News Archives: December, 2014

The Investment Company Institute released its latest data on "Worldwide Mutual Fund Assets and Flows (Third Quarter 2014)," which shows that global money market mutual fund assets increased slightly in the latest quarter (Q3 '14). The latest data show worldwide money market mutual fund assets rising by $12.5 billion to $4.751 trillion, led by inflows from the U.S. and Asia. Asia continues to show strong growth, led by another rapid increase in Chinese money fund assets. Also of note, Ireland moved ahead of France as the second largest money market fund country. Crane Data's Money Fund Intelligence International, through Dec. 29, shows that total "offshore" or international money fund assets (which are mainly domiciled in Dublin) grew by $67.5 billion in 2014 to $746.7 billion. Globally, MMF assets increased by $59.1 billion over the past year (through 9/30/14). We excerpt from ICI's latest "Worldwide" release and analyze the money fund portion below.

ICI's latest quarterly Worldwide Mutual Funds release says, "Mutual fund assets worldwide decreased 2.1 percent to $31.32 trillion, at the end of the third quarter of 2014, largely due to significant U.S. dollar appreciation. Worldwide net cash flow to all funds was $320 billion in the third quarter, compared to $285 billion of net inflows in the second quarter of 2014. Flows into long-term funds shrunk to $232 billion in the third quarter from an inflow of $352 billion in the previous quarter. Equity funds worldwide had net inflows of $31 billion in the third quarter, down from $65 billion of net inflows in the second quarter. Inflows into bond funds totaled $104 billion in the third quarter, down from $155 billion of net inflows in the second quarter. Money market funds experienced inflows of $89 billion in the third quarter of 2014 compared to the $67 billion outflow recorded in the second quarter of 2014."

ICI continues, "Money market funds worldwide experienced a net inflow of $89 billion in the third quarter of 2014 after registering a net outflow of $67 billion in the second quarter of 2014. The global inflow to money market funds in the third quarter was driven by inflows of $42 billion in the Americas, $18 billion in Europe, and $31 billion in the Asia Pacific regions."

According to Crane Data's analysis of ICI's worldwide funds data, the U.S. maintained its position as the largest money fund market in Q3'14 with $2.604 trillion (up to 59.0% of all worldwide MMF assets). Assets increased by $43.7 billion in Q3'14, though they are down by $76.5B in the 12 months through Sept. 30, 2014. As previously mentioned, Ireland unseated France as the second largest money market fund country. Ireland ended Q3 with $388.9 billion (8.8% of worldwide assets), down $3.9B for the quarter but up $26.0B over the last 12 months. France fell to third place among countries overall with $380.6 billion (8.6% of worldwide assets), down $38.6 billion in Q3 and down $62.0 billion over 1 year.

Australia remained in 4th place in the latest quarter, where assets were flat in the quarter (due to our estimating these) and down $22.3B over the past year to $322.1B (7.3%). Luxembourg remained in 5th place with $306.1B, or 6.9% of the total (down $1.5 billion in Q3 and down $15.5B for 1 year). Note that ICI's data didn't include money fund figures for Australia, the fourth largest country, again this quarter, so we included $322 billion for this, the same amount as last quarter.

China continued its dramatic money fund growth in Q3 of 2014. The 6th largest money fund country saw assets jump again. China now reports $287.7B in total, up $31.0B (12.1%) in Q3 and up a massive $207.9 billion (260.2%) over the last 12 months. ICI's latest Worldwide statistics also show Korea ($81.6B, up $8.2B and up $12.7B on the quarter and year, respectively), Mexico ($55.2B, down $1.0B and down $753M), and Brazil ($52.4B, down $5.4B and up $1.5), in the 7th through 9th largest money fund market spots. Mexico bumped Brazil out of the 8th spot. India remained in 10th place with $52.4B, down $6.0B for the quarter but up $10.4B for the year. Taiwan, Canada, South Africa, Sweden, Japan, Switzerland, Chile, Finland, Norway, and Italy also ranked among the 20 largest countries that have money market mutual funds.

Note that 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 our latest "Largest Money Market Funds Markets Worldwide" spreadsheet, based on ICI's data.

Finally, looking at Crane Data's year-end international money fund totals for 2014, as previously stated, total offshore assets were up $67.5 billion in 2014 to $746.7 billion. USD-denominated funds grew slightly on the year, up $1.9 billion to $376.2. GBP-denominated MMFs were up L24.8 billion to L153.3, while Euro-denominated money funds were up E10.3 billion to E89.1.

It was a landmark year for money market funds in 2014 as the SEC finally adopted money fund reforms. While the long-awaited reforms featured heavily in our coverage, it was not the only big story of 2014. Below, we excerpt from what we think are the 10 biggest stories that defined 2014. We selected the most popular, as well as those that represented some of the major trends of the past year. Crane Data's Top 10 Stories of 2014 include (in chronological order): Fed Extends Reverse Repo Program a Year; Increases Limit to $5 Billion (1/30/14); FDIC Shows Deposits Keep Growing, No Impact from TAG Expiration (2/27/14); SEC Posts 4 Mini Studies: Liquidity Costs, Non-Govt, Muni Backing, Safe (3/25/14); FSOC Annual Report: Wholesale Funding, Tri-Party Repo, Money Funds (5/8/14); China Booms, Drives Worldwide MMF Growth in Q1 Says ICI; U.S. Down (7/16/14); SEC Passes Final MMF Reform Rule 3-2; Final Reforms Just Like Proposed (7/23/14); Analyzing SEC's New Definitions, Rules for Government, Retail MMFs (8/20/14); Euro Money Fund Update: Negative Yields Arrive, But Assets Jump (11/14/14); Fed Takes Baby Steps Towards Hikes; Fed Funds Headed Higher in 2015 (12/18/14); and, Crane Data Launches Bond Fund Intelligence, Focus on Ultra-Shorts (12/23/14). (See Crane Data's News Archives here.)

Our Jan. 30 News story, "Fed Extends Reverse Repo Program a Year, Increases Limit to $5 Billion," represents one of the biggest trends of the year, the Fed's RRP program. (The Fed continued to tweak the program throughout 2014.) It says, "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, "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."

A Feb. 27 piece, entitled, "FDIC Shows Deposits Keep Growing, No Impact from TAG Expiration (2/27/14)," says, "The Federal Deposit Insurance Corporation released its latest "Quarterly Banking Profile" yesterday, which showed that "Deposit Growth Remains Strong" and that uninsured noninterest bearing transaction accounts left over from the temporary "TAG" (Transaction Account Guarantee) program continue to remain, and even grow, in the largest banks." Deposit growth continued through 2014, though it slowed at year-end as bank felt pressure to raise fees.

A March 25 piece, "SEC Posts 4 Mini Studies: Liquidity Costs, Non-Govt, Muni Backing, Safe," comments, "A press release entitled, "Staff Analysis of Data and Academic Literature Related to Money Market Fund Reform," says, "The staff of the Securities and Exchange Commission today made available certain analyses of data and academic literature related to money market fund reform. The analyses, which were conducted by the staff of the SEC's Division of Economic and Risk Analysis, are available for review and comment on the Commission's website as part of the comment file for rule amendments proposed by the SEC in June 2013 regarding money market fund reform." The postings or "mini" studies include: Analysis of Liquidity Cost During Crisis Periods; Analysis of Government Money Market Fund Exposure to Non-Government Securities, Analysis of Municipal Money Market Funds Exposure to Parents of Guarantors, and Analysis of Demand and Supply of Safe Assets in the Economy." These studies paved the way for the compromise reform proposal eventually passed by the SEC.

Another is a May 8 article, "FSOC Annual Report: Wholesale Funding, Tri-Party Repo, Money Funds." It comments, "The Financial Stability Oversight Council, or FSOC, released its 2014 Annual Report yesterday, which includes sections on wholesale funding, tri-party repo, and of course money market mutual funds. The report says of the Short-Term Wholesale Funding Markets, "The influx of customer deposits in recent years has afforded banks the opportunity to reduce their dependence on short term wholesale funding. Although the usage of commercial paper (CP), repo, time deposit, and other sources of wholesale funding fell this past year, financial institutions without access to customer deposits and prohibited from using customer cash and securities for proprietary purposes, such as broker-dealers, remain dependent on wholesale markets for funding. Since the Council's inaugural annual report nearly three years ago, the structural vulnerabilities of the tri-party repo markets have been highlighted. This past year witnessed important progress in tri-party repo reform."

Our July 16 News piece, "China Booms, Drives Worldwide MMF Growth in Q1 Says ICI; U.S. Down," says, "China continued its dramatic money fund growth in Q1 of 2014. The 6th largest money fund country saw assets jump again; China now reports $234.5B in total, up a massive $111.0 (89.8%) in Q1 (after rising $43.6B in Q4) and up $150.9 billion (180.7%) over the last 12 months. See our July 9 Link of the Day, "Chinese Money Fund Growth." The Asia Asset Management article said, "Money market funds (MMFs) continued to play a key role in the growth of mainland China's asset management industry. Beijing-based Tianhong Asset Management, which paired up with e-commerce giant Alibaba Group to launch the online fund platform Yu'e Bao, trumped conventional asset managers with total AUM of 586.1 billion RMB (US$93.88 billion) as of the end of June. Tianhong's ballooning AUM has mainly been driven by its partnership with Alibaba, through which it launched its first online MMF, the Tianhong Zenglibao Monetary Fund, in June 2013." Alibaba launched an online money-market fund called Yu'e Bao last June, and the fund had 554 billion RMB in assets as of March 31, 2014, which equates to around $90 billion USD."

Our biggest news story of the year hit on July 23, "SEC Passes Final MMF Reform Rule 3-2; Final Reforms Just Like Proposed." It comments, "The U.S. Securities & Exchange Commission (SEC), which discussed and passed its Final Money Market Fund Reforms Wednesday morning (July 23 10am) with a 3-2 vote, released the following press release and "Fact Sheet" outlining the new rules. The SEC's "Fact Sheet" on Money Market Fund Reform says, "The Commission will consider whether to adopt final rules that reform the way money market funds are structured and operate in order to better equip them to address run risks, while preserving the benefits of money market funds. The money market fund reforms would: Require certain money market funds to maintain a floating net asset value (NAV) for sales and redemptions based on the current market value of the securities in their portfolios rounded to the fourth decimal place (e.g., $1.0000). The requirement, which would apply to institutional prime money market funds (including institutional municipal money market funds), would result in the daily share prices of the money market funds fluctuating along with changes in the market-based value of the funds' investments.... The new tools -- fees and gates -- would give fund boards the ability to impose liquidity fees or to suspend redemptions temporarily, also known as "gate," if a fund's level of weekly liquid assets falls below a certain threshold." See Chair Mary Jo White's Opening Statement here, Commissioner Aguilar's Comments here, Commissioner Gallagher's Comments here, Commissioner Piwowar's (dissenting) Comments here, and Commissioner Stein's (dissenting) Comments here."

On August 20, we wrote, "Analyzing SEC's New Definitions, Rules for Government, Retail MMFs," saying, "While much of the focus of the SEC's recent Money Market Fund Reforms has been on institutional MMFs, the final rules also establish new guidelines -- and definitions -- for government and retail money market funds. We take a look at the key rules changes around government and retail MMFs below. On page 202 of the final rules (which were recently published in the Federal Register), it explains how the definition of government MMFs has changed, particularly with respect to the non-government basket. "The fees and gates and floating NAV reforms included in today's Release will not apply to government money market funds, which are defined as a money market fund that invests at least 99.5% of its total assets in cash, government securities, and/or repurchase agreements that are "collateralized fully" (i.e., collateralized by cash or government securities). In addition, under today's amendments, government money market funds may invest a de minimis amount (up to 0.5%) in non-government assets, unlike our proposal and under current rule 2a-7, which permits government money market funds to invest up to 20% of total assets in non-government assets."

On November 14, we covered, "Euro Money Fund Update: Negative Yields Arrive, But Assets Jump." It reads, "In its European MMF Quarterly report, Fitch Ratings says, "Euro-denominated money market funds are moving closer to negative yields, on average, as declining short-term market rates have turned negative for most high quality money market issuers. Euro MMFs saw their yields fall to 3bp, on average, at the end of September," Fitch's report states. "As higher yielding assets mature, funds are reinvesting at lower, often negative rates, which is expected to push euro MMF yields into negative territory." Fitch adds, "Negative euro MMF yields or the resulting use of unit cancellations to maintain a stable fund asset value, in and of itself, would not be a negative rating factor. It remains however untested how investors may react... Euro money fund assets have increased of late, however. Since June 11, when the European Central Bank decision to cut the interest rate on the deposit facility to -0.10% became effective, assets of euro-denominated MMFs have increased by E13.3 billion to E91.5 billion (as of Nov. 12, 2014), according to the Crane EUR MMF Index."

On Dec. 18, we wrote, "Fed Takes Baby Steps Towards Hikes; Fed Funds Headed Higher in 2015. The article says, "The Federal Reserve issued its FOMC statement following its 2-day meeting yesterday and removed its "considerable period of time" language and replaced it with "patient". The Fed also released its "dots" or "target federal funds rate projections," which shows expectations of 4 rate hikes in 2015 and a median Fed funds target of 1.125% by yearend. (The Wall Street Journal notes that the estimates are 2.5% for 2016 and 3.625% for 2017.) Chair Janet Yellen also held a press release where she affirmed market expectations for a hike in the Fed funds target rate around mid-year in 2015."

Finally, our Dec. 23 News reflects the growth of ultra-short bond funds and money fund alternatives, "Crane Data Launches Bond Fund Intelligence, Focus on Ultra-Shorts." We wrote, "Crane Data, which has published its flagship Money Fund Intelligence newsletter since 2006, is in the process of launching a new publication, Bond Fund Intelligence. Our latest monthly newsletter, which has been in "beta" testing the past two months, covers bond funds (including ETFs), with an initial focus on the ultra-short end of the spectrum. Bond Fund Intelligence includes news, features, and performance data on over 150 (up from 88 last month) of the largest bond funds. Crane Data also offers an Excel "complement" with even more performance, data and rankings, Bond Fund Intelligence XLS. BFI also includes our new Crane BFI Indexes, which will provide benchmarks for various bond market segments, including a new Conservative Ultra-Short BFI Index, a more focused benchmark for the more conservative funds in the space just beyond money market funds. While the official launch of Issue No. 1 is set for mid-January, Crane Data recently sent out its second "beta" edition to subscribers. (Let us know if you'd like to see a copy.)

In the December issue of our new publication, Bond Fund Intelligence, we interview William Belden, managing director and head of product development and management at Guggenheim Investments. We asked Belden about the launch and positioning of Guggenheim's Enhanced Short Duration ETF and its place in the changing cash management industry. Here is what he told us. (We reprint the article from our new BFI publication, which we recently launched to track the bond fund marketplace -- see our Dec. 23 News "Crane Data Launches Bond Fund Intelligence, Focus on Ultra-Shorts". Contact us if you'd like to see our latest "beta" issue.)

BFI: How long has Guggenheim been involved in ultra-short products? Belden: Guggenheim was founded in 1999 and has about $220 billion in assets under management with about $140 billion in fixed income. The short duration part of that space is a meaningful chunk of that asset base. The Guggenheim Enhanced Short Duration ETF (GSY) originally was launched as a passively managed index-based ETF in 2008 then switched over to an active strategy in 2011. I have been with Guggenheim since 2009. At the time I joined, I was with a predecessor firm called Claymore (which Guggenheim acquired). Claymore got into the ETF business in 2006 and my responsibility from the outset was product development for our ETF business.

BFI: Tell us about GSY. Belden: Our fixed-income investment philosophy relies on in-depth macro research, intensive fundamental research and legal analysis, and rigorous risk management. Our process is based on our belief that capturing attractive yields, while remaining focused on the preservation of capital, is the surest path to superior long-term investment results. GSY is composed of securities screened through a comprehensive process that continually assesses the creditworthiness of the portfolio. GSY originally began as an index-tracking ETF when it was launched in February 2008. At that time we believed it addressed a need in the ETF market for an exposure to the cash market. There really weren't many funds like it in the short end of the yield curve. Then, in 2009, Guggenheim acquired Claymore, as well as the Rydex Funds, which were both integrated into the Guggenheim ETF business.... The fund converted to an active strategy in June 2011, because we believed a more effective solution would be to have Guggenheim actively manage an ultra-short duration exposure that delivered our core competency as an asset manager -- active fixed income -- in an ETF wrapper.

BFI: How has it been received? Belden: Assets and recognition for the GSY strategy started to take off at the beginning of 2012. We're now at about $530 million in assets. We have been very pleased with the performance and the acceptance of the product, but we still feel like we're scratching the surface of what the opportunity ultimately presents us with. We present GSY as a cash alternative, and certainly something that is appealing from a yield perspective in comparison to money market funds or other cash vehicles. We talk about the fact that 90 to 100 basis points in nominal terms, given the risk/return profile of GSY in contrast to other cash investments, is pretty appealing -- and that has resonated. I think GSY fills a very nice sleeve.

BFI: What kinds of securities does it buy? Belden: In terms of securities, right now, we're limited in terms of the amount of structured credit we can buy in the fund. Also, we really feel like there [are some] attractive opportunities within the asset backed space. We don't use any derivatives in the portfolio right now to help manage duration exposure [and] we have a little bit of high yield. We like the shorter end of the curve as that type of exposure can add some yield while also having some risk control. We also have a decent amount of investment grade exposure. Also, we have some bank loans in the product, which are attractive in the sense that they are going to float with any potential rate increases that we might see. In terms of challenges, I think that certainly the supply of attractive investments and the flexibility to be able to allocate across those security types ... is a concern of the portfolio management team.

BFI: Tell us about the ETF vs. open-end fund structure. Belden: Some of the key features of the ETF structure -- efficiency, transparency, and flexibility -- provide for an optimal vehicle for delivering this type of exposure. Generally speaking, ETFs have been notably cheaper than most of the mutual fund counterparts -- and cost is obviously a big part of return. GSY, with a net expense ratio of 28 basis points, positions very effectively against open end counterparts.... Conversely, open-end funds price once a day, while GSY has intraday liquidity so you always have the ability to get into or out of the product. Another thing is the transparency. While mutual funds publish their holdings 4 times a year, ETFs are doing it every single day. We are finding more and more investors, particularly institutional investors, are very interested in knowing exactly where their exposures reside in any particular point in time. Lastly, there's often tax efficiency with ETFs in comparison to open-end funds, particularly for those that see higher degrees of turnover.

BFI: Will money fund regulatory changes impact GSY? Belden: The provisions don't actually become effective until 2016, and the interest rate scenario at that time will certainly have some influence on the pace and degree to which the movement occurs. But it's going to occur and I think it's already started in terms of people looking at alternatives and evaluating their options. We believe the impact of reforms will make the appeal of GSY even greater than it is today. It's important to keep in mind that GSY is not a money market fund, nor should it necessarily be considered a money fund replacement. However, if clients are looking to increase their opportunity to realize some level of income above the historically low levels they're receiving now on money market funds, and they're comfortable with the incremental risk that comes with investing in an ultra-short duration strategy, then GSY provides a very attractive alternative to consider for strategic cash allocations. The continued low interest rate environment combined with the changing regulatory landscape serve as a catalyst for more product development in the ultra-short duration space.

BFI: What is your outlook? Belden: Scott Minerd, Guggenheim's Global Chief Investment Officer, has said he believes the Fed won't raise interest rates anytime soon, and perhaps not until 2016.... We're big believers in GSY because of its ability to serve as a utility player in an investment portfolio. GSY can be used as a complement to money-market funds for those who might need cash-like liquidity in the next six months to two years. And the fact GSY is an actively managed ETF makes it an attractive alternative to passive ETFs in terms of risk management and an attractive alternative to money-market mutual funds in terms of portfolio transparency and ease of use."

Touchstone Investments became the latest manager to announce its exit from the money market fund business, we learned from mutual fund website Ignites.com. Touchstone, which has $1.1 billion in money fund assets according to Crane Data, is currently the 46th largest money market fund manager. It would be the fourth money manager to exit the space since June, and perhaps the first casualty, at least in part, of the SEC's money fund reforms. (GE Capital, Williams Capital (which outsourced to Northern Trust), and Virtus, are the other three, according to Crane Data's October 2014 MFI.) Touchstone will liquidate all of its money fund portfolios early in 2015 -– Touchstone Institutional MMF (TINXX) with $546 million as of 11/30/2014; Touchstone MMF S (TMSXX) with $260M; Touchstone MMF A (TMMXX) with $67M; Touchstone Ohio Tax-Free MMF Institutional (TIOXX) with $146M; Touchstone Ohio Tax-Free MMF A (TOHXX) with $61M; Touchstone Tax-Free MMF S (TTSXX) with $23M; and Touchstone Tax-Free MMF A (TTFXX) with $8 million.

Touchstone's SEC filing, dated Dec. 22, says, "At a meeting of the Board of Trustees of Touchstone Investment Trust held on November 20, 2014, the Board approved a plan to close and liquidate each of Touchstone Institutional Money Market Fund and Touchstone Money Market Fund on or about March 20, 2015 (the "Liquidation Date")." Then in an updated filing, it says, "The Liquidation Date has been postponed," so it's not clear what the exact timing of the liquidation will be.

A separate filing on a special shareholder meeting adds, "The Board of Trustees (the "Board") of Touchstone Investment Trust, a Massachusetts business trust (the "Trust"), has called a combined special meeting of shareholders of Touchstone Institutional Money Market Fund and Touchstone Money Market Fund ... to be held on February 20, 2015 at 10:00 a.m. Eastern Time (the "Special Meeting"), at the offices of the Trust, 303 Broadway, Suite 1100, Cincinnati, Ohio 45202. The Board has unanimously approved a Plan of Liquidation with respect to each Fund (each, a "Plan"), which provides for the complete liquidation of all of the assets of the Fund. The Board has directed that a proposal to liquidate each Fund pursuant to its Plan be submitted to a vote of each Fund's shareholders for their consideration at the Special Meeting (the "Proposal")."

It adds, "If the shareholders of a Fund approve the Plan, the Fund will cease its investment operations as soon as practicable and will not engage in any investment activities, except as necessary to effect the liquidation of the Fund, including winding up its business, converting its portfolio securities to cash, discharging or making reasonable provision for the payment of all of its liabilities and making liquidating distributions to shareholders on a pro rata basis in accordance with its Plan. Subject to approval by a Fund's shareholders, the date of liquidation for each Fund is anticipated to be on or about March 20, 2015."

The "Question and Answer" portion of the SEC filing explains the reasoning behind the move. "At meetings of the Board held in August and November 2014, the Funds' investment advisor, Touchstone Advisors, Inc. ("Touchstone"), informed the Board that it intended to cease managing U.S. money market funds. Based on Touchstone's presentation and recommendation, the Board concluded that the continued operation of the Funds is not in the best interests of the Funds or their shareholders considering all relevant factors, including, without limitation: 1) The Funds have been unable to gather significant assets outside of the Touchstone Funds complex and distribution opportunities are limited; 2) Additional regulatory changes to Rule 2a-7 under the Investment Company Act of 1940 (the "1940 Act") are expected to increase the Funds' expenses and negatively impact the Funds' ability to offer a competitive return to their shareholders."

It continues, "3) Since April 2009, the Funds have been unable to pay all their expenses and offer a competitive return to their shareholders. Touchstone has been reimbursing a portion of the Funds' expenses, but this has not resulted in any material increase in assets that would provide additional economies of scale. Touchstone has informed the Board that it does not intend to renew the expense limitations or to continue the voluntary fee waivers and expense reimbursements with respect to the Funds, although Touchstone will continue to partially waive and/or reimburse certain Fund fees and expenses as necessary to prevent each Fund's yield from dropping below zero. Absent fee waivers and expense reimbursements, the Funds' returns would likely make the Funds unattractive to new investors."

Touchstone's filing continues, "4) There are no other suitable funds in the Touchstone Funds complex into which the Funds could be merged. Any benefit to shareholders of the Funds of merging with a third-party fund would likely be outweighed by the expenses of such a merger. The assets of the Funds held by Touchstone and its affiliates likely would not move to a third party, and the Funds would likely be unattractive to another investment advisor because, among other things, Touchstone could not assure it that the remaining assets in the Funds would not be redeemed in a relatively short time after any such transaction."

However, it adds, "If you hold Fund shares through a Touchstone IRA or Coverdell ESA, and you do not provide instructions on the disposition of your shares by the Liquidation Date, your shares held on the Liquidation Date in a Fund will be liquidated and the proceeds used to purchase shares of Touchstone Ultra Short Duration Fixed Income Fund as a non-reportable transfer, in accordance with the applicable provisions of the custodial account agreements, to avoid potential tax penalties." According to Crane Data's Bond Fund Intelligence XLS, Touchstone Ultra Short FI A has $730 million in assets, Touchstone Ultra Short FI Y has $245M, and Touchstone Ultra Short FI Z has $397M.

For more on recent fund liquidations, see the October issue of our Money Fund Intelligence ("Rates, Reforms Driving Consolidation") and our Dec. 15 "Link of the Day," "JPMorgan Liquidates OH, MI Muni MFs."

Fidelity Investments published "Money Markets: Preparing for the New Reality," which reflects on a transformative year for money markets in 2014 and looks ahead to 2015. The Fidelity commentary, authored by Nancy Prior, Michael Morin, and Kerry Pope, says "What a difference a year makes. The money market landscape changed significantly in 2014, with implications for monetary policy, supply, and the regulatory environment. Specifically, U.S. economic growth evolved from a weather-induced first quarter contraction to the strongest consecutive six-month stretch of economic growth since 2003. Final rules for money market mutual fund reform were approved in July 2014, and the Federal Reserve (Fed) concluded its quantitative easing (QE) initiatives."

It continues, "The Fed reverse repo (RRP) facility and term repo programs played dual roles in the money market this year. In addition to their potential use in a policy shift, the programs' rules were modified in November to ensure the facility provided a solid floor under overnight market rates in anticipation of year-end. Scarce supply has been a long-term trend in the money market, presenting particular challenges as the third quarter came to a close, and the RRP facility changes should help provide additional supply."

Further, Fidelity writes, "The regulatory environment for money market mutual funds was also transformed during the year. After four years of deliberation, the Securities and Exchange Commission (SEC) approved new rules that will further regulate the money market mutual fund industry. The rules are scheduled to be fully implemented by October 2016 and are intended to increase the transparency of money market mutual funds, as well as give their investors additional protection during periods of extraordinary market stress."

So what's the outlook for 2015 -- higher rates or global headwinds? Fidelity writes, "The most recent economic data showed continued strength in the economy and progress in the labor markets, keeping investors' expectations focused on a potential rate hike in either the summer or fall of 2015. Global headwinds, however, especially weak inflationary pressures and slowing growth in Asia and Europe, could postpone the timing of any U.S. monetary tightening."

Fidelity also recapped the details of the operations within the Fed's $300 billion term Fed RRP facility. They highlight the three main points: "(1) transactions will mature no later than January 5, 2015; (2) operations will be conducted in a Dutch auction format, a bidding process in which the lowest rates submitted are accepted until the cap is reached. At that point, all those bidding at the highest yield accepted at the auction—known as the "stop-out rate," or "stop" -- or below are awarded their respective bids at the stop-out rate; and (3) operations will be subject to a maximum bid rate of 10 basis points. This new term facility will serve to further the goals of the overnight Fed RRP, but only over year-end."

The piece continues, "Other noteworthy aspects of the FOMC minutes revealed that the Fed is considering the introduction of segregated cash accounts (SCAs). This potentially nontraditional tool could assist the Fed in normalizing policy by possibly helping to reinforce a floor under short-term rates. SCAs would allow banks to pledge funds held in a segregated account at the Fed as collateral. Simply stated, a bank would earn the IOER (interest on excess reserves) rate on the balances in the account and would in turn pay the depositors a negotiated rate. The bank's depositor would have a claim to those reserves in the event the bank became insolvent."

Finally, they discussed their strategy going forward. "Fidelity's prime institutional money market mutual funds remained focused on year-end positioning. Supply in the markets remains very thin and we expect supply to continue to shrink as we approach the end of 2014. With that in mind, the funds have been seeking high-quality investments that mature in 2015, and participating in longer-dated floating-rate transactions. As we head into the final weeks of 2014, we anticipate supply to become even more limited and that the funds will increase their utilization of both the overnight and term Fed RRP facilities."

Vanguard writes in its "2015 Global Economic and Investment Outlook", "Central bank policies should diverge over the next several years. In line with Vanguard's outlook for 2014, we believe the Federal Reserve will keep short-term rates near 0% through mid-2015. We stress, however, that the Fed's rate rise will likely be more gradual (either moving in smaller increments or pausing) and will end lower than some predict, after accounting for the structural nature of the factors restraining growth. The European Central Bank (ECB) and the Bank of Japan may be hard-pressed to raise rates this decade. Indeed, across most major economies, real (inflation-adjusted) short-term interest rates are likely to remain negative through at least 2017.... The Fed's rate liftoff may induce some market volatility, but long-term investors should prefer that to no liftoff at all."

Finally, Dreyfus Senior Portfolio Manager Patricia Larkin writes in her latest "Taxable Money Market Commentary," "While 2015 may well be the year the Fed finally raises short-term rates, it is clearly not a foregone conclusion. The pace of domestic growth as well as financial and monetary conditions around the world will shape the Fed's ability and willingness to move toward higher rates. The money market fund industry will also be tested by looming regulatory changes both to the funds themselves as well as to many issuing entities. During this period, we intend to follow our long-held conservative credit policy while seeking to maintain appropriate levels of liquidity."

Crane Data, which has published its flagship Money Fund Intelligence newsletter since 2006, is in the process of launching a new publication, Bond Fund Intelligence. Our latest monthly newsletter, which has been in "beta" testing the past two months, covers bond funds (including ETFs), with an initial focus on the ultra-short end of the spectrum. Bond Fund Intelligence includes news, features, and performance data on over 150 (up from 88 last month) of the largest bond funds. Crane Data also offers an Excel "complement" with even more performance, data and rankings, Bond Fund Intelligence XLS. BFI also includes our new Crane BFI Indexes, which will provide benchmarks for various bond market segments, including a new Conservative Ultra-Short BFI Index, a more focused benchmark for the more conservative funds in the space just beyond money market funds. While the official launch of Issue No. 1 is set for mid-January, Crane Data recently sent out its second "beta" edition to subscribers. (Let us know if you'd like to see a copy.)

The December "beta" issue of Bond Fund Intelligence features the articles: "Bond Funds Have Another Big Year; Will Party End in 2015?," an introduction to BFI and a review of year-to-date asset totals; "BFI Profile: Guggenheim's Belden Talks About GSY," an interview with William Belden, managing director and head of product development and management at Guggenheim Investments; and our monthly, "Bond Fund News, which recaps the month's biggest bond fund stories. We also include a number of bond fund rankings and full tables with Nov. 30, 2014, performance statistics, as well as our Crane Bond Fund Indexes.

Our lead "Bond Funds Have Another Big Year" article explains, "Welcome to our 2nd "beta" issue of the new Bond Fund Intelligence! Crane Data, which publishes Money Fund Intelligence and information on money market mutual funds, is launching a new suite of products that track bond funds. Our initial focus is on the conservative, ultra‐short segment of the market, where we hope to produce more focused peer groups and averages. But we intend to keep expanding our coverage (this issue has 150 funds vs. 88 in our first "beta" issue and is 8 pages instead of 4), and we'll continue to refine our data collections throughout the coming year."

It continues, "2014 appears to be yet another year of big asset gains for bond funds. Assets have increased by over $200 billion YTD through October (according to ICI's statistics), and they've increased by almost $2 trillion since 2008. Given the big inflows into bonds since the zero rate regime started, we don't expect 2015 to be pretty, if indeed rate hikes are in the cards. Nonetheless, interest in the short-term space should continue to build as MMF reform approaches in 2016."

In our monthly BFI "profile," we interviewed Guggenheim's William Belden, managing director and head of product development and management at Guggenheim Investments. We asked Belden about the launch and positioning of Guggenheim's Enhanced Short Duration ETF and its place in the changing cash management industry. On the firm's history and the fund's background, he said, "Guggenheim was founded in 1999 and has about $220 billion in assets under management with about $140 billion in fixed income. The short duration part of that space is a meaningful chunk of that asset base. The Guggenheim Enhanced Short Duration ETF (GSY) originally was launched as a passively managed index-based ETF in 2008 then switched over to an active strategy in 2011. I have been with Guggenheim since 2009."

On how GSY has been received, Belden said, "Assets and recognition for the GSY strategy started to take off at the beginning of 2012. We're now at about $530 million in assets. We have been very pleased with the performance and the acceptance of the product, but we still feel like we're scratching the surface of what the opportunity ultimately presents us with. We present GSY as a cash alternative, and certainly something that is appealing from a yield perspective in comparison to money market funds or other cash vehicles. We talk about the fact that 90 to 100 basis points in nominal terms, given the risk/return profile of GSY in contrast to other cash investments, is pretty appealing -- and that has resonated. I think GSY fills a very nice sleeve." (Watch for more of the BFI Guggenheim "profile" in coming days.)

In our "Bond Funds News" section, we cover a variety of stories, including, "Bond Funds Hoard Cash." It says, "An article in The Wall Street Journal, entitled, "Bond Funds Load Up on Cash," says "[L]arge bond funds are holding the most cash since the financial crisis as portfolio managers brace for potential price swings and unruly trading ahead of an expected Federal Reserve rate increase in 2015." Citing Morningstar, the article says the 10 largest U.S. bond funds held an average of 6.6% of their portfolios in cash -- twice as much as 2013 and the most since 2007. It adds, "Adding cash can hurt fund performance but is just one strategy bond managers are using to shore up their funds' defenses in preparation for a turn in investor sentiment."

Also in the news, "Gross's New Bond Fund Tops $1B." The news brief says, "Since Bill Gross defected from PIMCO to Janus in late September, assets in the fund he manages, the Janus Unconstrained Bond Fund, have topped $1 billion, reports The Wall Street Journal. Investors poured $770 million into the fund in November, on top of the $364 million to total $1.2 billion. It had a mere $12 million when he arrived. Gross's former fund, PIMCO Total Return, had $290 billion in assets as of May 2013, writes the WSJ. It has seen $60 billion in outflows since Gross left."

Crane Data's December BFI XLS with Nov. 30, 2014, data shows total bond fund assets at $1.175 trillion. Just 7% of this asset total was in the Ultra-Short segment of the market; Crane Data shows a mere $22.3 billion in our new Conservative Ultra-Short Bond Fund category and $59.3 billion in our Ultra-Short category. The Crane BFI Index, which tracks 150 bond funds, was yielding 1.44%. The BFI Conservative UltraShort Index yields 0.78%; BFI UltraShort Index yields 0.84%; BFI Short-Term Index yields 1.42%; BFI Intermediate-Term Index yields 2.16%; and BFI Long-Term Index yields 2.41%. The 5 largest bond funds in the BFI universe, as of Nov. 30, include: PIMCO Total Return Inst ($162.8B), Vanguard Total Bond Market 2 Index ($54.4B), Vanguard Total Bond Market Index ($53.4), PIMCO Income Inst ($40.4B), and DoubleLine Total Return Inst ($37.8B). Contact us for a sample issue or more details. Bond Fund Intelligence is $500 a year (1-3 users), or $1,000 a year including the BFI XLS "complement".

The Investment Company Institute released its "Money Market Fund Holdings" report for November, which tracks the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds (as of Oct. 31, 2014). ICI's "Prime and Government Money Market Funds' Daily and Weekly Liquid Assets" table shows Prime Money Market Funds' Daily liquid assets at 25.8% as of November 30, 2014, down from 26.4% on Oct. 31. Daily liquid assets were made up of: "All securities maturing within 1 day," which totaled 22.2% (vs. 22.3% last month) and "Other treasury securities," which added 3.6% (down from 3.6% last month). Prime funds' Weekly liquid assets totaled 37.8% (vs. 38.4% last month), which was made up of "All securities maturing within 5 days" (32.9% vs. 33.5% in October), Other treasury securities (3.4% vs. 4.1% in October), and Other agency securities (1.5% vs. 0.9% a month ago). (See also our previous Money Fund Portfolio Holdings story, Crane Data's Dec. 10 News, "Dec. Portfolio Holdings Show Spike in Agencies, CDs, Repo; Drop in TDs.")

Government Money Market Funds' Daily liquid assets totaled 60.7% as of Nov. 30 vs. 60.5% in October. All securities maturing within 1 day totaled 27.8% vs. 26.2% last month. Other treasury securities added 32.9% (vs. 34.2% in October). Weekly liquid assets totaled 78.2% (vs. 77.3%), which was comprised of All securities maturing within 5 days (37.8% vs. 37.3%), Other treasury securities (31.2% vs. 32.8%), and Other agency securities (9.2% vs. 7.2%).

ICI's "Prime and Government Money Market Funds' Holdings, by Region of Issuer" table shows Prime Money Market Funds with 41.8% in the Americas (vs. 41.2% last month), 20.5% in Asia Pacific (vs. 20.5%), 37.5% in Europe (vs. 38.0%), and 0.3% in Other and Supranational (same as last month). Government Money Market Funds held 86.3% in the Americas (vs. 86.6% last month), 0.6% in Asia Pacific (vs. 0.9%), 13.1% in Europe (vs. 12.5%), and 0.0% in Supranational (vs. 0.0%).

The table, "Prime and Government Money Market Funds' WAMs and WALs" shows Prime MMFs WAMs at 46 days as of November 30 vs. 46 days in October. WALs were at 80 days, up from 79 last month. Government MMFs' WAMs was at 46 days, down from 48 days last month, while WALs was at 76 days from 77 days. ICI's release explains, "Each month, ICI reports numbers based on the Securities and Exchange Commission's Form N-MFP data, which many fund sponsors provide directly to the Institute. ICI's data report for October covers funds holding 94 percent of taxable money market fund assets." Note: ICI publishes aggregates but doesn't publish individual fund holdings.

In their latest "Prime Money Market Fund Holdings Update," JP Morgan Securities', Alex Roever, Teresa Ho, and John Iborg report, among other things, a sharp drop in U.S. Treasuries and a drop in usage of the Fed's RRP program. They comment, "Notably, prime holdings of US Treasuries fell by 13% month-over-month to their lowest levels we have on record, as bill supply remains tight and similar assets (Fed RRP) offer more attractive yields.... Prime MMF exposures to US banks (excluding ABCP/CCP) decreased by 3%, while exposures to Eurozone banks increased by 5%.... Additionally, sector allocations to Muni and Foreign SSA products decreased by 11% and 4% since October, and are also close to their lowest historical levels, as issuance in these higher quality credits remains constrained."

Roever, et. al., continue, "In aggregate, prime MMFs increased exposures to banks by a modest $8bn (+0.7%) month-over-month.... CP balances increased by $11bn scattered across regions, while CD balances grew by $3bn. CP/CD maturities extended 8 days in aggregate month-over month, as issuers -- particularly Canadian and US banks (+37 days and +22 days respectively) -- extended issuances further out over the turn. Looking ahead to next month, prime MMF bank exposures are poised to decline at year-end, especially in time deposits and repo holdings. We have witnessed this trend emerge increasingly over the past few quarters as many international banks and their affiliates seek to shrink their balance sheets at quarter-ends in preparation to officially begin disclosing Basel III leverage ratios and LCRs in 2015. Consequently, supply is likely to remain tight through the remainder of December, incentivizing higher use of the term and overnight Fed reverse repo facilities."

On the reverse repo program, they write, "MMF usage of the Fed ON RRP fell by $8bn month-over-month. Money market funds accounted for $153bn of RRP usage at November month-end, or 88% of total usage. Government MMFs continued to be the main users of the facility -- 25 funds took down $103bn in RRP. Meanwhile, 27 prime MMFs took down $50bn. Non-MMF counterparties represented $20bn in usage. As scheduled, over the course of November, the Fed began varying the offering rate on the overnight RRP facility.... [D]emand for the facility still appears to be a function of the spread of ON GC to the offered rate rather than the actual rate offered itself, excluding technical dates."

Finally, JPM adds, "Demand for the [NY Fed's new] term RRP registered $102bn, $52bn above the program's $50 aggregate cap, with the stop-out rate coming in at 8bp. Of a total of 71 bidders, 40 received allocations. Three more operations will take place on each Monday during the remainder of the month, with offering amounts of $50bn, $100bn, and $100bn respectively. We suspect that most demand for the first term RRP operation came from government money market funds. Government MMFs have historically been the largest users of the ON RRP since its inception, and it appears as if prime funds have been seeking higher yielding opportunities for the time being. Additionally, usage of the overnight RRP facility fell by $41bn on the day of the first term operation -- nearly a one to one decrease -- suggesting that government funds switched from overnight to term RRP in favor of its longer maturity. Given the term RRP's 7-day put feature which makes it very attractive from a liquidity bucket perspective, and the lack of investable supply over December 31st, we expect MMF demand over the remaining three operations to continue to be strong."

In the face of a negative interest rate environment and regulatory uncertainty in Europe, Northern Trust launched a variable net asset value money market fund in November, the Euro Liquidity Fund. (See our Nov. 6 "Link of the Day," "Northern's New Euro VNAV MMF.") Northern also recently held a webinar, "Why Returns Should Matter for Money Market Investors," featuring Wayne Bowers, CIO, EMEA and APAC, and David Blake, director, International Fixed Income, to discuss the possibilities and pitfalls of the shifting money market landscape and to explain why they launched a VNAV euro MMF. We review Northern's recent move and comments below, and we also quote from yesterday's Wall Street Journal article, "European Money-Fund Managers Brace for Losses".

Bowers said there are three main threats to the MMF industry in Europe. The first is regulations, which will directly impact the MMF industry in Europe and will most likely result in the adoption of VNAV funds, similar to the rules adopted in the U.S. The second is banking regulations, which will affect the prime instruments that have historically been used by money market funds. The third is negative interest rates, which threaten the constant NAV nature of a traditional money fund, explains Northern.

"Our view is that we will see sovereign QE from the ECB, most likely in the first quarter of next year," added Blake. "The most important piece as it relates to euro money market funds is that injection of liquidity is going to lead to lower and lower rates." That, in turn, will have an effect on yield, Blake said, which leads to a key question -- "Are fund managers altering risk profiles to maintain a positive yield? We worry that the threat facing money market funds -- negative interest rates -- are at risk of changing manager behavior. We go back to the basics and remind ourselves what the core principles of MMFs are -- principle preservation, liquidity management, and yield maximization, in that order. But with all that's going on with the structure of CNAV money market funds [and] their inability to handle negative rates, we're worried that yield maximization is actually creeping up."

Blake continued, "There is an opinion that we hear voiced from time to time that money funds are a commoditized product, but we reject that. We don't believe that money funds are all of equal risk, and to understand why that is, investors must look into the risk profile. The primary risk metrics within money market funds are based around duration, credit selection, and liquidity levels." However, he added, the game has changed in recent years. "The idea of being able to anticipate central bank changes and position the portfolio for the advantage of your clients has all but been taken out of the portfolio managers' toolkit. Credit risk is really the only tool that PMs have left to add to return with their money market fund.... In the current environment, more yield means more risk -- there's no way around that. Therefore we conclude that money funds are not a commoditized product and that investors should examine carefully the embedded risk within them."

"The return environment is clearly challenging for all investors, including money market funds. Our view is clear: we don't compromise your money fund allocation, but we do recognize that every basis point counts," said Blake. Thus, Northern employs a cash segmentation strategy with its clients. "We suggest, when possible, that clients look to split cash allocation across two or more buckets. Each of those buckets has a different purpose, a different risk profile, and a different return profile." They suggest Operational Cash, a defensive asset allocation to cover short-term spending needs; Reserve Cash, medium term cash allocation for intermediate or uncertain spending needs, and Strategic Cash, a longer term allocation for a traditional fixed income product. "This provides higher yielding overall portfolio allocation but it does so in a risk-controlled manner -- so your money fund is doing exactly what it should do -- preserving capital and maintaining liquidity. You can complement that with a high yielding strategy and take the risk in the appropriate place," he adds.

Finally, they discussed VNAV and the future of money market funds. Given the direction of interest rates and the regulatory environment, Northern had been considering for a while the idea of launching a VNAV euro MMF, explained Bowers. "We saw the potential for the ECB monetary policy to go from zero to negative, which would mean that the high quality assets used in money market funds would be negative yielding. So we knew that the CNAV structure would be, and is, fundamentally flawed when rates turn negative. The core principals of a money market fund demand an alternative structure. Our goal was not only to take a long term solution, but also listened carefully to our clients and what they wanted," he said.

"It seemed to be quite obvious that the VNAV structure would be preferred by our investors over the alternatives," Bowers added. "The need for cash management won't ever go away. If you look forward, the need for a VNAV structure is quite obvious. It not only makes sense today from the negative interest rate environment, but also in the future when you look at regulatory change." They expect reforms to be passed within the next 18-24 months and the negative interest rate environment to prevail for the foreseeable future.

When asked to explain the difference between the CNAV and VNAV structure, Blake said there are no differences except one. "What is changing is the accounting methodology, the idea of being able to move to a variable NAV specifically to cope with negative interest rates. We're not changing our portfolio management, we're changing the accounting methodology," he explains.

Finally, in the Q&A portion, Blake was asked why Northern is adopting a VNAV when the rest of the market seems to be maintaining the CNAV. "CNAV with the cancellation of units, or with a reverse distribution mechanism, is essentially a structure where the price of the fund remains at 1.00, but it seeks to deal with the negative interest rate environment by the forced cancellation or the forced redemption of investors' shares or units in the fund," said Blake. "A VNAV will vary based on the underlying market movements. It's exactly the same economic outcome. The reason we like VNAV is threefold: our clients prefer it, we feel it is a more transparent structure, and thirdly we have some technical concerns around CNAV with unit cancellation."

In other European MMF news, yesterday's Wall Street Journal featured, "European Money-Fund Managers Brace for Losses." The article says, "Some of the world's biggest money managers are making sweeping changes to their European money-market funds as a negative interest rate makes it unprofitable to run the investments. The moves by BlackRock Inc. and Northern Trust Corp. stem from the European Central Bank's decision in September to cut one of its interest rates into negative territory. The rate cut threatened the profitability of the E93 billion ($116 billion) industry of euro-denominated money funds, which are used by large corporations and institutional investors as a place to park cash while earning a small amount of interest."

The Journal piece quotes Crane Data's Pete Crane, "You can presume every euro money market fund out there already has something in place to deal with this scenario, or they've given the money back already." It adds, "The shift complicates options for money-fund clients, who already are struggling with where to put cash denominated in euros as some banks now are charging to hold such deposits on the back of the September rate cuts. This is the first time that a major market for institutional money funds -- considered to be the dollar, the sterling and the euro -- has experienced this sort of widespread rate challenge, money-fund managers said.... Fund managers draw a distinction between negative yields stemming from rate cuts and losses that occur because the instruments they invested in have declined in value -- a taboo prospect referred to in the industry as "breaking the buck.""

Finally, it concludes, "Companies might not see a giant exodus, even if all funds begin yielding negatively, because of the lack of other appealing options. Fund managers say euro funds generally cost investors less money than they would lose by keeping their cash at banks. Indeed, industrywide, assets in euro funds have fluctuated on a daily basis, but assets under management have increased E6.8 billion since the end of August through mid-December, according to Crane Data. "The view is, this is their best alternative,” says Dave Fishman, co-head of Goldman Sachs' global liquidity business.""

The Federal Reserve issued its FOMC statement following its 2-day meeting yesterday and removed its "considerable period of time" language and replaced it with "patient". The Fed also released its "dots" or "target federal funds rate projections," which shows expectations of 4 rate hikes in 2015 and a median Fed funds target of 1.125% by yearend. (The Wall Street Journal notes that the estimates are 2.5% for 2016 and 3.625% for 2017.) Chair Janet Yellen also held a press release where she affirmed market expectations for a hike in the Fed funds target rate around mid-year in 2015. The FOMC statement says, "Information received since the Federal Open Market Committee met in October suggests that economic activity is expanding at a moderate pace. Labor market conditions improved further, with solid job gains and a lower unemployment rate.... Inflation has continued to run below the Committee's longer-run objective, partly reflecting declines in energy prices. Market-based measures of inflation compensation have declined somewhat further; survey-based measures of longer-term inflation expectations have remained stable."

They explain, "Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced. The Committee expects inflation to rise gradually toward 2 percent as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate. The Committee continues to monitor inflation developments closely."

The FOMC adds, "To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy."

They explain, "The Committee sees this guidance as consistent with its previous statement that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program in October, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored. However, if incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.... The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run."

Finally, the Fed writes, "Voting against the action were Richard W. Fisher, who believed that, while the Committee should be patient in beginning to normalize monetary policy, improvement in the U.S. economic performance since October has moved forward, further than the majority of the Committee envisions, the date when it will likely be appropriate to increase the federal funds rate; Narayana Kocherlakota, who believed that the Committee's decision, in the context of ongoing low inflation and falling market-based measures of longer-term inflation expectations, created undue downside risk to the credibility of the 2 percent inflation target; and Charles I. Plosser, who believed that the statement should not stress the importance of the passage of time as a key element of its forward guidance and, given the improvement in economic conditions, should not emphasize the consistency of the current forward guidance with previous statements."

The WSJ article, entitled, "Fed Sets Stage for Rate Hikes in 2015," explains, "The Federal Reserve took a delicate step toward raising short-term interest rates in 2015, but at the same time exposed its skittishness about signaling a historic move away from easy-money policies in place since the global financial crisis. In a statement Wednesday after a two-day policy meeting, the Fed broached the prospect of "beginning to normalize the stance of monetary policy," the most direct formal reference to raising rates it has made in years."

While money market mutual fund yields won't move higher in earnest until the Fed moves, gross yields have inched higher in recent weeks, primarily due to the Fed's experiments with a higher RRP rate (which ended Monday). Last month, our Crane 100 Money Fund Index, an average of the 100 largest taxable money market funds, inched up one bps to 0.03%, its first increase since June 2013. The rate increases can't come soon enough for money market funds, who have been waiving billions of dollars a year in fees, charging on average just 0.13% vs. 0.37% at the end of 2008 when current the zero rate regime began.

In other news, Reuters writes "U.S. Fed awards fewest reverse repos in almost a year", which says, "The U.S. Federal Reserve on Wednesday awarded $31.78 billion of overnight fixed-rate reverse repurchase agreements to 23 bidders at an interest rate of 0.05 percent, the New York Federal Reserve said on its website. Wednesday's allotment was the smallest since Dec. 23, 2013, when the Fed awarded $28.76 billion to 31 bidders at an interest rate of 0.03 percent, according to Fed data. On Tuesday, the U.S. central bank allotted $40.72 billion in overnight reverse repos to 29 bidders, including Wall Street dealers, money market mutual funds and mortgage finance agencies at an interest rate of 0.05 percent."

The Federal Reserve's latest Z.1 "Financial Accounts of the United States" statistical release (formerly the "Flow of Funds") for the Third Quarter of 2014 was published last week. The four tables it includes on money market mutual funds show that the Household sector remains the largest investor segment, and Credit Market Instruments is the largest investment segment. Table L.206 shows the Household sector with $1.113 trillion -- or 43.4% of the $2.565 trillion held in Money Market Mutual Fund Shares as of Q3 2014. Household shares increased by $27 billion in the 3rd quarter, but are are down $22 billion year-to-date (after rising $21 billion in 2013). Household sector money fund assets remain well below their record level of $1.581 trillion at year-end 2008.

Nonfinancial corporate businesses were the second largest investor segment, according to the Fed's data series, with $512.9 billion, or 20% of the total. Nonfinancial corporate business assets in money funds increased $19.5 billion in the quarter and are down $8.2 billion YTD. In 2013, they increased by $40.5 billion. Funding corporations, which includes securities lenders, remained the third largest investor segment with $367.7 billion, or 14.3% of money fund shares. They increased by $3.0 billion in the latest quarter and have fallen by $66.1 billion YTD. They dropped $58.8 billion in 2013. (Funding corporations held over $906 billion in money funds at the end of 2008.)

State and local governments held 6.3% of money fund assets ($161.1 billion). Private pension funds, which held $137.2 billion (5.3%), remained in 5th place. The Rest of the world category was the sixth largest segment in market share among investor segments with 4.5%, or $114.8 billion, while Nonfinancial noncorporate businesses held $82.4 billion (3.2%), State and local government retirement held $36.2 billion (1.4%), Property-casualty insurance held $21.1 billion (0.8%), and Life insurance companies held $19.2 billion (0.7%), according to the Fed's Z.1 breakout.

The Fed's "Flow of Funds" Table L.120 shows "Money Market Mutual Fund Assets" largely invested in Credit market instruments ($1.419 trillion, or 55.3%), which includes: Open market paper ($332 billion, or 12.9%; we assume this is CP), Treasury securities ($392 billion, or 15.2%), Agency and GSE backed securities ($347 billion, or 13.5%), Municipal securities ($279 billion, or 10.9%), and Corporate and foreign bonds ($71 billion, or 2.7%).

Other large holdings positions in the Fed's series include Security repurchase agreements <b:>`_ ($576 billion, or 22.4%) and Time and savings deposits ($531 billion, or 20.7%) <b:>`_. Money funds also hold minor positions in Foreign deposits ($23 billion, or 0.9%) and Miscellaneous assets ($19 billion, or 0.7%). Checkable deposits and currency went into negative territory with -$3.1 billion.

During Q3, Credit Market Securities (up $32 billion), Time and Savings Deposits (up $21 billion), Treasury securities (up $21 billion), Agency and GSE Backed Securities (up $19 billion), Security Repos (up $12 billion), Corporate and foreign bonds (up $5 billion), and Misc. Assets (up $3 billion), showed increases. Checkable Deposits and Currency (down $22 billion), Open Market Paper (down $9 billion), Foreign Deposits (down $4 billion), and Municipal Securities (down $2 billion), showed declines. (We're not aware of a detailed definition of the Fed's various categories, so aren't sure in some cases how to map some of these figures against other data sets.)

Wells Fargo Securities money market strategist Garret Sloan had some observations about the Fed's Z.1 report in his Dec. 15 commentary. He writes, "Parsing the data by investor type, retail investors reduced holdings of credit market instruments, which includes U.S. Treasuries, by $131 billion. The largest reductions came in two sectors: municipals and corporate bonds. Retail investors reduced holdings by 2.9 percent and 6.1 percent respectively. This investor type reduced GSE holdings by a much larger percentage of holdings, but the outright holdings of GSE debt amongst this investor class is so small relative to the others it would likely distort the true flow numbers. These are direct investments, and not investments through mutual funds.... Over this same period retail deposit and money market fund activity has risen, with retail money fund assets rising by 2.5 percent and deposits climbing by 1.2 percent."

Sloan adds, "In the corporate investor section of the report, activity in credit market instruments was largely unchanged, with holdings relatively flat at just over a quarter of a trillion dollars. Treasury, commercial paper, agency, municipal, mortgage, and ABS holdings remained steady. Money market fund shares rose over the period by 3.5 percent, while deposits were largely flat. However, there appears to be a striking omission from the Flow of Funds Report with respect to holdings of corporate bonds. Based on discussions with many large U.S. nonfinancial corporations, we can confirm that many of them hold corporate bonds in their portfolios. Yet, in the most recent AFP Liquidity Survey as well as the Flow of Funds report, corporate bond holdings are not broken out."

Finally, he says, "In the public entity investor space, credit market instruments fell by 2.4 percent. Reductions were relatively even across asset classes, with Treasuries, Agencies, corporate and mortgage-backed bonds each falling by similar percentages, though on a dollar basis the Treasury and Agency markets felt the lion's share of the reductions. Money market funds fell by 1.6 percent and repo agreements fell by 1.5 percent. Meanwhile, time and savings deposits rose on a QoQ basis by 3.1 percent. As a percentage of total public entity non-retirement investment assets, Treasury securities remain the largest single allocation, with 23.3 percent of holdings, followed by Agency securities, which represented 18.5 percent. Deposit products are the next largest allocation, with 18 percent, followed by mortgages, and corporate equities representing 8.3 percent and 6.9 percent respectively. Corporate bonds represent 6.7 percent of total public entity assets, followed by money market funds at 6.5 percent, and repo agreements at 5.2 percent."

Yesterday, we reported on Fitch Ratings stable outlook for money market funds in 2015. (See Monday's "News," "Money Fund Outlook Stable for 2015, Says Fitch; New Products, Global). Moody's, however, came out with a slightly different take on 2015, issuing a negative outlook for money market funds next year with its publication, "2015 Outlook - Money Market Funds: Market Challenges Underpin Negative Outlook." Moody's explains, "Moody's has revised its outlook for money market fund ratings to negative from stable. The change in outlook reflects our expectation that 2015 will be an inflection point where, despite cautious investment approaches, MMFs will struggle to maintain the highest credit and stability profiles in the face of an ongoing supply-demand imbalance, low to negative fund net yields, and elevated asset flow volatility." Below, we excerpt from Moody's European-centric outlook, which focuses on supply, regulations, and interest rates.

Among its projections, Moody's expects the number of Aaa-mf funds to drop. They write, "MMFs will continue to face an unstable market environment with an ongoing supply-demand imbalance, potential divergence in global monetary policies, reduced secondary market liquidity, an expected increase in investor flow volatility and increased transition risk in global bank ratings. The combination of these factors should weaken funds' Credit and Stability Profiles under Moody's MMF methodology, and challenge MMF's ability to mitigate these pressures through active management. MMF managers' commitment to maximize fund yields in a historic low interest rate environment results in increasing extension of portfolios' maturities. A barbell strategy involves investing a large proportion of portfolio assets in longer-dated securities to generate higher yields, while offsetting these riskier investments with short-dated high quality securities."

Moody's explains, "MMF managers may also achieve this balancing act by lowering portfolio credit quality, but our data shows that this has not been the case so far, as credit quality in Moody's-rated MMF has generally improved over the last 12 months. Despite improvements in overall portfolio credit quality, higher percentages of longer-term investments and a reduction in availability of Aaa-rated securities have elevated exposure to market risk. This trend is clearly highlighted by the evolution of Euro MMF stress NAVs, which hit their lowest level in 12 months in Q3 2014. This negative trend would be further exacerbated in 2015, in case of further deterioration in portfolio credit quality, for example in the event of credit pressures in the banking sector."

Further, they comment, "[A] shortage of high quality short-term investments may drive greater risk-taking in MMFs. Rising investor demand globally for high quality short-term (overnight to 60 days) investments, combined with regulatory disincentives for financial institutions to rely on wholesale short-term funding will keep availability of money market supply tight, according to estimates from J.P. Morgan, and short-term rates floored."

Moody's speculates, "Tighter supply conditions for the highest quality short-term investments will push MMFs to extend their investment tenors in pursuit of yield and capacity, and potentially move down in credit quality in pursuit of the same. MMFs that pursue longer tenor and lower quality investments increase the fund's susceptibility to liquidity risk, a credit negative. We believe the severity of this risk has increased in the current market environment where availability of secondary market liquidity is an emerging concern due to the significant declines in broker-dealer security inventories."

They add, "Alternatives to direct bank obligations also remain limited. Non-financial commercial paper outstanding volumes have increased, but volumes are still relatively small. Similarly, asset backed commercial paper (ABCP) outstanding volumes are likely to remain depressed, as new regulations reduce the attractiveness for banks to finance assets through ABCP conduits."

Moody's Outlook continues, "In the US, the Fed's overnight reverse repo facility (RRP) and its newly announced term RRP facility will continue to be a temporary relief valve for eligible government and prime MMF counterparties against ongoing supply-demand imbalances.... While the new $300 billion aggregate facility cap reduces the utility of the facility at quarter-ends, the facility is only going to grow in importance for government MMFs, as new MMF reforms drive assets from prime funds into government MMFs. The end of QE in the US will also provide some supply benefits in 2015. On top of the ongoing supply-demand imbalance, gradual deterioration in banking system credit profiles will continue to create additional supply challenges. Further, in September, Moody's announced proposed changes to its bank rating methodology, which, if adopted, would likely impact eligible supply levels, as the proposed changes are likely to result in changes to banks' deposit and senior unsecured ratings."

On interest rates, Moody's comments, "Monetary policy normalization in the US and the UK and ECB's accommodative monetary policy will drive down MMF balances. While we expect monetary policy normalization to begin in the US and the UK, the timing and pace of policy normalization will be highly dependent on economic conditions. Following initial rate hikes, US and UK MMF balances are likely to fall, as MMF yields temporarily lag market yields on direct investments. As MMF yields catch up, MMF balances will rise consistent with previous tightening cycles, but not to the same degree, because US MMF reforms have made prime funds less attractive investments, and the supply-demand imbalance keeps government MMF yields floored."

They write, "In Europe, the ECB's accommodative monetary policy will continue to weigh heavily on short-term rates. Extremely low to negative fund net yields may become the new normal for Euro MMFs. While some Euro-denominated government MMFs started posting negative net yields in November, we expect net yields on Euro prime MMFs to continue to trend downwards, and they may turn negative for some prime funds in 2015. This will force Euro MMF investors to choose between paying for MMFs' safety and liquidity or investing in positive yielding alternative products featuring lower liquidity and/or riskier credit profiles. While many investors will stay put prioritizing safety and liquidity over yield, we expect a rise in outflows in 2015, as other investors show little appetite to stomach negative yields. In response to investor behavior, Euro MMF managers will feel greater pressure to increase credit and/or duration risk in funds, in order to generate positive yields, in some cases pushing the boundaries of key MMF rating factors."

Regulations will make MMFs less attractive liquidity options, says Moody's, concluding, "New US MMF reforms represent the biggest changes to the MMF product characteristics since the inception of MMFs in the 1970s.... These changes forever alter two of the qualities -- convenience and liquidity -- that investors found most attractive in MMFs as cash management products. While we have seen few signs of reform-related outflows from institutional prime MMFs to date, we expect outflows to accelerate through 2015 and into 2016, when the rules are scheduled to be implemented. Sweep account clients are likely to be among the early movers, as they have indicated that liquidity fees and redemption gates are major obstacles to product acceptance."

Finally, they say, "Government MMFs are a likely reinvestment choice for investors redeeming money from prime MMFs, but expectations that the rush of new money may worsen the supply-demand imbalance may make them a less attractive option. Alternative liquidity products such as separately managed accounts (SMAs), enhanced cash funds, ultra- and short-duration bonds will also be in higher demand, as cash investors seek to define the "new safe" liquidity products. All in all, we would not be surprised to see reform-related outflows exceed 25% of total AUM of institutional US prime funds between now and 3Q 2016 when the rules will be implemented. While it is impossible to determine when the European regulation on MMFs will be finalized, it seems that one of the key proposals initially made by the Commission -- to impose a 3% capital buffer on CNAV funds -- is strongly contested by fund managers. We therefore expect to see the future European MMF rules to combine principles of the initial proposal with some principles similar to the new US rules, such as floating NAV for prime funds held by institutional investors."

What's in store for money market funds in 2015? The outlook for MMFs is "stable" according to Fitch Ratings in its new report, "2015 Outlook: Money Market Funds." Fitch sees three major themes emerging next year: regulatory clarity, supply challenges, and interest rate divergence between the U.S. and Europe. The report says, "Fitch Ratings' Stable Outlook for money funds globally is underpinned by the funds' active, conservative management of credit, market and liquidity risks. The Outlook also reflects our view that [the] status quo will hold in the short term for money fund regulations globally, as reform will take time to implement. Nevertheless, Fitch recognizes that money fund reforms will have far-reaching implications for funds and investors in the US and Europe over time."

On reforms, Fitch discusses the long road to implementation. "The two-year implementation period that the SEC has provided for the main aspects of reform gives money fund managers and their institutional clients sufficient time to adjust to the new rules or opt for new alternatives. Investors have thus far taken a wait-and-see approach, and US money fund assets have been largely stable since the reform announcement."

Across the pond, the debate is just heating up. Fitch writes, "In Europe, the discussions about money fund regulation continue between the European Parliament, the Council of the European Union, and the European Commission, and may be finalized in 2015. Recent proposed amendments, dated 12 November 2014, from the rapporteur for the Economy and Monetary Affairs (ECON) Committee to the European Parliament are in many respects close to the US approach and would support some global regulatory consistency. The proposed regulation, which is due to be debated by ECON, is an amended version of the European Commission's original text. The main changes include allowing some money funds that invest mainly in EU public debt or are only available to retail investors, public authorities and non-profit organizations to continue to operate as constant net asset value (CNAV) funds without the need for a 3% capital buffer."

They add, "The proposal would also provide funds with the ability to apply amortized cost accounting for assets maturing within 60 days as well as, in times of liquidity stress, impose liquidity fees or redemption restrictions. The European Council is also reviewing the Commission's original text and will propose its own amendments. The proposed rules would probably drive some outflows as corporate treasurers accustomed to CNAV funds may look for alternative places to park their cash. However, we believe the impact may not be as dramatic as some participants initially feared, as a recent Fitch poll shows many investors will not change their cash management strategy, in part because alternatives are limited."

Fitch also expects supply challenges to persist in 2015. The Outlook explains, "Changing assumptions about the likelihood of sovereign support are placing downward credit pressure on banks, and in some cases removing their eligibility as investments for money funds.... Basel III regulations are constraining supply for money funds and cash investors. Although the new Basel III capital and liquidity rules do not take full effect for a few years, banks have been under pressure to achieve compliance much sooner. Basel III liquidity coverage ratio and leverage ratio requirements are putting pressure on the availability of short-term bank debt, deposits and repo.... This may partly offset the market supply issues but does not address the need for daily and weekly liquid assets. Callable and putable commercial papers (CPs) are examples of such new products."

But there are some supply opportunities out there. "Money funds are considering selective investments in issuers from Asia-Pacific and the Middle East, and to a lesser extent Latin America.... They primarily stem from Singapore, China, South Korea, the United Arab Emirates, Qatar and Chile. Money fund allocations to non-US sovereigns and quasi-sovereign entities, such as supranationals and government agencies, have risen but remain a function of available supply and the level of yield offered.... The US Treasury issued new floating-rate notes (FRNs) this year, and so far Treasury money funds have been the main buyers, surpassing investments by prime and government funds that have more alternatives to choose from.... The Fed's reverse repo program (RRP), introduced in September 2013, has been helpful for US money funds as a source of new supply. Demand for the RRP has been robust among US money funds and US Treasury money funds in particular."

Fitch also looks at interest rates and the impact on portfolios. They say, "Fitch expects the monetary policies of the eurozone, the UK, and the US to diverge in 2015. Low interest rates are likely to persist in the eurozone for the foreseeable future, with the ECB keeping policy rates unchanged until at least 2017. Policy rates are, however, expected to increase in the UK, with the Bank of England raising its policy rate in 1Q15, and in the US, with a possible Fed Funds target rate hike in mid-2015."

In the US, yields may start rising, but not in Europe. Fitch comments, "Euro money fund yields will remain low and are likely to turn negative in the year, while sterling and US dollar money funds may see their yields picking up timidly in 2015 as a result of expectations for slow interest-rate rises in these markets. Euro money funds are close to posting negative yields, as average euro money fund yields declined to 1bp at end-November 2014. With euro short-term rates negative for most high-quality issuers, funds are reinvesting the proceeds of maturing higher-yielding assets at lower, often negative rates. This will eventually turn euro money-fund yields negative."

Fitch also expects further consolidation, writing, "Fitch believes there is potential for further industry consolidation in 2015. Sustained low yields and resulting margin pressure, combined with potential corporate cash outflows, may cause some smaller managers to reconsider their commitment to the cash management business. Asset managers willing to be leading active players in liquidity product management will drive product innovation and/or customization to meet investors' needs for their short-term and strategic cash. Examples of new or growing alternative liquidity products include: 'cash plus' funds (funds with more duration and/or credit risk than a AAAmmf-like fund); repo-backed products (pooled funds investing in repos or notes backed by repo contracts or other collateral pools); direct investments in money market instruments for the largest and more sophisticated cash investors; unregulated pooled products; or separately managed accounts."

Finally, Fitch adds, "Global money fund assets under management totaled USD $4.7 trillion at end-June 2014, according to latest ICI data. This is higher than a year before, stable in most regions but Asia where Chinese money funds have grown considerably, reaching USD $257B from USD $50B. This was primarily driven by the fast development of a single Chinese money fund, which began accepting money direct from online payment services accounts. Around 90% of money fund assets are domiciled in just six countries: the US, France, Ireland, Luxembourg, Australia, and China. The remainder are domiciled in multiple other countries, notably Korea, Brazil, Mexico, Taiwan, Canada, South Africa, and India. Fitch expects global money fund assets to continue to be dominated by the US and core European domiciles (France, Ireland and Luxembourg). However, money funds in developing markets, notably in Asia, may rise as demand for such products is likely to continue to grow, albeit at a slower pace than this year."

In a speech Thursday, SEC Chair Mary Jo White spoke on "Enhancing Risk Monitoring and Regulatory Safeguards for the Asset Management Industry" and gave an overview of the asset management in a "new period of regulatory change." Judging by her comments, it seems the SEC's focus is moving beyond money market funds to other areas, such as data reporting for separate accounts and other investments and Financial Stability Oversight Council concerns over systemic risks. "Over the years, our regulatory program for asset management has grown and adapted, guided by our mission, to address ever-evolving markets and the challenges that evolution presents. We are now embarking on a new period of regulatory change, driven by long-term trends in the industry and the lessons of the financial crisis. This morning, I will talk about the SEC's perspective on the asset management industry today through a review of some of its most important features, highlighting the regulatory issues that the industry presents, and setting out how we plan to enhance and strengthen our response to those issues," said White in her introductory remarks.

She continued, "The Commission has regularly sought to evaluate and enhance its regulations to address portfolio composition and operational risks. Most recently, the Commission approved major reforms to money market funds that demand significant new controls to address the risks those funds present to investors and, potentially, the larger financial system. Working with our fellow regulators, the Commission has also established reporting requirements for advisers to private funds that includes important information about certain private fund activities. With respect to operational risk, the Commission has implemented a number of rules to protect customer information, including, most recently in 2013, rules to address the risk of identity theft."

She then discussed some new initiatives. "First, we must improve the data and other information we use to draw conclusions about the risks of the asset management industry and develop appropriate regulatory responses. Existing data requirements need to be expanded and updated. Second, we must take steps to ensure that registered funds enhance their fund-level controls so that they are able to identify and address risks related to the composition of modern portfolios, whether those spring from the overall financial profile of a fund, such as its liquidity levels, or the nature of specific instruments, such as derivatives. And third, we must take steps to ensure that firms have a plan for transitioning their clients' assets when circumstances warrant. If we have learned nothing else from the financial crisis, it is that we must test and plan for the worst."

On data reporting, she said, "The SEC's ability to effectively identify and address risks in the asset management industry is diminished without the ability to monitor for those risks at the fund level and across the entire industry. While funds and advisers currently report significant information about their portfolios and operations to the Commission, these reporting obligations have not, in my view, adequately kept pace with emerging products and strategies being used in the asset management industry."

She continued, "For example, our rules do not require standardized reporting for many types of derivatives used by funds today. This is a clear gap, particularly given the growth in the volume and complexity of derivatives used by funds. Similarly, we do not today receive the most complete information about securities lending by funds, which is done by approximately a quarter of funds. The staff is developing recommendations for the Commission to modernize and enhance data reporting for both funds and advisers.... Beyond that, the reporting and disclosure of fund investments in derivatives, the liquidity and valuation of their holdings, and their securities lending practices should all be significantly enhanced. Collecting more data on separately managed accounts, where the adviser manages assets owned by a particular client, will also better inform examination priorities and the assessment of the risks associated with those accounts, which are a significant portion of the business of many investment advisers."

On transition planning and stress testing, she explained, "A third focus of our regulatory enhancements is on the impact on investors of a market stress event or when an investment adviser is no longer able to serve its clients.... The staff is therefore developing a recommendation to require investment advisers to create transition plans to prepare for a major disruption in their business.... The staff is also considering ways to implement the new requirements for annual stress testing by large investment advisers and large funds, as required by the Dodd-Frank Act. Building on what we have learned about stress testing through money market reform, the staff is evaluating what protocols would be appropriate for investment advisers and investment companies."

On systemic risk, White said, "Before closing, I want to change my lens a bit and reflect very briefly on the Commission's role in addressing systemic risk, which has become part of the public dialogue about the regulation of asset management. The term "systemic risk" can mean different things to different speakers, and addressing the range of meanings is well beyond the scope of my remarks today. But, clearly, one of the most fundamental post-crisis changes for all of the financial regulators, including the Commission, has been an emphasis on addressing risks that could have a systemic impact on the securities markets or the financial system as a whole. This renewed emphasis, in my view, complements our long-standing mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation."

Further, "Truly tackling systemic risk in any area, obviously, demands a broader program than one agency can execute. Systemic risks cannot be addressed alone -- they are, after all, "systemic." Risks that could cascade through our financial system could have an impact on a range of market participants, many of which we do not oversee. The Financial Stability Oversight Council (FSOC) is an important forum for studying and identifying systemic risks across different markets and market participants. The market perspective that the SEC brings is an essential component of FSOC's efforts. And FSOC's current review of the potential risks to the stability of U.S. financial system of asset managers is a complement to the work we are now undertaking."

In conclusion, White commented, "In all of these efforts, the details will matter a great deal and there is significant work to do before we have final rules in place. We will be looking to investors and market participants to provide us their views, and I will be working closely with my fellow Commissioners to translate staff recommendations into Commission action. While the SEC's regulation of asset management is strong and comprehensive, the source of that strength has been our willingness to take stock of our rules with a clear vision and implement the necessary changes to make effective regulation that fits current market realities. We have done that many times since 1940, and it is essential that we do so again in 2015." (Side note: The FSOC meets next week, Dec. 18, and a "discussion regarding the Council's ongoing work on asset management and a discussion of nonbank financial company designations" is on its agenda.)

Crane Data published its latest Money Fund Intelligence Family & Global Rankings earlier this week, which rank the asset totals and market share of managers of money market mutual funds in the U.S. and globally. The December edition, with data as of Nov. 30, shows asset increases for about half of money fund complexes in the latest month, as well as modest gains over the past three months. Assets were basically flat in November, increasing only 0.8%. Over the last 3 months, assets were up 2.6%, and over the last 12 months, assets are relatively flat, down 0.8%. Below, we review the latest market share changes and figures. (These "Family" rankings are available to our Money Fund Wisdom subscribers.)

BlackRock, Dreyfus, Wells Fargo, Northern, Goldman Sachs, and Invesco were the biggest gainers in November, rising by $11.8 billion, $5.1 billion, $3.8 billion, $2.9 billion, $2.8 billion, and $2.0 billion, respectively. BlackRock, Goldman Sachs, JP Morgan, Dreyfus, First American, and Wells Fargo led the increases over the 3 months through Nov. 30, 2014, rising by $20.5B, $12.6B, $9.7B, $9.2B, $4.4B, and $3.3B billion, respectively. Money fund assets overall jumped by $21.0 billion in November, increased by $63.5 billion over the last three months, and decreased by $20.9 billion over the past 12 months (according to our Money Fund Intelligence XLS).

Our latest domestic U.S. money fund Family Rankings show that Fidelity Investments remained the largest money fund manager with $405.3 billion, or 15.8% of all assets (up $1.4 billion in November, down $4.6B over 3 mos. and down $24.6B over 12 months), followed by JPMorgan's $248.2 billion, or 9.7% (up $1.7B, up $9.7B, and down $1.8B for the past 1-month, 3-months and 12-months, respectively). BlackRock moved up to third with $209.0 billion, or 8.2% of assets (up $11.8B, up $20.5B, and up $4.0B). Federated Investors fell to fourth with $205.1 billion, or 8.0% of assets (down $2.3B, up $2.7B, and down $16.0B), and Vanguard ranks fifth with $172.4 billion, or 6.7% (up $202M, up $422M, and down $2.8B).

The sixth through tenth largest U.S. managers include: Dreyfus ($166.2B, or 6.5%), which moved ahead of Schwab ($161.8B, 6.3%), followed by Goldman Sachs ($145.9B, or 5.7%), Wells Fargo ($115.2B, or 4.5%), and Morgan Stanley ($108.7B, or 4.2%). The eleventh through twentieth largest U.S. money fund managers (in order) include: SSgA ($79.8B, or 3.1%), Northern ($78.8B, or 3.1%), Invesco ($60.7B, or 2.4%), BofA ($50.7B, or 2.0%), Western Asset ($43.7B, or 1.7%), First American ($40.5B, or 1.6%), UBS ($36.2B, or 1.4%), Deutsche ($31.6B, or 1.2%), Franklin ($19.8B, or 0.8%), and RBC ($17.8B, or 0.7%). Crane Data currently tracks 72 managers, same as last month.

Over the past year, Goldman Sachs showed the largest asset increase (up $14.7B, or 11.3%; followed by Morgan Stanley (up $14.1B, or 14.6%), Northern (up $5.5B, or 6.8%), BlackRock (up $4.0B, or 2.1%), and First American (up $3.9B, or 10.8%). Other gainers since Nov. 30, 2013, include: American Funds (up $2.9B, or 21.8%), BofA (up $2.0B, or 4.0%), SEI (up $1.8B, or 15.7%), Western (up $1.3B, or 3.1%), and Franklin (up $1.0B, or 5.3%). The biggest declines over 12 months include: Fidelity (down $24.6B, or -5.6%), Federated (down $16.0B, or -7.2%), UBS (down $8.9B, or -19.7%), SSgA (down $5.0B, or -6.0%), and Deutsche (down $4.6B, or -12.2%). (Note that money fund assets are very volatile month to month.)

When European and "offshore" money fund assets -- those domiciled in places like Dublin, Luxembourg, and the Cayman Islands -- are included, the top 10 managers match the U.S. list, except for Goldman moving up to No. 4, and Western Asset appearing on the list at No. 9. (displacing Wells Fargo 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 largest families: Fidelity ($412.2 billion), JPMorgan ($380.3 billion), BlackRock ($328.9 billion), Goldman Sachs ($228.3 billion), and Federated ($214.8 billion). Dreyfus ($190.5B), Vanguard ($172.4B), Schwab ($161.8B), Western ($133.3B), and Morgan Stanley ($126.9B) round out the top 10. These totals include offshore US Dollar funds, as well as Euro and Pound Sterling (GBP) funds converted into US dollar totals.

In other news, our December 2014 Money Fund Intelligence and MFI XLS show that yields have begun climbing for the first time since June 2013 in the month ended November 30, 2014. Our Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 838), moved up a tick to 0.02% for the 7-Day Yield and remained at 0.01% for the 30-Day Yield (annualized, net) Average. (The Gross 7-Day Yield was unchanged at 0.13%.) Our Crane 100 Money Fund Index shows an average 7-Day Yield of 0.03%, up from 0.02%, and a 30-Day Yield of 0.02%, same as last month. (The Gross 7- and 30-Day Yields for the Crane 100 remained unchanged at 0.16%.) For the 12 month return through 11/30/14, our Crane MF Average returned a record low of 0.01% and our Crane 100 returned 0.02%.

Our Prime Institutional MF Index yielded 0.03% (7-day), while the Crane Govt Inst Index moved up to 0.02% (from 0.01%). 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 0.09% (down from 0.10%), Treasury 0.06%, and Tax Exempt 0.11% in November.) The Crane 100 MF Index returned on average 0.00% for 1-month, 0.00% for 3-month, 0.02% for YTD, 0.02% for 1-year, 0.04% for 3-years (annualized), 0.05% for 5-year, and 1.58% for 10-years.

Crane Data released its December Money Fund Portfolio Holdings yesterday, and our latest collection of taxable money market securities, with data as of Nov. 30, 2014, shows jumps in Agencies, CDs, and Repo, and drops in Other (Time Deposits) and Treasuries. Money market securities held by Taxable U.S. money funds overall (those tracked by Crane Data) increased by $11.5 billion in November to $2.451 trillion. Portfolio assets increased by $4.7 billion in October, $42.4 billion in September, and $28.2 billion in August, after decreasing by $6.2 billion in July. CDs remained the largest portfolio composition segment among taxable money funds, ahead of Repos. In third were Treasuries, just ahead of CP. These were followed by Agencies, Other (Time Deposits), and VRDNs. Money funds' European-affiliated holdings stood at 28.1%, the same level as last month. Below, we review our latest Money Fund Portfolio Holdings statistics.

Among all taxable money funds, Certificates of Deposit (CDs) were up 2.1% in November, increasing $11.3 billion to $563.3 billion, or 23.0% of holdings, after rising $5.6 billion in October, dropping $20.1 billion in September, and rising $1.6 billion in August. Repurchase agreement (repo) holdings increased by $10.8 billion to $522.1 billion, or 21.3% of assets, after decreasing $85.3 billion in October, increasing $84.4 billion in September, and rising $4.3 billion in August. Treasury holdings, the third largest segment, decreased by $3.0 billion to $385.9 billion (15.7% of holdings). Commercial Paper (CP), the fourth largest segment, increased by $0.8 billion to $380.0 billion (15.5% of holdings). Government Agency Debt was up $11.7 billion to $347.3 billion (14.2% of assets). Other holdings, which include primarily Time Deposits, decreased sharply, (down $18.2 billion) to $226.9 billion (9.3% of assets). VRDNs held by taxable funds decreased by $1.8 billion to $25.4 billion (1.0% of assets).

Among Prime money funds, CDs still represent over one-third of holdings with 36.9% (up from 36.3% a month ago), followed by Commercial Paper (24.9%). The CP totals are primarily Financial Company CP (14.8% of holdings) with Asset-Backed CP making up 5.7% and Other CP (non-financial) making up 4.4%. Prime funds also hold 5.6% in Agencies (up from 4.9%), 3.6% in Treasury Debt (down from 3.9%), 4.1% in Other Instruments, and 6.4% in Other Notes. Prime money fund holdings tracked by Crane Data total $1.526 trillion (up from $1.522), or 62.3% of taxable money fund holdings' total of $2.451 trillion.

Government fund portfolio assets totaled $461.0 billion in November, up from $452.0 billion last month, while Treasury money fund assets totaled $466.0 billion, down from $495.1 billion at the end of October. Government money fund portfolios were made up of 56.4% Agency Debt securities, 24.0% Government Agency Repo, 2.8% Treasury debt, and 16.3% in Treasury Repo. Treasury money funds were comprised of 68.7% Treasury debt, 30.1% Treasury Repo, and 1.1% Government agency, repo and investment company shares.

European-affiliated holdings increased $1.4 billion in November to $688.5 billion (among all taxable funds and including repos); their share of holdings remains 28.1%, the same as last month. Eurozone-affiliated holdings also increased slightly (up $9.5 billion) to $359.6 billion in November; they now account for 14.7% of overall taxable money fund holdings. Asia & Pacific related holdings increased by $1.0 billion to $308.6 billion (12.6% of the total), while Americas related holdings increased $9.0 billion to $1.452 trillion (59.3% of holdings).

The overall taxable fund Repo totals were made up of: Treasury Repurchase Agreements (up $3.1 billion to $264.4 billion, or 10.8% of assets), Government Agency Repurchase Agreements (up $1.5 billion to $167.6 billion, or 6.8% of total holdings), and Other Repurchase Agreements (up $6.2 billion to $90.0 billion, or 3.7% of holdings). The Commercial Paper totals were comprised of Financial Company Commercial Paper (up $1.9 billion to $226.1 billion, or 9.2% of assets), Asset Backed Commercial Paper (up $1.4 billion to $87.3 billion, or 3.6%), and Other Commercial Paper (down $2.5 billion to $66.6 billion, or 2.7%).

The 20 largest Issuers to taxable money market funds as of Nov. 30, 2014, include: the US Treasury ($386.2 billion, or 17.3%), Federal Home Loan Bank ($207.4B, 9.3%), Federal Reserve Bank of New York ($144.1B, 6.5%), BNP Paribas ($63.7B, 2.9%), Credit Agricole ($60.2B, 2.7%), Wells Fargo ($59.2, 2.7%), JP Morgan ($58.0B, 2.6%), Bank of Tokyo-Mitsubishi UFJ Ltd ($57.2B, 2.6%), RBC ($55.9B, 2.5%), Bank of Nova Scotia ($54.4B, 2.4%), Federal Home Loan Mortgage Co ($52.0B, 2.3%), Bank of America ($50.6B, 2.3%), Federal National Mortgage Association ($46.3B, 2.1%), Citi ($44.5B, 2.0%), Sumitomo Mitsui Banking Co ($44.2B, 2.0%), Barclays PLC ($44.2B, 2.0%), Toronto-Dominion ($42.7B, 1.9%), Credit Suisse ($41.5B, 1.9%), Natixis ($41.0B, 1.8%), and Federal Farm Credit Bank ($38.9B, 1.7%).

In the repo space, Federal Reserve Bank of New York's RPP program issuance (held by MMFs) remained the largest program with 27.6% of the repo market. 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 ($144.1B, 27.6%), Bank of America ($41.5B, 7.9%), BNP Paribas ($39.6B, 7.6%), Barclays ($31.6B, 6.1%), Credit Agricole ($25.9B, 5.0%), Wells Fargo ($24.4B, 4.7%), Societe Generale ($24.3B, 4.7%), JP Morgan ($23.6B, 4.5%), RBC ($20.9B, 4.0%), and Credit Suisse ($20.2B, 3.9%).

The 10 largest issuers of CDs, CP and Other securities (including Time Deposits and Notes) combined include: Bank of Tokyo-Mitsubishi UFJ Ltd ($48.7B, 4.7%), Sumitomo Mitsui Banking Co ($44.2B, 4.3%), Toronto-Dominion Bank ($37.6B, 3.6%), Bank of Nova Scotia ($35.7B, 3.4%), RBC ($35.0B, 3.4%), DnB NOR Bank ASA ($34.7B, 3.3%), Wells Fargo ($34.7B, 3.3%), Credit Agricole ($34.3B, 3.3%), Natixis ($34.1B, 3.3%) and JP Morgan ($33.9B, 3.3%).

The 10 largest CD issuers include: Bank of Tokyo-Mitsubishi UFJ Ltd ($38.5B, 6.9%), Sumitomo Mitsui Banking Co ($37.7B, 6.8%), Toronto-Dominion Bank ($37.1B, 6.7%), Bank of Montreal ($30.7B, 5.5%), Mizuho Corporate Bank Ltd ($30.1B, 5.4%), Bank of Nova Scotia ($30.1B, 5.4%), Wells Fargo ($26.0B, 4.7%), Rabobank ($23.0B, 4.1%), Natixis ($19.5B, 3.5%), and RBC ($16.7B, 3.0%).

The 10 largest CP issuers (we include affiliated ABCP programs) include: JP Morgan ($23.0B, 7.2%), Commonwealth Bank of Australia ($16.7B, 5.3%), Westpac Banking Co ($16.5B, 5.2%), Lloyds TSB Bank PLC ($15.7B, 4.9%), RBC ($13.7B, 4.3%), BNP Paribas ($10.8B, 3.4%), Australia & New Zealand Banking Group ($9.8B, 3.1%), Toyota ($9.2B, 2.9%), DnB NOR Bank ASA ($9.0B, 2.8%), and National Australia Bank Ltd ($8.9B, 2.8%).

The largest increases among Issuers include: Bank of Montreal (up $8.8B to $38.1B), RBC (up $8.1B to $55.9B), Mizuho Corporate Bank (up $5.1B to $38.7B), Federal Home Loan Mortgage Co. (up $4.2B to $52.0B), Federal National Mortgage Association (up $3.5B to $46.3B), Bank of America (up $3.2B to $50.6B), Rabobank (up $3.1B to $29.6B), BNP Paribas (up $2.9B to $63.7B), Barclays (up 2.9B to $44.2B), and Federal Home Loan Bank (up $2.8B to $207.4B).

The largest decreases among Issuers of money market securities (including Repo) in November were shown by: Bank of New York Mellon (down $11.4B to $10.8B), DnB Norbank ASA (down $8.2B to $34.7B), Citi (down $7.7B to $44.5B), Bank of Tokyo-Mitsubishi UFJ Ltd. (down $4.3B to $57.2B), Swedbank AB (down $3.9B to $29.6B), Goldman Sachs (down $3.8B to $10.9B), US Treasury (down $2.7B to $386.2B), Credit Agricole (down $2.6B to $60.2B), Skandinaviska Enskilda Banken AB (down $2.5B to $30.0B), and Australia & New Zealand Banking Co. (down $2.3B to $18.3B).

The United States remained the largest segment of country-affiliations; it represents 49.7% of holdings, or $1.218 trillion. Canada (9.5%, $231.7B) moved into second, jumping ahead of France (9.3%, $227.3B). Japan (7.5%, $183.2B) remained in fourth place, followed by the U.K. (5.0%, $122.4B) in fifth place. Sweden (4.7%, $116.2B) was in sixth place, followed by the Australia (3.7%, $91.7B), The Netherlands (2.9%, $69.8B), and Switzerland (2.7%, $55.5B). Germany (1.9%, $45.4B) held 10th place among country affiliations. (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 Nov. 30, 2014, Taxable money funds held 26.7% of their assets in securities maturing Overnight, and another 12.6% maturing in 2-7 days (39.3% total in 1-7 days). Another 16.9% matures in 8-30 days, while 28.1% matures in the 31-90 day period. The next bucket, 91-180 days, holds 11.9% 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 Tuesday, and our MFI International "offshore" Portfolio Holdings and Tax Exempt MF Holdings will be released later this week. Visit our Content center to download files or visit our Portfolio Laboratory to access our "transparency" module. Contact us if you'd like to see a sample of our latest Portfolio Holdings Reports or our new Reports Issuer Module.

Money market funds are not the only cash investment vehicle feeling the pinch from regulators. Banks are under their own pressures, as detailed by the story on the front page of Monday's Wall Street Journal, "Banks Urge Clients to Take Cash Elsewhere." The story reads, "Banks are urging some of their largest customers in the U.S. to take their cash elsewhere or be slapped with fees, citing new regulations that make it onerous for them to hold certain deposits. The banks, including J.P. Morgan Chase & Co., Citigroup Inc., HSBC Holdings PLC, Deutsche Bank AG and Bank of America Corp., have spoken privately with clients in recent months to tell them that the new regulations are making some deposits less profitable, according to people familiar with the conversations. In some cases, the banks have told clients, which range from large companies to hedge funds, insurers and smaller banks, that they will begin charging fees on accounts that have been free for big customers, the people said. Bank officials are also working with these firms to find alternatives for some of their deposits, they said. The change upends one of the cornerstones of banking, in which deposits have been seen as one of the industry's most attractive forms of funding, said more than a dozen corporate officials, consultants and bank executives interviewed by The Wall Street Journal."

The article continues, "Some banks, including J.P. Morgan and Bank of New York Mellon Corp., have also started charging institutional clients fees to hold euro deposits, mainly driven by the European Central Bank's move to make firms pay to park their cash with the ECB. BNY Mellon recently started charging 0.2% on euro deposits. State Street Corp. said in its third-quarter earnings call in October that it planned to begin charging fees later this year on euro deposits. U.S. banking rules set to go into effect Jan. 1 compound the issue, especially for deposits that are viewed as less likely to stay at the bank through difficult times. The new U.S. rules, designed to make bank balance sheets more resistant to the types of shocks that contributed to the 2008 financial crisis, will likely have little effect on retail deposits, insured up to $250,000 by federal deposit insurance. But the rules do affect larger deposits that often come from big corporations, smaller banks and big financial firms such as hedge funds. Hundreds of companies and other bank customers with deposits that exceed the insurance limits could be affected by the banks' actions. Overall, about $4 trillion in deposits at banks in the U.S. were uninsured, covering more than 3.5 million accounts, according to Federal Deposit Insurance Corp. data."

Further, "The rule primarily responsible involves the liquidity coverage ratio, overseen by the Federal Reserve and other banking regulators. The new measure, finalized in September, as well as some other recent global regulations, are designed to make banks safer by helping them manage sudden outflows of deposits in a crisis.... Some corporate officials said the new rules could make it more expensive for them to keep money in the bank or push them into riskier savings instruments such as short-term bond funds or uninsured money-market funds." "

The piece quotes ICD's Tory Hazard, "You’re going to see a lot of corporations that have had much simpler portfolios that are going to move toward more sophisticated portfolios." It adds, "Some bankers said they are advising corporate clients to break up large deposits across several banks, including smaller ones not affected by all of the new rules. Others might be attracted to other products offered by banks or products being created by asset managers."

In other news, money market Strategists continue weighing in on and explaining the Fed's new Term Repo and RRP programs. Joseph Abate said the term repo program is likely to push overnight market rates to their highest levels in more than a year. "Early this week, the Fed released the calendar and sizes for this month's term RRP operations. The total $300bn offering will be split across four weekly operations -- two of $50bn and two of $100bn. The operations are scheduled for 9:30am each Monday morning beginning on December 8 and are for same-day settlement (in the October FOMC minutes the Committee seemed to lean toward forward settlement). Puzzlingly to us, given the potential for significant rate volatility, the Fed has decided to have all four term RRPs mature on the same day (January 5). We expect heavy participation at the first operation as investors gear up for year-end. With dealer balance sheet capacity likely to be more limited than it was at the end of September, our sense is that the demand for the Fed’s term repo could easily top $450bn and might even reach $500bn."

Andrew Hollenhorst with Citi Research added, "This week the Fed increased the rate paid on cash placed in its reverse repo facility (RRP) to 10bp, the highest level we have seen since the program's inception in October 2013. In theory, the facility rate provides a floor on ON Treasury repo rates since investors should demand any non-Fed counterparty to match or exceed the rate available from the Fed. This logic is complicated by a number of factors. First, overnight repo balances are often rolled day after day and MMF may be reluctant to pull cash from a dealer counterparty, even if dealer rates are at or below the RRP rate, since this could jeopardize the ability to place cash in repo with that dealer in the future. Second, while RRP is available to a broad set of MMF counterparties, some MMF are too small to participate and securities lenders, which have substantial quantities of cash to invest, are unable to participate. Finally, the program is now capped at $300bln in aggregate use. If the cap is exceeded, the available $300bln is distributed through a Dutch auction process."

He adds, "Recently, we have heard increasing concern from short-term investors regarding the Fed's plan to eventually "phase out" reverse repo. The current "operational exercise" ends in January at which point the Fed will very likely announce the continuation of the program as a tool in its exit process. In our view MMF would be encouraged to participate and the floor would be strengthened by the Fed announcing that RRP would be available for at least a substantial period of time. However, we think this is unlikely as the Fed will want to maintain maximum flexibility in deploying (or not) its various tools in the exit process."

In his last "Portfolio Commentary" column before retiring, Dave Sylvester, head of money funds at Wells Fargo Advantage Funds writes, "Since the Federal Reserve (Fed) began testing its Reverse Repurchase Agreement (RRP) facility in September 2013 until the beginning of November, the facility has undergone a number of changes, from varying the overnight rate within a range of 1 to 5 basis points (bps; 100 bps equals 1.00%) to increasing the per-counterparty limit from the initial $500 million to the current $30 billion. The changes in counterparty limits served to firm the floor under interest rates because more money placed in the RRP facility meant less money chasing a limited amount of investments below the Fed's desired target interest-rate level. During the first year of testing, the RRP program was viewed by investors as a rare bright spot, with expectations it would bring an unlimited supply of repo collateral/investment supply into a drought-stricken market."

He adds, "In particular, government fund managers were delighted with this development as Treasury bill (T-bill) supply continued to decline and regulations drove shrinkage in the dealer repo market. The promise of a bottomless pit of supply to meet the needs of the Mt. Everest of cash proved too good to be true when the Fed, motivated, at least in part, by fears the facility could be used as a safe haven in times of stress, and thus disintermediate the banking sector, announced on September 17, 2014, that it would be limiting the overall size of the overnight RRP facility to $300 billion."

The European Parliament's ECON Committee put forth a new version of a proposal for money market fund reform in Europe in November. The new rapporteur of the ECON Committee drafted the amendments, which updates the EU's original proposal from September 2013. Partner Dan Morrissey and attorneys at Irish law firm William Fry, published a report entitled, "ECON publishes new report on proposed EU Money Market Fund Regulation" that summarizes the revised proposal. It explains, "The draft regulation, which was first proposed by the European Commission on 4 September 2013, contains new measures that would apply to all Money Market Funds, whether UCITS or AIFS, that are established, managed or marketed in the EU. While the European Commission has proposed the draft regulation, both the European Parliament and the Council of the EU have a role, in accordance with the EU's ordinary legislative procedure, in negotiating and deciding the final text to be adopted."

The Fry report says, "The draft regulation provides that all CNAV MMFs would be required to establish and maintain at all times a "capital buffer" amounting to at least 3% of the total value of their assets (NAV Buffer). This NAV Buffer should be composed of cash and held in a protected reserve account in the name of the CNAV MMF. Importantly, the draft regulation allows a transitional period for existing CNAV MMFs to establish the NAV Buffer." But no formal vote ever took place on it and in March 2014, any action on MMF reform was postponed. Wrote Fry, "In October 2014 the newly re-constituted ECON Committee appointed Neena Gill, a British MEP, as the new rapporteur for the draft regulation. In November 2014, Ms. Gill published a new draft ECON report on the draft regulation."

An important difference in the new draft proposal by Gill concerns the capital buffer. In the Explanatory Statement, the new proposal is summarized. "MMFs are an important short term investment instrument. They have the potential to play a crucial role in the setting up of a European CMU [Capital Markets Union] and in revitalising a European industrial policy. Within this context, it's the rapporteur's opinion that a competitive MMF market will contribute to a well-functioning CMU."

It goes on to explain the development of the new proposal. "During the last months, the rapporteur has had an intensive dialogue with a cross section of stakeholders and organised a roundtable on the 4th of November which was well attended by MEPS, regulators, investors and the fund industry. The rapporteur fully recognises the role MMFs play as a short term cash management instrument for investors as well as for borrowers and she also appreciates that a significant proportion of industries, local authorities, charities and foundations make use of MMFs to manage their excess of cash. Therefore her objective is to have a well regulated, supervised and transparent European MMF market in line with the political aim to boost economic growth and forge a capital markets union, to maximise the benefits of capital markets and non-bank financial institutions for the real economy. However, it is important to understand that MMFs remain investment funds, susceptible to different risks. It is the rapporteur's opinion that this regulation should tackle the vulnerability of MMFs to investor runs and the risk to tax payers' money on the one hand and ensure an important source of short term funding for banks and European industry remains alive on the other hand.... Due to the experiences during the financial crisis, both CNAV as well as VNAV MMFs proved to be risky and needed different kinds of support. It is the rapporteur's opinion that the intrinsic vulnerabilities of both types of MMF should be tackled and that the rules should be applied to both where appropriate."

It then discusses a new plan for CNAV funds. "The rapporteur recognises the benefits of CNAV MMFs, both for investors using these funds as well as for the Member States in which the largest part of this type of MMF are domiciled.... However, the rapporteur is concerned about the long term future of the CNAV industry to deliver a constant net asset value in a perpetual low interest rate environment. To address the risks that pose this structural stability issue, the rapporteur distinguishes different options. 1. The European Commission proposal addresses this through the introduction of a capital buffer. However the rapporteur believes this proposal should be amended. 2. It is the rapporteur's opinion that a new category of CNAVS should be established in the coming years: EU government CNAV MMF funds. EU government CNAV MMFs offer the option of a CNAV fund which invests a majority of its assets into EU government debt. This would have several benefits relative to a VNAV fund. The majority of the funds would be invested in government debt -- high quality and liquid; EU governments would benefit from a healthy demand for their short-term debt; the balance of the funds would still be available to invest in high quality banks/corporates or via ABCP, in the SME sector. Furthermore, the rapporteur proposes to introduce stringent diversification and concentration requirements to ensure that these funds are deployed across the EU."

More on the potential EU Government CNAV funds: "The mechanics of an EU government CNAV MMF would be to increasingly invest into a greater percentage of European public debt until the percentage reaches at least 80% by 2020. As a consequence, EU government CNAV MMFs would be exempt from any form of capital buffer requirement. The capital buffer will be based on the risk profile of the assets and have a sliding scale in terms of the percentage. The capital buffer would be applied proportionally until the fund reaches the 80% of EU public debt investment. The EU public debt needs to be defined in a broad way: it should be defined as cash, government assets or reverse repos secured with government debt."

It goes on, "a package of extra measures is required to be implemented to ensure stability of the market. One of these will be on sponsorship. MMFs need to demonstrate that they are able to stand alone, independently from its parent or sponsor bank and that every type of explicit and implicit sponsoring will be prohibited (except for the building up of the capital buffer). It is understood that more than $12 billion [sic] was invested by sponsors to maintain the constant value of CNAV funds during the crisis. Therefore any exception to this principle should be interpreted restrictively and be subject to a transparent procedure, in order to avoid contagion. The concept of sponsoring should be interpreted as widely as possible: every type of supporting measure by a parent or linked bank should therefore be notified, in advance, to the EC and ESMA for approval. Breaking this rule should be sanctioned by withdrawal of the MMF authorisation."

On transparency it says, "Secondly, increased transparency is a top priority for the rapporteur. Firstly the actual net asset value of CNAVs should be subject to daily disclosure requirements, including publication on the fund's websites; stress tests should take place on a quarterly basis; additionally, all documents targeted at investors of the fund should clearly state that the fund is an investment product which is not guaranteed by any kind of sponsor support and that there are risks to the investor's capital. The investor should sign a statement confirming that they have clearly understood this."

There's also discussion of a new "retail" category, as well as fees and gates. "The rapporteur is mindful of the necessity for some investors, like foundations, municipalities, charities, housing companies and individual investors who are unable to invest in VNAVs. In particular, the fact that the statutes of these organisations make it difficult or prohibit investment in floating funds. For this reason, it is the rapporteur's opinion that a 'retail' category of investors should be recognized. That should be allowed to continue using CNAV MMFs provided a comprehensive package is put into place including a very stringent system of liquidity fees and redemption gates that will be applied in times of serious stress. The European Commission will be asked to review the macro-economic impact of this exception after 3 years."

On fees and gates it says, "After lengthy discussions with the representatives from the CNAV industry on their proposal to establish a system of liquidity fees and redemption gates, as an alternative to the capital buffer, the rapporteur still has reservations if this was the only instrument. On its own, it is not the most effective way to prevent the risk of investor flight. In practice the onus is completely on the fund manager to decide when to impose such a measure, if at all. During the earlier crisis such measures were not used by CNAV MMFs despite their availability under the UCITS directives. A liquidity fee is akin to a decrease in the redemption price, so can therefore be deployed as and when necessary. The rapporteur is concerned that these instruments could cause strong pro-cyclical effects. However they could be form part of the total package, provided that the discretionary element for using liquidity fees and redemption gates is taken away and that the moment of triggering is clearly defined and disclosed."

It concludes, "MMFs should continue to play a crucial role in financing the economy and in particular in establishing the capital markets union. Both CNAV and VNAV funds should have the same regulatory treatment, with the exception of the capital buffer for VNAV funds. Excessive risks in CNAV and VNAV MMFs should be tackled properly to avoid investor runs; the real economy should be protected from regulatory gaps and loopholes and excessive systemic risks, resulting in a strong European economy."

Finally, the William Fry report outlined the next steps. "The ECON Committee has indicated that any proposed amendments to the latest draft report will be submitted by 11 December 2014. The draft report, and any proposed amendments, are due to be considered by the ECON Committee at its January meeting and a provisional vote by the ECON Committee has been scheduled for February 2015. A vote on the draft regulation by all Members of the European Parliament has been tentatively set for March 2015. The Council published its first compromise text to the draft regulation dated 10 November 2014 and importantly proposed the removal of the requirement for CNAV MMFs to establish the NAV Buffer. In addition, the Council introduced the concept of a retail and small professional money market fund to which certain protections may be imposed such as imposing liquidity fees of up to 2% on redemptions, redemption gates that limit the amount of shares or units that can be redeemed on any day, or suspension of redemptions for up to 15 days. The Council compromise text will be considered further by the Council in due course."

The December issue of Crane Data's Money Fund Intelligence was sent out to subscribers Friday morning. The latest edition of our flagship monthly newsletter features the articles: "Assets Flat 3rd Year in a Row; JPM Rates, Supply Outlook," a review of year-to-date asset totals and a look ahead to next year; "Wells' Sylvester Retiring: Parting Words of Wisdom," an interview with Dave Sylvester, senior portfolio manager and long-time head of money market funds at Wells Fargo; and, "ICI Recaps Regs, 80% Stable NAV," which examines highlights from ICI's 2014 Annual Report. We also updated our Money Fund Wisdom database query system with Nov. 30, 2014, performance statistics, and sent out our MFI XLS spreadsheet early this morning. (MFI, MFI XLS and our Crane Index products are available to subscribers via our Content center.) Our December Money Fund Portfolio Holdings are scheduled to go out on Tuesday, Dec. 9.

The latest MFI's "Assets Flat 3rd Year in a Row" article comments, "As the second half rally continues, money market mutual fund assets should end 2014 roughly flat. November was the fourth straight month of money fund asset gains, with assets up by $21.0 billion (according to MFI XLS), and assets have increased for 7 weeks in a row (according to ICI's weekly series, which showed a jump of $25.6 billion this week). YTD, assets are now down a mere $31 billion, or 1.1%. This likely will be the third year in a row that fund assets have been flat, falling or rising by under $100 billion, or 1%. (MMF assets increased by $10 billion in 2012 and by $14 billion in 2013.) All things considered, it hasn't been nearly as bad as many expected, given that the Securities & Exchange Commission adopted Money Fund Reforms in July that altered money funds. While many predicted outflows would accompany the new rules, just the opposite happened."

It continues, "Our MFI Daily shows assets surging in early December. Assets have increased by $35.2 billion in the first 3 days of the new month, with Prime Institutional funds accounting for over half of the gains ($21.7 billion). Money fund assets have shown a pattern of decreasing approximately 5% over the first half of the year, and gaining back this deficit in the second half of the year for the past 3 years. (See the chart in the story for annual money fund assets.)"

In our monthly MFI profile, we interviewed Wells Fargo's Dave Sylvester, who announced his retirement, effective March 31, 2015, after a long and successful career that included 35 years with Wells Fargo. On his career in the money fund space, he said, "I started in the fixed income markets in 1974 and then I came to Minneapolis to work for the old Northwestern National Bank in 1979. We had some short-term common and collective funds for trust accounts and I was the portfolio manager on those. Then, in 1987, Norwest opened its money fund suite, the Prime Value Funds. I was the portfolio manager at the time and I've managed those ever since and have been focused exclusively on short-term assets since a few years after those funds opened. We've had a great experience with the growth of those funds. I've managed cash for 35 years and I've managed cash exclusively for the last 25 years."

On some of the changes he has seen over the years, Sylvester said, "The shareholder composition is the biggest change I think. You've got to look at the liability side of the funds balance sheet and that's seen maybe more changes than the asset side. When we first started doing this in the '80s, individuals were coming out of bank savings accounts where the rate was capped by the Federal Reserve moving in to instruments that had no artificial rate cap. Now, we have a lot of institutional MMFs; they've become much more of an institutional cash management vehicle and that presents a different set of challenges to some extent. The industry didn't necessarily respond to how the funds were structured in light of their new shareholder composition and so, they were restructured for us. If there's a lesson in that it is, as the market evolves, the industry might want to be in front of it and think about whether the structure is appropriate for the types of shareholders it has."

The December MFI article on the ICI 2014 Annual Report says, "The Investment Company Institute released its 2014 Annual Report earlier this week, which included a recap of a landmark year for money market funds as sweeping reforms were passed by the SEC. The most notable statistic from the report revealed that nearly 80% of U.S. MMF assets will retain a stable net asset value once reforms are implemented in October 2016. This is much higher than current categorizations of "Prime Institutional" due to the new definition of retail funds and marks a major win for the industry."

It explains, "The 60-page report begins with a letter from ICI Chairman William MacNabb, the chairman and CEO of Vanguard. He comments, "In July, we saw the resolution of the six-year-long debate over how to make money market funds more resilient with adoption of new reforms by the Securities and Exchange Commission (SEC). The changes are sweeping and yet nuanced. Retail investors -- including those who invest through retirement plans and omnibus accounts -- will still have access to stable value prime, tax-exempt, and government money market funds. Institutions can choose to invest in stable-value government funds or floating value prime funds. The SEC rejected such harmful ideas as capital requirements or holdbacks on redemptions.... These factors -- combined with the Institute's reputation for fact-based policy analysis and advocacy -- helped policymakers create a package of reforms that will largely preserve the benefits of money market funds for investors, issuers, and the economy."

Crane Data's December MFI XLS with November 30, 2014, data shows total assets increasing for the fourth straight month in November, rising $21.0 billion after jumping $10.2 billion in October, $27.5 billion in September, and $34 billion in August. As of Oct. 31, total money market fund assets stood at $2.559 trillion with 1,228 funds, 7 less than last month. Our broad Crane Money Fund Average 7-Day Yield and 30-Day Yield ticked up to 0.02% (from 0.01%) while our Crane 100 Money Fund Index (the 100 largest taxable funds) ticked up to 0.03% (7-day and 30-day) <b:>`_. On a Gross Yield Basis (before expenses were taken out), funds averaged 0.13% (Crane MFA, unchanged) and 0.16% (Crane 100) on an annualized basis for both the 7-day and 30-day yield averages. (Charged Expenses averaged 0.11% and 0.13% for the two main taxable averages, both down a tick from last month.) The average WAM for the Crane MFA and the Crane 100 were 44 and 46 days, respectively. The Crane MFA WAM is the same as last month while the Crane 100 WAM is down 1 day from the prior month. (See our Crane Index or craneindexes.xlsx history file for more on our averages.)

The U.S. Treasury's Office of Financial Research issued its 2014 Annual Report to Congress, which analyzes potential threats to U.S. financial stability, documents OFR's progress in meeting the mission of the Office, and reports on key research findings. "Since our 2013 report, several financial stability risks have increased. The three most important are excessive risk-taking in some markets, vulnerabilities associated with declining market liquidity, and the migration of financial activities toward opaque and less resilient corners of the financial system," writes OFR Director Richard Berner in the opening letter. "Gaps in analysis, data, and policy also persist, despite progress in narrowing them. If left unaddressed, these threats could adversely affect financial stability," adds the executive summary. The 164-page report includes several points related to money market funds, including a recap of the SEC's MMF reforms. Money market funds are also addressed in the OFR's soon-to-be-published strategic plan. Also, there is a new initiative related to data gaps in the repo markets.

The OFR says, "One of OFR's top research priorities for its soon to be published 5-year Strategic Plan is to develop "a suite of additional monitors and dash-boards, focused on money market funds, hedge funds, and credit default swap markets." Later in the report, it explained more about this initiative. "The tools we are developing to assess risks to the financial system include [an]: Interactive Money Market Fund Monitor that examines holdings of individual funds and the industry as a whole on the basis of credit, interest rate, and liquidity risk." OFR is also developing [a] "Liquidity Library to monitor market liquidity conditions on a broad, high-frequency basis." In addition, they are working on a `Reference Guide on U.S. repurchase agreement (repo) and securities lending markets. "The guide will examine how dealers and their clients use these markets, building on the Office's ongoing research on the sources and uses of short-term funding, and will identify potential vulnerabilities and data gaps."

OFR will also address data gaps in the repo markets. They write, "Filling data gaps in the repo and securities lending markets is a top priority for the OFR. Availability of data about repo and securities lending activities has improved since the crisis. But much of the available data is not collected in a consistent manner, which would allow for comparison and aggregation, and most is not available to the public. In addition, there are still segments of these markets not covered by existing data collections. As part of the domestic efforts on this front, the OFR, the Federal Reserve Board of Governors, and the Federal Reserve Bank of New York are planning a joint pilot data collection based on these templates to improve our understanding of bilateral repo activities. These agencies have solicited voluntary participation and feedback on a proposed template from firms that are large participants in the repo market, with an aim to finalize this data template by the end of 2014. We anticipate a voluntary data collection focused on bilateral repo activity will begin in the first half of 2015. These data will also be shared with the SEC. Further work will be done on a securities lending data collection in 2015."

On the repo markets, it adds, "The degree of transparency about repo transactions and positions from a market-wide perspective depends on whether trades are settled centrally (triparty) or bilaterally. The triparty market is the most transparent part of the market. These trades are settled using the triparty repo settlement platforms at the clearing banks. Currently only two banks -- Bank of New York Mellon Corp. and JPMorgan Chase & Co. -- provide triparty repo services. The Federal Reserve Bank of New York collects data about trading activities in triparty repo markets from the two clearing banks, identifying the dealers, investors, and collateral by asset class. The Federal Reserve Bank uses this information for its own monitoring and analysis and publishes monthly triparty repo summary statistics on its website.... By contrast, there are limited market data available about repo trades that dealers settle bilaterally outside the triparty clearing banks. Anecdotal and survey evidence indicates this repo market suffered distress during the financial crisis."

It continues, "The 22 U.S. primary dealers that serve as trading counterparties to the Federal Reserve Bank of New York account for most trading in the U.S. repo market. These dealers confidentially report their market activities weekly to the Federal Reserve on Form FR 2004. This form collects information including position, transaction, financing, and fails data in U.S. government securities and other selected fixed-income securities. The Federal Reserve Bank of New York publishes on its website every week consolidated information about primary dealer positions based on Form FR 2004 data. However, Form FR 2004 does not cover activities of broker-dealers that are not U.S. primary dealers, and it does not differentiate triparty from bilateral trades. In addition, the form does not include important information such as haircuts, rates, and the identity of the counterparty, and the information it does contain is highly aggregated. As a result, significant data gaps exist at the transaction level of these trades, particularly in the repo activities of dealers who are not primary dealers and the repo activities that are not settled on the clearing banks' triparty settlement platforms. We can only produce rough estimates of the size of the bilateral repo market based on these data.... More information on repo transactions would also be valuable for our financial stability monitoring and analysis so we can better understand how the markets function, how they interact with one another, and how risks can build and shift in these markets."

The OFR report also dedicated a page to money market reform. "The financial crisis illustrated the vulnerability of money market funds to mass redemptions and prompted regulators to implement a series of reforms in this market.... The SEC announced reforms in July 2014 addressing those concerns. Its rule requires institutional prime money market funds to implement a combination of floating net asset value, redemption restrictions, and liquidity fees by October 2016. The rule also made enhancements to the SEC's existing stress testing regime by requiring a fund to test its ability to maintain weekly liquid assets of at least 10 percent and to minimize principal volatility in response to certain specified hypothetical stress scenarios."

It goes on, "With the implementation of floating net asset values, institutional investors may leave prime money market funds for government money market funds, which invest mostly in government securities, cash, or repurchase agreements backed by government securities. Under the SEC rule, these funds retain their ability to transact at a stable net asset value. Investors may also increase their bank deposits and holdings of other cash products offered by banks. Some large institutional investors might also switch to separately managed cash accounts, which could be harder for supervisors to monitor."

The OFR adds, "The rule also sought to address potential preemptive runs by allowing boards of directors of funds the discretion to apply redemption restrictions. Redemption restrictions, often referred to as "gates," have been adopted in many overseas markets to limit fund outflows during financial crises. However, in Europe these gates are always in place as described in fund offering documents, but only rarely used. Some research has suggested shareholders might run preemptively if they feared redemption restrictions would be imposed, meaning discretionary gates could worsen a run. Others have argued that liquidity fees may exacerbate institutional investor runs during a crisis. The benefit of the new rule cannot be evaluated until the money market industry again faces strain and run risks. The ongoing concentrations of money market fund assets within a few large asset managers may raise more systemic stability concerns and require enhanced monitoring of potential cash reallocation."

Later it adds, "Money market funds will be required to disclose detailed information on their websites daily, including net asset values rounded to the fourth decimal place, daily liquid assets, weekly liquid assets, net inflows and outflows, imposition of fees and gates, and any use of affiliate sponsor support. In addition, the SEC will introduce a new form, Form N-CR, for reporting material fund events." (Note: Most of these new disclosures will begin in April 2016.)

On separate accounts, the report says, "Separately managed accounts that invest only in short-term assets collectively have about $330 billion under management in 347 accounts, according to the [SIFMA] survey.... Without access to market-level data, regulators cannot evaluate shifts in activities and their impacts on broader markets. For example, a potential shift of cash management away from money market funds in response to regulatory reform could accelerate the growth of separately managed cash accounts.... These market developments cannot be effectively understood and monitored so long as gaps remain."

Regarding corporate cash, OFR explains, "Nonfinancial corporations had about $1.8 trillion in cash at the end of the first quarter of 2014, a record according to available data. But regulators have limited information about how nonfinancial corporations invest their cash. This represents an important gap in our ability to understand what drives growth and risk in short-term wholesale funding markets. Specifically, we need data to help us analyze both the sources and uses of funds in these markets.... In a recent survey by the Association for Financial Professionals, 81 percent said they expect their cash and short-term investment balances to grow or remain at the current level.... Such surveys are currently the only available data source of corporate cash investments. No complete standardized dataset on corporate investments of financial assets is available to aid regulators and policymakers in monitoring any potential shifts in corporate investment preferences."

Finally, in a review of 2014 market developments, the report states, "Accommodative global monetary policy, coupled with the Federal Reserve's purchases of large amounts of low-risk assets and changes in risk sentiment, helped to compress volatility and risk premiums (the returns in excess of the return earned on a risk-free investment). These conditions encouraged investors to increase their holdings of long-dated securities and products with riskier credit attributes in a search for higher returns. Over the past five years, investors moved out of money market instruments and into riskier assets such as leveraged loans, high-yield corporate credit, eurozone peripheral bonds, and emerging market equities."

Two thousand and fourteen has been a landmark year in the 43-year history of money market mutual funds with the passage of sweeping reforms by the Securities and Exchange Commission. In its 2014 Annual Report, the Investment Company Institute recapped all the changes that took place in 2014, which we covered in our Nov. 21 News, "ICI Annual Report Recaps Regulatory Debate; 80 Percent Stable NAV." As we look ahead to a new era for MMFs, we thought it would be a good time to take a look back at where we've been, thanks to a timeline featured in the ICI annual report under the heading, "Major Events in Money Market Fund History." Writes ICI, "Investors continue to embrace money market funds -- and have been rewarded with remarkable resilience, liquidity, and stability. Money market funds have long played a crucial economic role, providing an important vehicle for short-term financing and cash management in both the public and private sectors." We reprint ICI's timeline tracking the history of MMFs below, and also source their table of "Money Market Funds by the Numbers," which reviews a number of major statistics on money funds.

ICI's "Money Market Funds by the Numbers" include: "`$2.6 trillion -- Money market funds held nearly $2.6 trillion in assets in June 2014. That's nearly $740 billion (41 percent) more -- at average yields of 1 basis point for taxable funds -- than they held when average yields exceeded 6 percent in late 2000. $509.8 trillion -- More than half a quadrillion dollars have flowed in and out of money market funds since 1984 -- shortly after the SEC adopted Rule 2a-7 of the Investment Company Act of 1940 to enable the funds to maintain a stable net asset value per share. $517 billion -- Prime money market funds held more than half a trillion dollars in weekly liquid assets as of June 30, 2014 -- roughly 37 percent of total prime money market fund assets, or well above the 30 percent requirement established in the SEC's 2010 reforms. 79 percent -- As of June 2014, money market funds held $268 billion of tax-exempt securities -- nearly four-fifths of municipal short-term debt. State and local governments issue debt to finance roads, bridges, airports, water and sewage treatment facilities, hospitals, low income housing, and other public projects."

The Numbers continue: "50 million -- Nearly 50 million individual shareholders owned money market funds in June 2014. This translates into nearly 30 million U.S. households. 35 percent -- As of June 2014, taxable money market funds held $347 billion -- or more than one-third -- of the commercial paper that businesses use to finance payroll, inventory, and other short-term liabilities. 996 percent -- During the past two decades, money market fund assets have grown nearly elevenfold -- from $233.6 billion at year-end 1984 to $2.6 trillion in June 2014. $377 billion -- As of June 2014, taxable money market funds held $377 billion -- or 13 percent -- of short-term debt issued by the Treasury."

ICI's "Major Events in Money Market Fund History" timeline features: "OCTOBER 1971 -- The first money market fund (MMF), the Reserve Fund, opens to investors. JULY 1983 -- SEC Rule 2a-7 permits MMFs to use amortized cost valuation and/or penny rounding pricing to help maintain a stable NAV. MARCH 1986 -- The SEC adopts Rule 2a-7 amendments that impose additional requirements on the quality and diversification of demand features. FEBRUARY 1991 -- The SEC adopts Rule 2a-7 amendments that tighten credit standards for eligible investments by taxable MMFs, including addition of a diversification requirement. SEPTEMBER 1994 -- Community Bankers U.S. Government Money Market Fund liquidates and distributes assets at $0.96 per share, becoming the first MMF to "break a dollar."

It continues: MARCH 1996 -- Amendments to Rule 2a-7 tighten investment restrictions on tax-exempt MMFs and address the rule's application to asset-backed securities. SEPTEMBER 16, 2008 -- The Reserve Primary Fund, with $785 million invested in Lehman Brothers, becomes the second MMF to "break a dollar." Investors receive more than $0.99 per share. SEPTEMBER 19, 2008 -- Federal Reserve announces the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility for commercial paper. The AMLF ends February 1, 2010. SEPTEMBER 19, 2008 -- U.S. Treasury announces Temporary Guarantee Program, designed to restore to $1.00 the NAV of a participating MMF that breaks a dollar. Program expires after one year with $1.2 billion in fees paid by MMFs to the Treasury, but no claims paid by Treasury under the guarantee. OCTOBER 10, 2008 -- SEC staff sends a letter to ICI temporarily allowing MMFs to value some high-quality, short-term securities at amortized cost for shadow pricing under Rule 2a-7. NOVEMBER 24, 2008 -- Federal Reserve Bank of New York provides senior secured funding to a series of special-purpose vehicles that purchase high-quality money market instruments from U.S. MMFs. The facility is never used."

The Timeline also includes: JANUARY 14, 2009 -- MMF assets hit $3.92 trillion, their highest level ever. MARCH 2009 -- ICI issues Report of the Money Market Working Group. ICI's Board voluntarily adopts its wide-ranging recommendations for stronger MMF regulation. JUNE 2009 -- U.S. Treasury issues a white paper directing the SEC to move forward with plans to reduce the risk profile of individual MMFs and make the industry less susceptible to "runs." JANUARY 2010 -- The SEC adopts Rule 2a‑7 amendments that incorporate many of the Money Market Working Group's recommendations: tighter MMF liquidity requirements, stricter quality requirements, reduced maturity limits, and enhanced disclosure of portfolio holdings, among others. OCTOBER 2010 -- The President's Working Group on Financial Markets issues a report urging additional changes to MMFs. MAY–AUGUST 2011 -- Facing a possible federal government default on payments to bondholders, MMF managers adjust fund portfolios to mitigate risks. MAY–NOVEMBER 2011 -- U.S. prime MMFs continue their careful response to the worsening debt crisis in the eurozone, reducing their holdings of eurozone banks."

Finally, the timeline concludes: AUGUST 2012 -- The SEC announces that it will not proceed with a vote to solicit public comment on potential structural reforms of MMFs. SEPTEMBER 2012 -- Treasury Secretary Timothy Geithner urges members of the Financial Stability Oversight Council to recommend that the SEC proceed with MMF reform. NOVEMBER 2012 -- SEC study examines what caused redemptions of prime MMFs during the 2008 crisis, the efficacy of the 2010 reforms, and how MMFs would have performed in 2008 had the 2010 reforms been in place. NOVEMBER 2012 -- FSOC solicits public comment on three requirements for MMFs: a floating NAV, a NAV buffer of up to 1 percent of assets, or a risk-based NAV buffer of 3 percent. JUNE 2013 -- SEC proposes amendments to the rules that govern MMFs. The proposal generates more than 1,400 comment letters. SEPTEMBER 2013 -- European Commission proposes a new regulatory regime requiring EU MMFs to either maintain a capital buffer of at least 3 percent or float the NAV. These regulations remain pending. JULY 2014 -- The SEC adopts amendments to the rules that govern MMFs."

As 2014 winds down -- a big year for money market funds highlighted by the adoption of SEC MMF reforms -- JP Morgan money market strategists Alex Roever, Theresa Ho and John Iborg look ahead to 2015, "Where the Rubber Meets the Road." That's the title of the most recent commentary in which Roever and his team offer their 2015 outlook for the money market funds. "Monetary and regulatory policy will gain traction in the coming year, and the money markets figure prominently in both," writes JPM in its introduction. Among their projections, they look at interest rates, money fund flows, and supply.

On interest rates, Roever, et. al., say, "[O]ur economists currently expect that the FOMC will begin raising its Fed funds target range in June 2015, and that it will raise the target corridor twice more before the end of 2015. Mechanically, we see this as the target range rising in June to 25-50bp (from 0-25bp), with IOER going to 50bp. By the end of the year we see the target range as 75-100bp, with IOER at 100bp. In the first full year of tightening, our economists expect 150bp of tightening, based on their forecast for employment, GDP, inflation and other key economic variables. Over the course of the cycle, they expect tightening to continue until late-2017, finishing with Fed funds at 3.5%."

Next, JPM's "Outlook" looks at the potential for funds to flow out of bank deposits into MMFs. "Aside from what happens with the Fed and Treasury next year, another issue weighing on market participants is what happens to the [approx.] $10tn of deposits that are on bank balance sheets. Of concern is that a portion of these deposits could enter the money markets, further overwhelming the markets that are short on investible products.... In the coming year there are two reasons why deposits may leave banks for the money markets. The first is interest rate-driven. Over prior tightening cycles, flows into MMFs have tended to increase with Fed rate hikes, albeit on a lagged basis. In pursuit of higher returns, depositors, and mostly retail depositors, leave banks for other cash substitutes, often in the form of MMFs. When rates rise, they become more competitive relative to bank money market accounts. The second reason is regulatory-driven. Bank regulations such as LCR and SLR generally require banks to hold HQLA and leverage capital against institutional deposits, making them punitive to hold onto bank balance sheets."

How will reforms impact flows? "One important factor that is different than in the past is that structural changes to MMFs and the money markets limit the number of alternatives to which the deposits could move. This point resonates particularly with institutional shareholders. MMF reform has fundamentally altered the landscape and the appeal for the product, particularly for prime institutional MMFs. Besides the fact that most investment guidelines do not allow cash to be invested in products with floating NAVs, the inability for corporations to obtain intraday liquidity is a big issue for many institutional investors that use MMFs as a tool to manage their operational cash (anecdotally, we have heard MMFs and third party vendors are currently exploring ways to rectify this). Tack on fees/gates, which are especially troubling for sweep accounts, institutional prime MMFs are simply not as attractive as a cash management tool as before," they write.

The Outlook continues, "Government MMFs do not fare much better. While they are exempt from structural reforms, their capacity to absorb liquidity is limited by the amount of assets in which they can invest. Without an increase in government supply, a large liquidity injection would compel funds to aggressively bid for whatever paper they can find, pushing yields on bills, repo and MMF yields sharply lower.... Retail investors are less impacted by MMF reforms, but the mismatch between supply and demand in the money markets will likely keep MMF yields low for awhile, even as interest rates rise, thus lessening their appeal to yield sensitive investors."

It adds, "In the absence of MMFs, investors could choose to move beyond the money markets and into ultra-short bonds funds that operate slightly outside of 2a-7. Typically, these funds earn a slightly higher yield than MMFs as they don't have to abide strictly to 2a-7 rules. In the case of institutional investors, they could also move into separately managed liquidity portfolios, a product that asset managers are increasingly marketing as a MMF-alternative."

Will prime institutional MMF assets take a hit? "Estimates of how much money could flow out these funds have varied widely across the industry, ranging from $150bn to as much as $500bn.... Interestingly, recent data provided by ICI suggests that the actual institutional exposure in prime MMFs could actually be smaller than expected. In fact, they estimate that as of year-end 2013, roughly 34% of all prime MMF assets are owned by institutional shareholders, comprised of mostly non-financial and financial companies. The other 66% are owned by retail investors vis-a-vis retirement funds, 529 plans, retail brokers, etc. Applying these percentages to the level of prime fund assets today would imply that there are less than $500bn of assets in prime funds that are truly institutional and the other $950bn are comprised of retail money. If correct, the pool of money that's impacted by reforms could be significantly smaller than expected, biasing the amount of outflows lower. Recently, there's been discussion of potentially creating a 60d MMF as a work around to the mark-to-market issue that plagues floating NAV MMFs. However, we see two issues with this as a possible alternative. The first is there is not enough 60d supply.... The second reason is that even with a 60d maturity, the fund itself would still be a floating NAV MMF which means that the same intraday liquidity issues still apply."

Roever also looks at supply in 2015 -- the good and the bad. "While the markets have adapted to the presence of fewer investment opportunities, scarcity of assets remains a challenge in the money markets.... In 2015, there are good news and bad news. The good news is that total money market supply is poised for a rebound next year. In fact, we think total money market supply (excluding Fed ON RRP) could increase by 4% year-over-year, led by increases in Treasury outstandings. The bad news is that credit supply (total ex-Treasures) will remain flat year-over-year, driven by a confluence of factors."

What asset classes could grow next year? "Treasuries. Across asset classes, Treasury balances are poised to increase the most next year. Contrary to expectations, the rise will not necessarily come from bills as Treasury continues to extend the weighted average maturity of its debt portfolio. Instead, growth in this sector will come from Treasury FRNs and Treasury coupons that are rolling into the 2a-7 space."

It continues, "We expect balances for non-financial CP to increase gradually to $290bn by the end of 2015. Similar to prior years, very low interest rates and the sharp supply/demand imbalance in the money markets will prompt many non-financial issuers to tap the USCP market for funding, either for working capital purposes or for event-driven transactions. Indeed, since 2009 non-financial CP outstandings have grown by $176bn or 192% to $269bn as of October 2014.... We estimate outstandings of financial CP/CDs will increase 3% or $36bn year-over-year. As was the case this year, most of the growth will likely come from foreign banks."

What asset classes could shrink next year? "Repo. This is a sector that continues to encounter persistent pressures on the regulatory policy front. While changes in the regulatory environment have been evident for the past couple of years and the market as a whole has shrunk as a result, we think there is still slight room for repo balances to fall.... Taken together, we think it's possible that repo balances could fall another 2% and end the 2015 year at $2,300bn.... ABCP. This is another sector that continues to face regulatory headwinds. From LCR to SLR to the Volcker Rule to the Credit Risk Retention rule, conduit businesses have been hit from nearly every angle."

Finally, it adds, "Agencies. Our Agency strategists project agency discount note outstandings to decrease by $45bn year-over-year. As expected, a large part of the decline is going to be driven by the continued wind-down of Fannie Mae (FNMA) and Freddie Mac (FHLMC) ($35bn), particularly FHLMC ($25bn) which has been reducing the size of its retained portfolio at a much quicker pace than mandated."

A new report by Fitch Ratings finds that the bulk of European money market funds come from three countries -- France, Ireland and Luxembourg -- and it compares the two types of funds in Europe. (Note: Crane Data tracks the funds in Ireland and Luxembourg via our Money Fund Intelligence International, but not those domiciled in France. We do not consider the latter "money market funds" and refuse to acknowledge them as such.) The Fitch report, called "Diversity of European Money Market Funds" examines this two-tiered framework of European MMF industry, which groups funds into "short-term money market funds" and "money market funds." States the Fitch report, "European money market funds' assets totalled EUR917bn at end-June 2014, as per the latest EFAMA statistics. Assets have gradually declined since they peaked in March 2009 at EUR1.4 trillion."

It goes on, "European money market funds are defined as "short-term money market funds" or "money market funds" following the introduction of harmonised European money market fund definitions in 2010. In November 2014 the European Commission proposed further changes to the regulatory framework, which are still under discussion. These changes, if adopted, would have far reaching implications for the money market fund industry and cash investors, notably for accounting practices."

Fitch writes, "Investment guidelines and risk profiles of European money funds vary within the framework provided by the regulation, depending on the fund's balance between safety of investment and yield generation. Money market fund and liquidity product ranges may encompass both the most conservative money funds, with extremely strong capacity to provide liquidity and invested capital, and other less risk-averse, short-term investment solutions. The demand for the latter has been fuelled by extremely low yields and the greater ability of investors to differentiate between their short-term and strategic cash management needs."

They add, "Minimum investment horizons of sampled funds vary between one day for most short-term MMFs, including AAAmmf funds and alike, and more than 12 months for sampled short-term bond funds. For MMFs it is wide-ranging from seven days up to more than 12 months in few cases, although the majority is below three months."

Fitch explains, "The vast majority of European money market funds are domiciled in France, Ireland and Luxembourg as money market funds domiciled in these countries have consistently totalled around 90% of European money market funds' assets over the past five years. Fitch estimates that 62% of European money market funds' assets fall under the ESMA short-term MMF category, of which more than three-quarters are CNAV, the remainder being VNAV funds. Money market funds that are classified as MMFs, the second ESMA category, account for about 30% of the European money market fund universe. These are exclusively VNAV Funds."

They add, "There is however considerable variation between countries. Short-term MMFs account for an overwhelming portion (97%) of Ireland-domiciled and around 70% of Luxembourg money market funds. By contrast, only one-third of France-domiciled money market funds are short-term MMFs and two-thirds are MMFs. This reflects the notable but steady shift in investors' positioning from when the ESMA definition came into force in 2011, where 60% of French money funds were short-term MMFs. Short-term MMFs assets are almost evenly spread across US dollars, euros and sterling, based on funds' currency of denomination. [Non short-term] MMFs assets are by contrast much more concentrated in euros, reflecting an investor base more anchored in Continental Europe."

It continues, "More than 320 asset management companies are involved with managing European money market funds but only five accounted for 40% of total assets. These include Amundi, BlackRock, JPMorgan Asset Management, which individually have more than EUR100bn of European money market fund assets under management each, and Goldman Sachs Asset Management and BNP Paribas Investment Partners, with close to EUR60bn each. Amundi, BNPP IP and CM-CIC Asset Management are the largest players in ESMA MMF. In short-term MMFs, BlackRock, JPMorgan AM and Goldman Sachs AM dominate the market, followed by Deutsche AM, BNPP IP and HSBC Global AM. This reflects an increased concentration among short-term MMF asset managers as they are looking for scale in this low, declining margin market."

In a conference call that accompanied the release of the report, Charlotte Quiniou, director, Fund and Asset Manager Group at Fitch Ratings, discussed the prospects for money market fund reform in Europe. "Our view is that the proposed reform will be a big shakeup for the industry in Europe and it may lead to some outflows as some investors may decide to withdraw from the constant NAV fund that they are accustomed to. However, we believe that the impact may not be as bad dramatic as some initially feared," she said. "We had a recent poll as the cash manager conference that we held two weeks ago and it shows that many investors won't change strategies. This is mainly because alternatives are limited. We also believe that certain aspects of the regulation will make money market funds less risky through the liquidity and diversification regulation that is being proposed."

In related news, an article on Seekingalpha.com shows that there has been significant consolidation amongst MMFs in Europe. A story entitled "Fund Launches, Closures, And Mergers During Q3 2014," reports significant consolidation amongst European money market funds. It says, "Q3 2014 witnessed the launch of 429 funds: 149 equity funds, 120 bond funds, 117 mixed-asset funds, 38 "other" funds, and 5 money market funds. During the same period 324 funds were liquidated: 94 equity funds, 63 bond funds, 72 mixed-asset funds, 71 "other" funds, and 24 money market funds. For Q3 2014, 318 funds were merged: 93 equity funds, 102 bond funds, 84 mixed-asset funds, 5 "other" funds, and 34 money market funds.... Of significance was the decrease in money market products, where 58 products were removed from the market while only 5 were launched."

The article continues, "Since consolidation in the European fund industry has not yet finished, we expect to see more funds closed or merged over the next few years. That said, Q3 2014 saw a slowdown in fund liquidations, while the number of fund mergers in Europe went up. That might be an indicator the industry has already liquidated the funds that are no longer in the favor of investors. The industry may now be lifting synergies within product ranges by merging funds with similar investment objectives to increase the profitability of the funds."