the vulnerabilities that precipitated and exacerbated the crisis. Changes in bank capital regulation under Basel III have significantly increased requirements for loss-absorbing capital at global banking firms--including a surcharge for systemically important institutions and a ceiling on leverage.... The Basel III framework also includes liquidity requirements designed to mitigate excessive reliance by global banks on short-term wholesale funding and to otherwise constrain risks at those banks. Further steps are under way to toughen the oversight of large institutions and to strengthen the financial infrastructure."

Bernanke adds, "Oversight of the shadow banking system also has been strengthened. For example, the new Financial Stability Oversight Council has designated some nonbank firms as systemically important financial institutions, or SIFIs, subject to consolidated supervision by the Federal Reserve. In addition, measures are being undertaken to address the potential instability of short-term wholesale funding markets, including reforms to money market funds and the triparty repo market. Of course, in a highly integrated global financial system, no country can effectively implement the financial reforms I have described in isolation. The good news is that similar reforms are being pursued throughout the world, with the full support of the United States and with international bodies such as the Basel Committee and the Financial Stability Board providing coordination."

He also says, "Much progress has been made, but more remains to be done. In addition to completing the efforts I have already mentioned, including the full implementation of new rules and supervisory responsibilities, the agenda still includes further domestic and international cooperation to ensure the effectiveness of mechanisms to allow the orderly resolution of insolvent institutions and thereby increase market discipline on large institutions."

Finally, Bernanke comments on monetary policy, "Once the economy improves sufficiently so that unconventional tools are no longer needed, the Committee will face issues of policy implementation and, ultimately, the design of the policy framework. Large-scale asset purchases have increased the size of our balance sheet and created substantial excess reserves in the banking system. Under the operating procedures used prior to the crisis, the presence of large quantities of excess reserves likely would have impeded the FOMC's ability to raise short-term nominal interest rates when appropriate. However, the Federal Reserve now has effective tools to normalize the stance of policy when conditions warrant, without reliance on asset sales. The interest rate on excess reserves can be raised, which will put upward pressure on short-term rates; in addition, the Federal Reserve will be able to employ other tools, such as fixed-rate overnight reverse repurchase agreements, term deposits, or term repurchase agreements, to drain bank reserves and tighten its control over money market rates if this proves necessary. As a result, at the appropriate time, the FOMC will be able to return to conducting monetary policy primarily through adjustments in the short-term policy rate. It is possible, however, that some specific aspects of the Federal Reserve's operating framework will change; the Committee will be considering this question in the future, taking into account what it learned from its experience with an expanded balance sheet and new tools for managing interest rates."

Federated Investors writes in its latest "Month in Cash: A little closer to normalcy," "After five years of historically low cash rates, relief appears to be on this year's horizon. OK, we know you've been promised rate-relief before, only to see it evaporate. But there's good reason to believe it will bear out this time around. Economic growth clearly has picked up in the U.S. and elsewhere, including Japan and the eurozone. A two-year budget deal struck between House Republicans and Senate Democrats has lessened the possibility of more policy shock out of Washington. And perhaps most important, the Federal Reserve has begun to let off the gas. Add this altogether, and the result is a macroeconomic and geopolitical environment that argues for a move toward normalcy in the money markets, i.e., a steepening cash-yield curve."

Money Markets CIO Deborah Cunningham explains, "The speed and magnitude of this shift remains very much in question, to be sure. This month's initiation of tapering by the Fed is very modest, dropping the $85 billion in monthly asset purchases known as quantitative easing (QE) to just $75 billion. The post-December Federal Open Market Committee (FOMC) meeting statement and comments from Ben Bernanke in his subsequent press conference -- his last as Fed chair -- further reinforced the notion the target funds rate will remain effectively anchored at 0% well beyond the time when the unemployment rate drops below the 6.5% threshold, which could be breached as early as summer. In other words, any move up in short rates is going to be measured. But it seems to us that the takeaway from the December meeting is the bias on rates will be upward in 2014."

She continues, "While December's unveiling of tapering plans was a bit of a surprise -- it's possible Bernanke wanted to act so incoming successor Janet Yellen could start with a clean slate, i.e., this burden of when and how much to taper wouldn't be hanging over her head -- we were encouraged the FOMC chose to split the $10 billion cut equally between Treasury and agency mortgage securities. It signaled the Fed is focused on the broader bond market and not just Treasuries, which generally are more volatile, prone to swings up and down on the on-again, off-again flight-to-quality trade whenever crises erupt. As long as the economic situation continues to improve without any major external shocks, we think the Fed is likely to bump up the pace of tapering as the year progresses. Even if it doesn't, it will be done with QE by 2015."

Finally, Federated adds, "Moreover, from a money market perspective, the Fed's decision to extend and expand the overnight reverse repo facility that is being tested to manage its exit from all the extraordinary monetary accommodation of the past five years also was a positive. The reverse repo rate was dropped to 3 basis points, most likely to appease dealers concerned the previous 5 basis points was too high amid all the year-end window-dressing that typically causes supply to dwindle. But we would expect the rate will move back to 5 basis points as supply re-enters the market with the New Year. Also notable was that the Fed tripled the amount participants such as Federated can purchase. This vastly boosts liquidity in the marketplace, a plus for rates. When combined with a strengthening economy, this helps solidify our view money-market rates will start moving off their lows of the past several years. It may be some time before we get true normalcy, but given recent history, we'll take it."

In other news, ICI reports in its latest "Money Market Mutual Fund Assets" that money fund assets jumped at the end of 2013, gaining over $20 billion for the second straight week. Its release says, "Total money market mutual fund assets increased by $24.04 billion to $2.719 trillion for the eight-day period ending Tuesday, December 31, the Investment Company Institute reported today. Taxable government funds increased by $23.49 billion, taxable non-government funds decreased by $400 million, and tax-exempt funds increased by $960 million."

In 2013, money fund assets increased by $54 billion, or 2.0%, versus an increase of $10 billion, or 0.4%, in 2012. Institutional assets accounted for all of the increase, gaining $54 billion (3.1%), while Retail assets were flat (up $0 billion). In December, MMF assets rose by approximately $41 billion (based on ICI's weekly data series).

ICI's latest weekly says, "Assets of retail money market funds increased by $2.37 billion to $929.25 billion [34.2% of total assets]. Taxable government money market fund assets in the retail category increased by $40 million to $199.67 billion [7.35], taxable non-government money market fund assets increased by $1.08 billion to $533.03 billion [19.6%], and tax-exempt fund assets increased by $1.25 billion to $196.55 billion [7.2%]."

It adds, "Assets of institutional money market funds increased by $21.67 billion to $1.789 trillion [65.8% of total MMF assets]. Among institutional funds, taxable government money market fund assets increased by $23.45 billion to $762.53 billion [28.0%], taxable non-government money market fund assets decreased by $1.48 billion to $952.49 billion [35.0%], and tax-exempt fund assets decreased by $290 million to $74.42 billion [2.7%]."

We hope our subscribers and visitors all had a nice Holiday break; Happy New Year! Below, we excerpt from what we think are contenders for the 10 biggest stories covered on's daily News in 2013. While the year was dominated by continued virtually zero rates, regulatory stories and the SEC's Money Market Fund Reform Proposal in June (and comments on the proposal) featured heavily in our news coverage. Our Top 10 Stories of 2013 include (in chronological order): JP Morgan Joins Goldman in Disclosing Daily Mark-to-Market NAVs (1/10/13), SEC's Gallagher Attacks FSOC, Says Moving Forward w/Proposal Shortly (2/26/13), FSOC Report Comments on MMF Reform, Will Stand Down if SEC Moves (4/26/13), Bernanke Expects Zero Rates to Continue, But Aware of Costs, Risks (5/23/13), SEC Chair Mary Jo White on Reforming MMFs Proposal and Alternatives (6/6/13) , Fidelity Argues Municipal MMFs Funds Not a Risk in Recent SEC Meeting (8/29/13), RIP MMFs in Europe? EU Issues Proposed Rules With 3 Percent Buffer (9/4/13), Wells Reform Comment Sums Up Majority View; Disclosure Concerns (9/19/13), Federated's Donahue Says 98 Percent Oppose Float; Rules After Q1'14 (10/28/13), and SEC Charges Ambassador Money Mkt Fund Portfolio Manager With Fraud (11/27/13).

Our Jan. 10 News story, "JP Morgan Joins Goldman in Disclosing Daily Mark-to-Market NAVs," says, "Goldman Sachs announced that they would begin reporting mark-to-market, or "shadow" NAVs out to 4 decimal places on a daily basis. Now the 2nd largest money fund manager says it will join them. A press release says, "J.P. Morgan Asset Management today announced that three of its U.S. money market funds will begin to disclose their market-based NAVs per share (also known as Shadow NAVs) on a daily basis. This additional disclosure will provide investors with greater transparency regarding the Market-Based NAV's fluctuation, but will not change the funds' existing objective to maintain $1.00 stable NAV."

A Feb. 26 piece, entitled, "`SEC's Gallagher Attacks FSOC, Says Moving Forward w/Proposal Shortly (2/26/13)," says, "U.S. Securities & Exchange Commission Commissioner Daniel Gallagher, presenting at "The SEC Speaks in 2013," attacked the encroachment of the Financial Stability Oversight Council (FSOC) upon the SEC's turf and again predicted that an SEC proposal on money fund reforms was coming soon. (See our Jan. 17 Crane Data News, "SEC's Gallagher Says Proposals Coming in Q1, Backs Floating NAV.") Gallagher said, "This brings me to the elephant in the room: FSOC. FSOC was created, in part, to respond to the realization during the financial crisis that regulatory balkanization had resulted in a lack of communication and information-sharing among financial services regulators, which undoubtedly led to poor policy decisions during the crisis. None of us who lived through the crisis on the ground floor would argue against improvements to the regulatory structure that would facilitate coordination and information-sharing among regulators. However, with FSOC the threats to the Commission's independence move from the theoretical to the immediate, for already in its short existence, this new body has directly challenged the Commission's regulatory independence. It is also where just one member of the Commission, the Chairman, can defend that independence. Pursuant to the provisions of Dodd-Frank establishing FSOC, the group is composed not of agencies, but the individual heads of agencies, acting ex officio."

An April 26 piece, "FSOC Report Comments on MMF Reform, Will Stand Down if SEC Moves," comments, "The Financial Stability Oversight Council (FSOC) issued its "2013 Annual Report, which contains an update on "Reforms of Wholesale Funding Markets" and a section on "Money Market Funds." It says, "The Council took concrete steps to support the implementation of structural reforms to mitigate the vulnerability of money market mutual funds (MMFs) to runs, a recommendation made by the Council in its 2011 and 2012 annual reports. In November 2012, the Council issued Proposed Recommendations Regarding Money Market Mutual Fund Reform, under Section 120 of the Dodd-Frank Act. This action followed the decision by SEC Commissioners not to move forward with the MMF reforms as proposed by their staff in August 2012.... If the SEC moves forward with meaningful structural reforms of MMFs before the Council completes its Section 120 process, the Council expects that it would not issue a final Section 120 recommendation to the SEC."

We also quote a May 23 article, "Bernanke Expects Zero Rates to Continue, But Aware of Costs, Risks." It says, "Federal Reserve Chairman Ben Bernanke testified on "The Economic Outlook before Congress' Joint Economic Committee. While he didn't give much hope that rates would be rising anytime soon, he did offer hope that the Fed would begin withdrawing its special accommodations soon and again recognized the severe plight of savers. He says, "With unemployment well above normal levels and inflation subdued, fostering our congressionally mandated objectives of maximum employment and price stability requires a highly accommodative monetary policy. Normally, the Committee would provide policy accommodation by reducing its target for the federal funds rate, thus putting downward pressure on interest rates generally. However, the federal funds rate and other short-term money market rates have been close to zero since late 2008, so the Committee has had to use other policy tools."

Our June 6 News piece, "SEC Chair Mary Jo White on Reforming MMFs Proposal and Alternatives," says, "[T]he 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.)"

An August 29 story, "Fidelity Argues Municipal MMFs Funds Not a Risk in Recent SEC Meeting," comments, "While there haven't been many new "Comments on Proposed Rule: Money Market Fund Reform; Amendments to Form PF" of substance lately, we did notice some recent additions to the "Meetings with SEC Officials section at the bottom of the comment page. The new additions include two recent meetings of Fidelity Investments, which is by far the largest manager of money market mutual funds with over $419.5 billion (17.0%) in assets, with SEC representatives.... As we mentioned, the earlier meeting, though, contains a Powerpoint showing why Municipal, or Tax-Exempt money funds, should be exempt from the SEC's onerous proposals.

On Sept. 4, we wrote, "RIP MMFs in Europe? EU Issues Proposed Rules With 3 Percent Buffer (9/4/13)," saying, "The European Union issued a release on "shadow banking" and proposed rules on money market funds on Wednesday, which include a controversial 3% "NAV buffer" mandate for Constant NAV funds. The "Commission's roadmap for tackling the risks inherent in shadow banking, says "The Commission has today adopted a communication on shadow banking and proposed new rules for money market funds (MMFs). The communication is a follow-up to last year's Green Paper on Shadow Banking (IP/12/253). It summarises the work undertaken so far by the Commission and sets out possible further actions in this important area. The first of these further actions -- the proposed new rules for money market funds -- is unveiled today and aims to ensure that MMFs can better withstand redemption pressure in stressed market conditions by enhancing their liquidity profile and stability." The Commission also released a document entitled, "New rules for Money Market Funds proposed -- Frequently Asked Questions." (Note: Crane Data will be hosting its first European Money Fund Symposium in less than 3 weeks, Sept. 24-25, in Dublin, Ireland, so we expect this proposal to be a major topic of discussion.)"

On Sept. 19, we began covering the host of SEC comment letters with "Wells Reform Comment Sums Up Majority View; Disclosure Concerns." It says, "With the deadline for Comments on the SEC's Money Market Fund Reform Proposal now passed, we continue to read through the mountain of feedback. Today, we quote from the Wells Fargo Advantage Funds' comment, which, though there have been many diverse views, represents the mainstream of comment letters to date. It also addresses some of the technical disclosure issues that are causing concerns among portfolio managers. (See the latest list of comment letters here.) The comment, "Karla Rabusch, President, Wells Fargo Funds Management, LLC says, "While we believe the 2010 Amendments adequately reduced the risk that money market funds pose to financial stability, we do not oppose in principle additional measures to further strengthen money market funds and further reduce the risk of rapid and substantial redemptions, or "runs," during periods of market distress. We believe, however, that any further regulatory measures must strike an appropriate balance between the costs to investors and others, including businesses, states, municipalities and other local governments that rely on money market funds as a source of short-term credit, and any benefits in the form of a marginal reduction in run risk. We largely opposed the set of proposed recommendations issued by the Financial Stability Oversight Council ("FSOC") in November 2012 because we believed they lacked such balance."

On Oct. 28, we wrote, "Federated's Donahue Says 98 Percent Oppose Float; Rules After Q1'14 Federated Investors, the third largest manager of money market mutual funds with over $226 billon (according to Crane Data's Money Fund Intelligence XLS), held its third quarter earnings conference call, and, as usual, CEO and President J. Christopher Donahue weighed in on a number of issues impacting money market funds, including the SEC's Money Market Fund Reform Proposals. (See the transcript of the call from Seeking Alpha here.) He said, "We were heartened to see that many of our clients and issuers that we invest with went on the record to express their strong concern with the measures proposed by the SEC. The overall response to the SEC has been broad based. Many individuals and groups representing literally millions of businesses, treasury and financial professionals, as well as state and local government finance professionals and investment officers have submitted their views for consideration. These responses overwhelmingly express opposition to Alternative One, the SEC's floating NAV proposal. In fact, over 98% of the more than 1,400 letters expressed opposition to the SEC's floating NAV proposal."

Finally, on Nov. 27 we featured, "SEC Charges Ambassador Money Mkt Fund Portfolio Manager With Fraud, which says, "The Securities & Exchange Commission issues a press release yesterday entitled, "SEC Announces Fraud Charges Against Detroit-Based Money Market Fund Manager," which says, "The Securities and Exchange Commission today announced fraud charges against a Detroit-based investment advisory firm and a portfolio manager for deceiving the trustees of a money market fund and failing to comply with rules that limit risk in a money market fund's portfolio. Money market funds seek to maintain a stable share price by investing in highly safe securities. Under the federal securities laws, a money market fund may only invest in securities determined by the fund's board of trustees to present minimal credit risk." (See the full SEC order here.) This is the only SEC action we're aware of involving a money market fund, other than ones related to the now infamous Reserve Primary Fund (which "broke the buck" in 2008)."

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