News Archives: March, 2014

We wrote last week about the SEC's recent "Staff Analysis of Data and Academic Literature Related to Money Market Fund Reform" release (see our March 25 News, "SEC Posts 4 Mini Studies: Liquidity Costs, Non-Govt, Muni Backing, Safe"; comments should be submitted by April 23). Today, we take a closer look at one of the 4 papers, "Demand and Supply of Safe Assets in the Economy," which attempts to defuse the criticism that reform proposals could cause a massive shift away from Prime funds and assets and into Government funds and securities. The brief study uses an example a 20 percent shift in assets from Prime funds into Governments, but it oddly includes securities outside of Treasuries in its estimate of securities "with virtually no default risk". We also note below the announcement of FSOC of a conference on asset management to take place May 19.

The "SEC's Safe Assets" piece says, "The Division of Economic and Risk Analysis ("DERA") has reviewed recent evidence on the availability of domestic government securities and global "safe assets." The memorandum is intended to assist the Commission in the development of final rules regarding Money Market Fund (MMF) Reform that could possibly increase the demand for these assets. We focus not only on the availability of domestic government securities, but also global safe assets. The fungibility and hence substitutability of global safe assets in other contexts (but not for money market funds) would likely free up supplies of domestic government securities elsewhere. DERA staff ("staff") note a marked increase in the global demand for domestic government securities and global safe assets but do not anticipate that, if such changes were adopted, the impact would be large relative to the domestic and global markets for safe assets."

It continues, "A safe asset is defined as any debt asset that promises a fixed amount of money in the future with virtually no default risk.... Historically, bank deposits and Treasuries constitute the vast majority of domestic safe assets. Questions are now being raised as to whether the global economy has and will have an adequate supply of safe assets. Analysts from the International Monetary Fund and Credit Suisse, for example, predict a shortfall. Arguments supporting the idea of a shortfall, however, ignore the ability of market participants to adjust to a changing landscape. For example, sustained excess demand for safe assets should increase the price of safe assets and lower rates."

Under a section entitled, "Shift in Investment from Prime Money Market Funds to Government Funds," the paper explains, "In the 2013 Proposing Release, the Commission proposed to exempt government MMFs from a floating NAV requirement and fees and gates. If adopted, some investors that today invest in prime MMFs may shift their investments to government MMFs, thereby raising the demand for domestic government securities and safe assets in the economy."

It continues, "In November 2013, prime funds held approximately $1,783 billion in assets, whereas government and treasury funds held $952 billion in assets, or around 32 percent of all money market fund assets. It is difficult to estimate the amount of money that might shift from prime MMFs into government funds if the Commission adopts the floating NAV exemption, but if even 20 percent of prime fund investments shifted into government funds, approximately $357 billion dollars would need to be invested in government securities. Given the global market for safe assets is estimated to be $74 trillion, it is difficult to envision such flows would create a problem. Moreover, evidence from the 2008 Financial Crisis indicates government funds are able to absorb large inflows, especially if they occur over a period of time. As shown in Figure 1, government money market fund assets increased by $409 billion (44 percent) during the Crisis Month (9/2/2008 to 10/7/2008), whereas prime fund assets fell by $498 billion (24 percent)."

The SEC study adds, "An increase in demand for safe assets without a concomitant increase in supply could increase safe-asset prices and lower returns.... Currently, government MMFs may invest up to 20 percent of their portfolios in non-government securities. A credit event in the 20 percent portion of a government fund's portfolio could trigger a drop in shadow price, thereby creating incentives for shareholders to redeem shares ahead of other investors. The Commission therefore asked questions in the 2013 Proposing Release as to whether there should be additional limits or requirements on the 20 percent threshold." (See also the SEC's mini-study, "Government Money Market Fund Exposure to Non-Government Securities".)

Finally, the Safe Assets comment adds, "As Figure 4 shows, on average government MMFs invest less than five percent of their assets in non-government securities today, 85 percent invest less than eight percent, and 90 percent invest less than 15 percent. Government funds invested approximately $2.8 billion in non-government assets as compared to $503 billion in government assets in November 2013. Given the size of the global market for safe assets, the staff does not anticipate a problem if the Commission lowers the 20 percent threshold. Concomitantly, the staff does not anticipate that lowering the 20 percent threshold would impose heavy portfolio rebalancing costs on funds. Even if some funds must rebalance their portfolios towards more government securities, the market appears to be able to absorb some rebalancing, as evidenced during the 2008 Financial Crisis."

In other news, a statement entitled, "Financial Stability Oversight Council (FSOC) to Host Public Asset Management Conference," tells us, "In order to help inform the ongoing assessment by the Financial Stability Oversight Council (Council) of risks to U.S. financial stability, the Council will host a conference on the asset management industry and its activities. The Council welcomes the opportunity to hear directly from the industry and other stakeholders, including academics and public interest groups, on this issue. The asset management conference will be held on May 19, 2014 in the Cash Room at the Department of the Treasury. The program will include several panels, moderated by senior staff of Council members. Panels will focus on an in-depth examination and discussion of targeted issues associated with asset management in order to further inform the work of the Council. A full agenda outlining discussion topics, panelists, and viewing information will be released before the conference. The conference will be webcast live in its entirety on"

Money market mutual fund assets declined for the 4th week in a row and have declined in 9 out of 12 weeks in 2014. Assets have dropped by $76 billion, or 2.8%, during the first quarter, with Institutional funds declining by $68 billion, or 3.8%, and Retail MMFs declining by $8 billion, or 0.8%. Below, we review the latest weekly asset series from the Investment Company Institute, which is the first to utilize ICI's recently updated "Fund Classification Categories." We also review the sizes of various fund categories, given the recent press attention on what fund segments may be covered by new regulations, and compare ICI's categorizations with Crane Data's.

ICI's latest "Money Market Fund Assets" release tells us, "Total money market fund assets decreased by $3.19 billion to $2.64 trillion for the week ended Wednesday, March 26, the Investment Company Institute reported today. Among taxable money market funds, treasury funds (including agency and repo) decreased by $1.38 billion and prime funds decreased by $520 million. Tax-exempt money market funds decreased by $1.29 billion." ICI adds in a footnote, "The weekly change in money market fund assets is primarily driven by flows and can be used as a proxy for net new cash flows."

The release continues, "Assets of retail money market funds decreased by $880 million to $921.69 billion. Treasury money market fund assets in the retail category increased by $280 million to $203.85 billion, prime money market fund assets decreased by $860 million to $523.37 billion, and tax-exempt fund assets decreased by $300 million to $194.47 billion." ICI's totals show Retail money funds making up 34.9% of total money fund assets, with Prime Retail accounting for 19.8% of all assets, Treasury Retail (includes Agency & Repo) accounting for 7.7% of assets, and Tax Exempt Retail accounting for 7.4% of total assets.

It adds, "Assets of institutional money market funds decreased by $2.31 billion to $1.72 trillion. Among institutional funds, treasury money market fund assets decreased by $1.66 billion to $717.48 billion, prime money market fund assets increased by $340 million to $927.62 billion, and tax-exempt fund assets decreased by $990 million to $76.07 billion." ICI's totals show Institutional money funds making up 65.1% of total money fund assets, with Prime Inst accounting for 35.1% of all assets, Treasury Inst (includes Agency & Repo) accounting for 27.1% of assets, and Tax Exempt Inst accounting for just 2.9% of total assets <b:>`_.

In comparison, Crane Data's separate "Fund Type" categorization shows Treasury Institutional money funds making up 12.8% of all assets, Government Institutional funds making up 12.0% of assets, Prime Institutional funds making up 32.9% of assets, Treasury Retail making up 4.7%, Govt Retail 5.1%, Prime Retail 22.3%, Tax Exempt Retail 5.1%, Tax Exempt Inst 2.2%, and State Tax Exempt 2.9%. (Note that the SEC's definition of "Prime Institutional", whether it will refer to redemption limits or social security numbers, will differ from ICI's or Crane's totals, but it's unclear by how much.)

The Institute's MMF Assets update explains, "ICI reports money market fund assets to the Federal Reserve each week. Data for previous weeks reflect revisions due to data adjustments, reclassifications, and changes in the number of funds reporting. Weekly money market assets for the last 20 weeks are available on the ICI website."

A second footnote says, "ICI classifies funds and share classes as institutional or retail based on language in the fund prospectus. Retail funds are sold primarily to the general public and include funds sold predominantly to employer-sponsored retirement plans and variable annuities. Institutional funds are sold primarily to institutional investors or institutional accounts purchased by or through an institution such as an employer, trustee, or fiduciary on behalf of its clients, employees, or owners. For a detailed description of ICI classifications, please see ICI New Open-End Investment Objective Definitions."

ICI's new fund classification system replaces the term "Non-Government" with the more commonly used "Prime", and it replaces "Government" with "Treasury" (that includes Treasury & Repo and Treasury & Agency). They also shifted some retirement assets into Retail from Institutional. ICI's recent re-categorization defines the various sectors as: Taxable Money Market funds seek to maintain a stable net asset value by investing in short-term, high-grade securities sold in the money market. The average maturity of their portfolios is limited to 60 days or less. Treasury & Repo Money Market funds invest in securities issued by the U.S. Treasury, including repurchase agreements collateralized fully by U.S. Treasury securities. Treasury & Agency Money Market funds invest in securities issued or guaranteed by the U.S. government or its agencies and repurchase agreements for those securities. Prime Money Market funds invest in a variety of money market instruments, including certificates of deposit of large banks, commercial paper and banker's acceptances."

Finally, they write, "Tax-Exempt Money Market funds seek income that is not taxed by the federal government, and in some cases state and municipalities, by investing in municipal securities with relatively short maturities. The average maturity of their portfolios is limited to 60 days or less. National Tax-Exempt Money Market funds seek income that is not taxed by the federal government by investing in municipal securities with relatively short maturities. State Tax-Exempt Money Market funds predominantly invest in short-term municipal bonds of a single state, which are exempt from federal income tax as well as state taxes for residents of that state included in the fund issue."

ICI's latest "Trends in Mutual Fund Investing, February 2014" shows that money fund assets decreased by $47.3 billion in February, after decreasing $10.5 billion in January and increasing $45.1 billion in December and $4.8 billion in November. For calendar 2013, ICI showed money fund assets up by $25.0 billion, or 0.9%. The Institute's February asset totals show an increase in both stock fund and bond fund assets; bond funds were up $37.8 billion after being up $28.5 billion in January and down $34.2 billion in Dec. and down $110.2 billion over the past year. (Bond fund assets declined by $124.4 billion in 2013.) ICI also released its latest "Month-End Portfolio Holdings of Taxable Money Funds," which verified our reported drops in Government Agencies, CDs and Repos in February (and increase in Treasuries). (See Crane Data's March 13 News, "Treasury Holdings Rise, Agencies, CDs Drop in Feb., Fed Repos Jump.") Note ICI also modified its Fund Classification (category) scheme; watch for more details when its weekly "Money Market Fund Assets" report comes out tomorrow.

ICI's February "Trends" says, "The combined assets of the nation's mutual funds increased by $429.2 billion, or 2.9 percent, to $15.23 trillion in February, according to the Investment Company Institute's official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI.... Bond funds had an inflow of $7.67 billion in February, compared with an inflow of $1.18 billion in January. Taxable bond funds had an inflow of $6.13 billion in February, versus an inflow of $840 million in January. Municipal bond funds had an inflow of $1.55 billion in February, compared with an inflow of $344 million in January."

It adds, "Money market funds had an outflow of $46.71 billion in February, compared with an outflow of $9.40 billion in January. Funds offered primarily to institutions had an outflow of $40.58 billion. Funds offered primarily to individuals had an outflow of $6.13 billion." Money funds represent 17.5% of all mutual fund assets while bond funds represent 21.9%.

ICI's Portfolio Holdings for Feb. 2014 show that Holdings of Certificates of Deposits declined by $11.6 billion (after jumping by $48.4 billion in Jan. and falling $25.9 billion in Dec.) to $566.9 billion (23.7%), as CDs remained the largest composition segment. Repos declined by $11.6 billion, or 2.4%, (after declining by $16.5 billion in Jan. and rising $43.0 billion in Dec.) to $472.1 billion (19.7% of assets). Repo was the second largest segment of taxable money fund portfolio holdings according to ICI's data series. Treasury Bills & Securities, the third largest segment, showed an increase of $7.8 billion in Feb. (after a decrease of $43.8 billion in Jan.) to $460.5 billion (19.2%).

Commercial Paper, which increased by $2.0 billion, or 0.5%, remained the fourth largest segment just ahead of U.S. Government Agency Securities. CP holdings totaled $365.0 billion (15.3% of assets) while Agencies fell by $21.1 billion to $339.6 billion (14.2%). Notes (including Corporate and Bank) fell by $7.6 billion to $95.7 billion (4.0% of assets), and Other holdings rose by $479 million to $78.8 billion (3.3%).

The Number of Accounts Outstanding in ICI's Holdings series for taxable money funds decreased by 156,596 to 23.746 million, while the Number of Funds remained flat at 381. Over the past 12 months, the number of accounts fell by over 1.1 million and the number of funds declined by 18. The Average Maturity of Portfolios remained flat at 48 days in Jan. Over the past 12 months, WAMs of Taxable money funds remain declined by one day.

Note: Crane Data has updated its March MFI XLS to reflect the 2/28/14 composition data and maturity breakouts for our entire fund universe. Note again too that we are now producing a "Holdings Reports Issuer Module," which allows subscribers to choose a series of Portfolio Holdings and Issuers and to see a full listing of which money funds own this paper. (Visit our Content Center and the latest Money Fund Portfolio Holdings download page to access the first version of this new file.)

Today, we excerpt from our latest fund "profile" in our Money Fund Intelligence newsletter ($500/yr), which was originally published on March 7... This month MFI interviews Federated Investors' Executive V.P. & C.I.O. for Global Money Markets Deborah Cunningham. Our Q&A follows. MFI: Tell us about your history. Cunningham: From Federated's perspective, we've been involved in running cash since the beginning of time. We now have the oldest registered money market fund on the books of the SEC, Federated Money Market Management. It has 40+ years of history at this point. We ran cash before we even had funds, so we had risk-averse strategies from the very beginning. As far as our historical involvement in the money fund industry, we've been involved in every step of the process, from the original exemptive orders that led to amortized cost, to the first go-round of 2a-7, to the '92 amendments, the '96 amendments, the 2010 amendments, etc.... I started at Federated in 1981, and began in our accounting department. I moved into Investment Management and became actively involved in the team management process for the money funds in 1986.

MFI: What is Federated's main priority? Cunningham: I think our biggest priority is to maintain a product that is useful for our underlying clients. We continue to say ad nauseam that the goal from a cash investor's perspective is to have liquidity, priced at par, with a return commensurate with whatever the market is providing. Unfortunately, over the course of the last six years, the market hasn't been providing a whole lot. But nonetheless that's still the goal of a cash product: to provide safety and stability, and give whatever return you can from a market perspective. So what we have prioritized in that process is making sure that the restrictions, requirements and rulemaking around the product don't eliminate any of those three ideas: stability, i.e., the constant NAV and the amortized cost pricing; liquidity; and return.

MFI: What's your biggest challenge today? Cunningham: I'd still say low yields are the biggest challenge. Definitely supply and regulation are challenges also, and rank up there in the top 3. But rates, in fact, are the biggest issue. We've seen an inordinate amount of waivers, which are not losses, but they are reduced profitability. That's in the context of what's available on an overall gross return or gross yield basis from the marketplace. The economic situation, the credit markets, all of those things are reflecting back into the abysmally low rates ... and it's not a healthy market. We need to get past that, which I believe we are working towards. But, nonetheless, the interest rate challenge is definitely the biggest one.... It's not as if we've been immune to any kinds of problems or issues or challenges in the market place, but this one has just been historically very, very long.

MFI: You have never had a loss event or bailout event, right? Cunningham: No -- I'm knocking on wood -- that is true. We've never had to get parental support, and never had defaulted securities.... But we want to make sure that we continue to do our jobs along the analyst side of the equation with regard to our overall investment team approach.... Maybe that's why we were more confident maintaining our exposure in the most recent credit cycle.... We never exited our business with the European banks. We shortened the durations, mostly reflective of the volatility and the lack of liquidity that was evolving in some of those issuers' names. But we didn't abandon them. And that definitely evolved because of the strength of our credit and investment processes.

MFI: Can you tell us about the 2008 Putnam [Inst MMF] merger? Cunningham: That's one of the reasons why we are very adamant in today's proposed regulatory changes that the "gates and fees" option does work. That was a real life version of that, when clients of the Putnam Institutional Prime Money Market Fund ultimately became shareholders of Federated Prime Obligations Fund. Without that gate being imposed, there could have been worse problems in the marketplace from the liquidity perspective.... It worked. As long as it's not a credit problem, the gates and fees work.

MFI: What about supply? Cunningham: Obviously, the regulatory environment, from a money fund perspective, is tenuous, and we are currently working through that. But also, many of our issuers are faced with their own constraints in their own regulatory environments, particularly banks where you have certain requirements from Dodd-Frank, from Basel III, from a SIFI standpoint. All those things weigh heavily on how banks are issuing and what they're issuing.... As you well know, banks are a large portion of most prime fund holdings.

MFI: Are you using NY Fed repo? Cunningham: We generally have some exposure in our government funds that are eligible to use the program and occasionally exposure in our prime funds. A couple of things: we obviously think it's an immensely helpful program by the NY Fed because it helps establish the viability of the unwind process. Even if it's only on a temporary overnight basis and it's only using treasury collateral, it's established a floor for that type of transaction, giving the Fed more ultimate control in their rate-setting process. This is a program that the NY Fed seems to be pretty optimistic about continuing. They're calling it an exercise now and not just as test, so that's a good development.... Having said that, we have 25 or so other counterparties that we also want to maintain a relationship with on a regular basis. We're trying to walk a tightrope between the relationships that we've developed, and want to maintain and continue to use on a funding basis, versus what seems to be pretty stable and growing potential with the NY Fed.

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.

The SEC's release tells us, "The analyses examine: The spread between same-day buy and sell transaction prices for certain corporate bonds from Jan. 2, 2008 to Jan. 31, 2009. The extent of government money market fund exposure to non-government securities. Academic literature reviewing recent evidence on the availability of "safe assets" in the U.S. and global economies. The extent various types of money market funds are holding in their portfolios guarantees and demand features from a single institution."

It continues, "The SEC staff believes that the analyses have the potential to be informative for evaluating final rule amendments for the regulation of money market funds. These analyses may supplement other information considered in connection with those final rule amendments, and the SEC staff is making these analyses available to allow the public to consider and comment on this supplemental information. Comments on this supplemental information may be submitted to the comment file for rule amendments the SEC proposed in June 2013 regarding money market fund reform (File No. S7-03-13) and should be received by April 23, 2014."

The SEC adds, "Additional studies, memoranda, or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials and an invitation for public comment will be made available on the Commission's web page. To ensure direct electronic receipt of such notifications, sign up through the "Stay Connected" option at to receive by e-mail "Notifications Regarding the Money Market Fund Reform and Amendments to Form PF Rulemaking.""

The SEC's first study comments, "The Division of Economic and Risk Analysis ("DERA") has prepared an analysis of the spread between same-day buy and sell transaction prices ("spread") for Tier 1 and 2 securities during the period starting January 2, 2008 and ending January 31, 2009. This analysis is intended to assist the Commission in the development of final rules regarding Money Market Fund (MMF) Reform, including any possible liquidity fee. The analysis documents changes in the cost of liquidity provision before, during, and after the window that commences with the bankruptcy of Lehman Brothers and ends the day before the Federal Reserve's announcement of the creation of the Money Market Investor Funding Facility."

The "Government MMF Exposure to Non-Government Securities update tells us, "The Division of Economic and Risk Analysis has studied the exposure of government money market funds to non-government assets between November 2010 and November 2013. The analysis provides information that characterizes the usage level of non-government securities in government money market funds, and it is intended to assist the Commission in developing final rules regarding Money Market Fund Reform, including any appropriate exemption for government money market funds."

Their Muni MMF Guarantor paper says, "In this memo, the Division of Economic and Risk Analysis presents an analysis of the exposure municipal money market funds ("MMFs") have to the parents of guarantors. There are two types of municipal MMFs on Form N-MFP (item 10): Single State and Other Tax-Exempt funds. The analysis examines the extent to which MMFs use the "25% basket" under which up to 25% of the value of securities held in a MMF portfolio may be subject to guarantees or demand features from a single guarantor in municipal MMFs. The analysis is intended to assist the Commission in developing final rules regarding Money Market Fund Reform."

Finally, the "Safe Assets update," states, "The Division of Economic and Risk Analysis ("DERA") has reviewed recent evidence on the availability of domestic government securities and global "safe assets." The memorandum is intended to assist the Commission in the development of final rules regarding Money Market Fund (MMF) Reform that could possibly increase the demand for these assets. We focus not only on the availability of domestic government securities, but also global safe assets. The fungibility and hence substitutability of global safe assets in other contexts (but not for money market funds) would likely free up supplies of domestic government securities elsewhere. DERA staff ("staff") note a marked increase in the global demand for domestic government securities and global safe assets but do not anticipate that, if such changes were adopted, the impact would be large relative to the domestic and global markets for safe assets."

Money market strategists spent most of their commentaries last week writing about Janet Yellen and the Federal Reserve's seeming shift towards raising the Fed funds target rate earlier in 2015 than many expected. We quote below from several of them. Barclays latest "US Weekly Money Market Update", written by Joe Abate, says, "Short-term (as well as other fixed income) markets were riled by the increase in the FOMC's median fed funds forecasts for 2015 and 2016 that accompanied the FOMC statement. The median estimate for 2015 increased from 0.75% to 1.00%, and the estimate for 2016 rose to 2.25% from 1.75%. Markets got a further shock later during the press conference when Fed Chair Yellen implied that the Fed could raise interest rates perhaps "six months or that type of thing" after the asset purchases ended. Since there is a nearly uniform consensus that the Fed's asset purchases will end in October, her six-month comment suggested that the Fed might consider pushing interest rates higher as soon as March or April 2015. This is considerably sooner than the markets were pricing in before the FOMC meeting."

Abate continues, "Indeed, the implied yields on the December 2015 and December 2016 fed funds futures contracts moved higher by 18 and 29bp, respectively, between Tuesday and Thursday. Similarly, the June 2015 fed funds contract sold off by 7.5bp as markets moved the timing of the first rate hike from the fall to late spring 2015. But have markets overreacted a bit? We think that they may be reading too much into the Fed's dots."

J.P. Morgan Securities' weekly "Short-Term Fixed Income", written by Alex Roever and Teresa Ho, comments, "All eyes were on the Fed this week, as Janet Yellen conducted her first FOMC meeting and news conference as Fed chairwoman. While there were parts of the meeting/news conference that came in closer to expectations, there were other parts that surprised the markets as well. Overall, the balance of information provided a more hawkish tone than anticipated."

They explain, "As expected, the Fed announced that it would taper another $10bn, reducing its asset purchases to $55bn per month ($25bn in MBS and $30bn in Treasuries) effective in April. At the current pace of decline, this would suggest that the Fed will draw its asset purchase program to a close by the end of October. Furthermore, the FOMC moved toward a more qualitative forward guidance, by jettisoning the numeric thresholds which had been a key part of policy statements since December 2012. Instead, the FOMC will take into account a wide assortment of labor market, inflation and financial market indicators when deciding to remove policy accommodation."

JPM writes, "Away from tapering and forward guidance, one of the key developments that decidedly delivered a more hawkish flavor to the meeting was its interest rate forecast. Based on the Fed's Summary of Economic Projections (SEP), there are now 13 participants that expect the first tightening to occur in 2015, up from 12 in the previous December projections, and two participants that expect the first rate hike to occur in 2016, down from three previously. More significantly, the median Fed Funds target forecast for 4Q15 increased 25bp to 1.0% and for 4Q16 50bp to 2.25%. As our US economist noted, the change in the Fed Funds forecast is greater than that would be implied by the change in economic forecast and thus suggests a relatively hawkish shift in the Fed's reaction function. This perception was reinforced by Yellen's remark, perhaps inadvertently, that rate hikes could commence six months after the end of asset purchases, which would imply Q215. Prior to the Fed meeting, the Fed Funds futures market was pricing Q415."

They add, "Against this backdrop, the liquidity markets generally remained well behaved. Although Treasury bill yields trended higher immediately after the release of the FOMC statement, the trend appeared to have dissipated by Thursday's morning as yields fell. Outside of bills, GC repo yields moved lower as we began to see the stock of bill outstandings decline as we near the end of tax season. GC repo finished the week at 7bp, and assuming we see no announcement to an increase to the Fed's RRP rate or the deposit rate paid to FMUs that have access to the Fed, we wouldn't be surprised if GC trades tight to the Fed's RRP rate in the coming weeks."

Wells Fargo's Garret Sloan comments on the overall higher rates recently, "The repo market has been strangely elevated for the entire month of March and it feels like that stickiness in the high single digit rates and at some points in the low double digits has potentially aroused the rest of the market. Despite the fact that much of the collateral glut in the repo markets took place earlier in February, it was not until month-end that we saw a real backup in rates. Until that point 5 basis points was the norm, but a combination of things seems to have caught up with repo and it may be contagious. The last day of February, repo jumped higher from 5 basis points to just under 10 basis points, and it has not looked back. It initially felt like it would be a temporary situation, but repo rates have held: possibly helped by a higher reverse repo rate and a higher maximum allocation that changed on February 25th.

Finally, he adds, "Perhaps this could be the turn of the tide in the front-end as investors begin to push back on low rates and tight spreads. It will be interesting to see who prevails in this clash of wills. The 1-month offered side in 30-day top tier CP backed up 2 basis points yesterday while tier 2 CP on average remained flat. But with repo in the high single digits, the interest in mid-single digit industrial CP of course should decline, and if not decline at least investors will push back simply out of indignation at the thought of paying up for 30-day industrial CP relative to Treasury repo."

Federated Investors' President & CEO J. Christopher Donahue spoke last week at the Citi Asset Management Conference and, as he usually does, addressed a number of issues related to money market mutual funds. He commented, "In terms of money market reform, we were down at the Commission last week seeing one of the commissioners and her staff, and needless to say we asked them this question. One response we got was, "Well the casing for the sausage is not yet complete." Now you can put any type of timeframe on that you want.... [T]he chairman said that the rule would come out, quote "near term this year." The Wall Street Journal in some of their writings has indicated mid- to late-second quarter. The SEC filed a report a number of months ago that said they'd have it in by October of 2014."

Donahue continued, "When we did the 2010 amendments, it took them about 6 months from the date the comments finished to when the rule was published. These comments were finished in September. Here we are right near that [6 months]. However, this time it is a lot more complicated, a lot more controversial, so I don't think that they will make the 6 month time frame. But that's kind of setting the stage, and it remains true that Mary Jo White has indicated that she wants to wrap these things up."

When asked about the floating NAV, he commented, "Well actually I don't know where they will go. I think it is interesting that one of the newer commissioners, Piwowar, came out with a little speech saying he thinks we ought to give investors a choice -- sort of pick one from column A and pick one from column B. And by that he meant that you would have the option of having a variable that asset value money market fund with no fees and gates [or] a constant net asset value money market fund with fees and gates. I think that would be a very fine result. So far as we are concerned, anything that preserves the existence of the constant net asset value money fund is a good thing for the capital markets, the users, the shareholders, all the stakeholders, including of course Federated."

Donahue adds, "Where exactly they will go, I don't know. I know that they have not yet solved all of the challenges on tax, accounting, state law, etc., with the floating NAV. The comments that came in as of September 17 were 98% against a floating NAV, and 90% of the comments were in favor for some form of gates or fees, which were "Alternative II". So how the SEC comes out is very, very difficult for me to project. Obviously, we are in favor of maintaining and enhancing the resiliency of money funds."

On another topic, he tells us, "The Fed came up with the reverse repo, a test they have recently expanded from a few billion up to now where they will give $7 billion to each one of the funds. The rate is now 5 basis points. There is something under $100 billion in this test, but now they have announced that this is no longer a test, it's an exercise. `These kinds of words are apparently important because now this means that it will extend into 2015 so they will be an active reverse repo player. We are active in using this reverse facility and it acts as a pretty good bottom [to] the rates situation on the short side."

Donahue says, "Our people believe that there will be some steepening of the short-term yield curve in the second half of the year. Notice I did not say increased rates. Okay, no one is talking about that until sometime in 2015, and some are and some aren't. That will be helpful in terms of the rates situation with the funds. But again that's a little down the road. If you average the last two quarters of last year, they were both right around $30 million in waivers for Federated. That's waivers from operating income. We on our [earnings] call expected that we said the same number will occur in Q1. As we sit here in early March, I have no reason to go off either high or low to that number at this point."

He explains, "The way this business has evolved is that there is a lot of sharing of the gross earnings on a money market fund with the distributor. What has enabled Federated to withstand the low interest rates is the fact that we charge an administrative fee to the funds of about 7.5 basis points. We don't always collect all of that but it is what in fact allows the administration to keep going.... So that structure is the key to allow us to function in this rate environment. In terms of the sharing, as a general rule you can stipulate that our customers, who we love dearly, are always looking for a higher payout on their assets. But of course when there is no yield there is not much to fight about.... But I think the bigger picture here is, if you look at the commitment of both Federated and our distributors, to maintaining this cash management service in this kind of an environment. [F]or some of our customers, its tens of millions of dollars that have been waived, and not received, because of the low interest rates. Yet the product use continues, because it's a very important cash management vehicle for those people."

Finally, Donahue was also asked about rising rates and the impact on MMFs. He says, "When rates go up, as long as they don't go up rapidly ... we don't expect large sudden decreases [in assets]. One of the reasons we will think that situation will not happen this time is that all of the people that are interested in yield are already gone. There hasn't been any yield to speak of in these products for several years. So if they are interested in yield, they are doing something else. For example, bank deposits since '08 have doubled from $3.5 trillion to about $7 trillion. That is because some of the bigger banks are actually able to bid up against a low yield in a money fund for those assets. You have a situation where the clients in terms of yield are able to find another warm and loving home. So in effect, what it reflects on us is that our business remains strong because of its activity as a cash management service."

U.S. Securities & Exchange Commission Chair Mary Jo White spoke Wednesday at the Chamber of Commerce's "8th Annual Capital Markets Summit", but she gave little indication of when we might see pending money market fund reforms and what form they might take. We also excerpt from the SEC's Craig Lewis, who spoke Tuesday at ICI's MFIMC conference in Orlando. Yesterday, White commented, "The terminology 'shadow banking' is used fairly widely and to some degree it's taken as a pejorative [to mean] somehow that markets aren't regulated.... I'm a member of FSOC and also a member of the FSB steering committee.... I think it is very important that we distinguish between effective systematic risk regulation and the means to get there. Banking regulation, that prototype, isn't necessarily what works best in the capital markets space.... We certainly gave input on the OFR process.... For example, on money market funds, FSOC has made it very clear that they regard the SEC as the expert."

When asked about money fund reform, she adds, "On the status of that, we are as a Commission, and obviously together with the staff, actively involved and proceeding to the adopting phase. We have taken a very in-depth look at all the impacts of [the] two alternative proposals that we can proceed with, or in combination. We have gotten extensive, invaluable comments on this. We are very sensitive to preserving the product as part of this process. [But] what we are obviously focused on is what happened during the financial crisis and the heightened redemptions in the prime institutional funds."

White continues, "If we were to go with, as part of what we ultimately adopt, a floating NAV, that's where I think most of the significant cost, tax and accounting concerns come in. We are laser-focused on those. We're in discussion on the tax consequences with the IRS.... If we did go the route of the prime floating NAV, having to compute and report small gains over time.... On the accounting side, we're in dialogue with FASB on this, [we're] ensuring that MMFs would continue, were we to go that route, as cash equivalents. Those two sets of issues -- not the only cost issues -- we're looking very closely. [We're looking] at the systems and operation issues as well."

She adds, "In 2010, the SEC did take significant action to enhance the resiliency of money market funds... We also did an in-depth study.... Those reforms don't solve that [redemption] problem was one of the conclusions of that study. That's what we're about now, trying to do it in the best, most optimal, cost effective way as we can."

The SEC's Lewis commented Tuesday on "The Example of Money Market Fund Reform," "As many of you may know, the Commission has been considering the question of what, if any, further reforms to money market funds may be appropriate. As I'll describe, this process has been marked with a high level of public engagement with relevant economic issues by DERA. For example, before any policy choices were even proposed, DERA staff authored a memorandum intended to assist in formulating a well-considered proposal. That memo contained both a quantitative and qualitative analysis responding to certain questions regarding money market funds raised by Commissioners Aguilar, Paredes, and Gallagher. Those questions focused on three issues: (1) What were the determinants of investor behavior and its effect on MMF performance during the 2008 financial crisis; (2) What has been the effect of the 2010 money market fund reforms; and (3) How future reforms might affect the demand for investments in money market fund substitutes and the implications for investors, financial institutions, corporate borrowers, municipalities, and states that sell their debt to money market funds. That staff memorandum, which was made public, helped inform the subsequent proposal."

He continues, "Now let's turn to the proposal itself. The proposing release itself exemplifies the way that the Commission, rulewriters, and economists are working closely together to develop rule releases. The proposal contained a fully integrated qualitative and quantitative analysis. For example, the release contained an analysis of the economics of money market funds, including the combination of MMF features that may create an incentive for their shareholders to redeem shares in periods of financial stress. The release considered the economic consequences of a floating NAV and liquidity fees and gates as well as effects on efficiency, competition, and capital formation. And we examined the potential implications of these proposals on current investments in money market funds and on the short-term financing markets. The analyses indicated, in part, that the economic implications of the floating NAV and liquidity fees and gates proposals depend on investors' preferences, and the attractiveness of investment alternatives."

Lewis explains, "DERA also placed additional data analyses into the comment file as part of the proposal process. For example, one of the many issues that the Commission thought through as part of the proposal is determining the appropriate size of diversification limits in money market funds. To assist the Commission and to inform the public, DERA staff developed memoranda that quantitatively evaluated the exposure and concentration money market fund portfolios have to the parent companies of guarantors and the parent companies of issuers. Those memos were included in the public comment file."

He adds, "Moreover, as I mentioned earlier, DERA has a strong research program designed to focus on issues of importance to the Commission. Flowing from my work on the money market fund release, I have authored a working paper entitled, The Economic Implications of Money Market Fund Capital Buffers. That working paper has more recently been included in the public comment file. I'll briefly describe its principal findings. If one considers the possible rationales for employing a capital buffer, which was discussed but ultimately not proposed by the Commission, one possible objective is to protect shareholders from losses related to defaults in concentrated positions, such as the one experienced by the Reserve Primary Fund following the Lehman Brothers bankruptcy. If complete loss absorption is the objective, a substantial buffer would be required. For example, it has been suggested that a 3% buffer would accommodate all but extremely large losses. While such a capital buffer could make a money market fund better able to withstand significant credit events, it would be a costly mechanism from the perspective of the opportunity cost of capital because those contributing to the buffer would deploy valuable scarce resources that are being used elsewhere in presumably more valuable opportunities."

Lewis tells us, "Moreover, a basic precept of financial economics is that rational investors demand compensation for bearing risk. Since a capital buffer is designed to absorb the risk associated with credit events, it follows that those investors contributing funds to a capital buffer will demand compensation for bearing this risk. My paper illustrates that to the extent a capital buffer could insulate money market fund shareholders from adverse credit events, it would have the additional result that money market funds would only be able to offer shareholders returns that mimic those available for government securities, thus effectively converting prime money market funds into "synthetic" Treasury funds."

He adds, "So now the question is why does any of this matter to you? Why should you care about a simple memorandum on economic analysis authored two years ago? Of course, I imagine that some of you might be interested in the outcome of the Commission's consideration of money market fund reform. And so at a minimum I hope you can see how much significant, rigorous thought has already gone into that process. But beyond this single rule, I challenge you to become an active part of the Commission's engagement with economic thought. As I have described, the Commission and staff are exploring different ways to demonstrate publicly our thinking on various issues. We will continue to have robust and transparent analyses in rule proposals. And importantly, we will continue, as appropriate, to put additional analyses into the comment files. Thus, the most obvious way you can become part of this is through engagement in the comment process. I have said this in many settings and I will say it again -- I encourage you to submit comment letters that contain robust qualitative and quantitative economic analyses of our rules."

Finally, Lewis comments, "I too often read a comment letter that engages only with the policy discussions in a rule and see a missed opportunity to respond to the entirety of the rule release. The economic analyses that are crafted as part of the Commission's rule releases are not simple tabular accountings of costs and benefits that are after-the-fact calculations and monetizations of the effects of our rules. They are wide-ranging, sophisticated analyses that reflect months (or maybe years) of engagement among DERA, the rulewriting staff, the Office of the General Counsel, and the Commissioners. They animate and fully explain the Commission's thinking on particular policy choices. When commenters offer a rigorous and full engagement with the economic analysis -- and I don't mean with a throw-away line about benefits or burdens -- it helps to ensure that the public is fully engaged in the same, economically driven discourse that is flourishing within the walls of the SEC. And the end results of that conversation can only be positive for investors and our markets."

ICI released its latest monthly "Money Market Fund Holdings, February 2014" yesterday, the third edition in its new series 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 Feb. 28, 2014. The release was also accompanied by a comment entitled, "U.S. Prime Money Market Funds and European Borrowing from Economist Chris Plantier. The update says, "The Investment Company Institute (ICI) reports that, as of February, prime money market funds held 23.83 percent of their portfolios in daily liquid assets and 37.27 percent in weekly liquid assets. Government money market funds held 61.89 percent of their portfolios in daily liquid assets and 84.54 percent in weekly liquid assets in February." (See Crane Data's March 13 News, "Treasury Holdings Rise, Agencies, CDs Drop in Feb., Fed Repos Jump".)

ICI's "Prime and Government Money Market Funds' Daily and Weekly Liquid Assets table shows Prime Money Market Funds' Daily liquid assets at 23.8% as of Feb. 28, 2014, up marginally from 23.2% on 1/31/14. Prime funds' "All securities maturing within 1 day" totaled 17.0% (vs. 17.5% last month) while their "Other treasury securities" entry added 6.8% (vs. 5.7% last month) to the Daily liquid total. Prime funds' Weekly liquid assets totaled 37.3% (vs 36.6% last month), which was made up of "All securities maturing within 5 days" (29.4% vs. 29.1% in Jan.), Other treasury securities (6.8% vs. 5.6% in Jan.), and Other agency securities (1.0% vs. 1.8% a month ago).

Government Money Market Funds' Daily liquid assets total 61.9% in February vs. 60.4% in January. All securities maturing within 1 day totaled 22.9% vs. 22.2% last month. Other treasury securities added 39.0% (vs. 38.2% in Jan). Weekly liquid assets totaled 84.5% (vs. 84.3%), which was comprised of All securities maturing within 5 days (33.5% vs. 35.3%), Other treasury securities (37.8% vs. 35.3%), and Other agency securities (13.2% vs. 13.7%).

ICI's "Holdings by Region of Issuer summary explains, "Prime money market funds' holdings attributable to the Americas rose from 42.25 percent in January to 42.44 percent in February. Government money market funds' holdings attributable to the Americas declined from 84.58 percent in January to 84.48 percent in February." (ICI doesn't publish individual fund holdings.)

Their "Prime and Government Money Market Funds' Holdings, by Region of Issuer table shows Prime Money Market Funds with 42.4% in the Americas (vs. 42.3% last month), 18.9% in Asia Pacific (vs. 19.4%), 38.4% in Europe (vs. 38.2%), and 0.3% in Other and Supranational (vs. 0.2%). Government Money Market Funds held 84.5% in the Americas (vs. 84.6% last month), 0.6% in Asia Pacific (vs. 0.6%), 14.9% in Europe (vs. 14.7%), and 0.1% in Supranational (vs. 0.1%).

The "Weighted Average Maturities (WAMs) and Weighted Average Lives (WALs) section tells us, "Prime funds had a weighted-average maturity of 48 days and a weighted-average life of 83 days, as of February. Average WAMs and WALs are asset-weighted. Government money market funds had a weighted-average maturity of 47 days and a weighted-average life of 68 days, as of February." The table, "Prime and Government Money Market Funds' WAMs and WALs shows Prime MMFs WAMs lengthened by one day and WALs remaining unchanged from last month (at 48 and 83 days, respectively) and Government MMFs' WAMs shortened by one day to 47 days and their WALs increased by two days to 68 days.

The release adds, "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 February covers funds holding 94 percent of taxable money market fund assets."

ICI's "Viewpoint" accompanying the release, entitled, "U.S. Prime Money Market Funds and European Borrowing," says, "European holdings by U.S. prime money market funds have fluctuated significantly since early 2011. Prime money market funds greatly reduced their holdings of European issuers as a percentage of their overall portfolio in the summer of 2011, as the eurozone debt crisis worsened, and holdings have not fully returned to levels seen before then. This reduction in part reflects the perception that some European banks may be riskier now, but it also reflects the mounting regulatory pressures on European banks to reduce their reliance on short-term wholesale funding."

It continues, "Since then, prime money market funds' holdings of European issuers have fallen from a peak share of 51.5 percent, reaching a low of 28.6 percent in June 2012 and gradually increasing thereafter. This trend continued in the most recent month, with the share of European holdings in prime money market funds' portfolios rising slightly, from 38.17 percent in January 2014 to 38.42 percent in February 2014. This share of European holdings remains significantly below the peak share seen in early 2011."

While there are no specific topics addressing money market mutual funds at this year's ICI and FBA "Mutual Fund and Investment Management Conference", which takes place this week in Orlando, ICI President and CEO Paul Schott Stevens spoke on "Financial Stability and U.S. Mutual Funds." Meanwhile, other speakers, including SEC Director of the Division of Investment Management Norm Champ, mentioned money market fund regulations but provided little detail. ICI's Stevens says, "Today I will discuss an emerging issue of critical importance: whether registered funds, or asset managers more generally, pose significant risks to the financial system. Could funds or their managers trigger or accelerate the next great financial crisis? Many of you may be thinking, "That's an easy question, because we all know that they won't. Next topic!" Others may think, "That's not an issue my company has to worry about, because we're not one of the largest asset managers. This isn't our fight.""

He explains, "So, my first challenge today is to dispel those two notions -- because everyone in our industry needs to take note of this matter; to understand what's at stake for funds and their investors; and to engage alongside ICI to help us make the strongest possible case. For those of you who think this whole notion about funds and systemic risk should be easily dismissed on its merits -- think again. Unfortunately, in very short order, we've had reports from both U.S. and international regulators suggesting that asset managers or the funds they offer may well be the next target for enhanced regulation on the grounds of systemic risk. We have serious disagreements with these reports -- but they nonetheless could be the predicate for new, bank-style prudential regulation for our industry."

Stevens continues, "If regulators ultimately decide that certain funds or asset managers should face enhanced prudential regulation, the consequences will reach far beyond the 20 largest managers listed in the U.S. report, or the 14 U.S. registered investment companies singled out under the global authorities' preliminary thresholds. I'm going to describe how we got into this debate ... to lay out why even the largest U.S. mutual funds do not create systemic risk ... and to describe the potential implications of this issue."

He tells us, "Our argument can be summed up in four points: First, mutual funds make little use of leverage -- the essential fuel of financial crises. Second, mutual funds simply do not "fail" the way banks and insurance companies do. Third, the specific risks that the OFR Report hypothesizes have no factual predicate. And finally, the structure and comprehensive regulation of mutual funds and their managers not only protect investors, but limit systemic risks and risk transmission."

Stevens says, "Let's start with leverage. Leverage is the fuel that can turn a financial spark into a bonfire. Indeed, all major financial crises have involved debt that has grown dangerously out of scale. Former Federal Reserve Chairman Alan Greenspan is one of the many authorities who have emphasized the central role of leverage in the 2008 financial crisis. As he writes: "Subprime [mortgages] were indeed the toxic asset, but if they had been held by mutual funds or in 401(k)s, we would not have seen the serial contagion we did.... It is not the toxic security that is critical, but the degree of leverage of the holders of the asset.... In 2008, tangible capital on the part of many investment banks was around 3 percent of assets. That level of capital can disappear in hours, and it did. And the system imploded.""

He asks, "Why does Chairman Greenspan say that mutual funds would not have fueled "serial contagion" -- in other words, systemic risk? Precisely because mutual funds make little or no use of leverage. Then, by the OFR's account, stock and bond funds "face the risk of large [shareholder] redemption requests in stressed markets" -- forcing funds to liquidate portfolio securities at "fire sale" prices. This, according to the OFR, transmits risks across the financial system. These are interesting conjectures. But there is no support for them in the historical record."

Stevens adds, "Actually, we have been hearing claims that fund investing could destabilize markets for quite a while -- since 1929, in fact. ICI Research has scoured every period of market stress since World War II. The data show no evidence that fund investors panicked and stampeded in any of those episodes. Let me repeat: no evidence ... in any of those episodes. Most broadly, we do know the Federal Reserve as a systemic risk regulator would practice "prudential supervision." This brand of regulation concerns itself primarily with preserving the banking system. Certainly, it is not guided by the interests of investors. Nor is it predicated on notions of fiduciary duty, the unwavering responsibility of investment advisers always to act in the best interests of their funds or other clients."

Stevens also says, "So in times of market turmoil, the Fed might well decide that it is necessary for a fund to maintain financing for a troubled company or financial institution -- irrespective of the best interests of the fund's shareholders. We do know that this risk is not purely theoretical. Amidst the rescue of Bear Stearns in March 2008, the collapse of Lehman Brothers in September 2008, and the European banking crisis of 2011, U.S. and other bank regulators harshly criticized funds for pulling back from funding dodgy institutions. Bank regulators apparently expected that, in the interests of "the system," funds would ignore credit risks, accept predictable losses -- in short, "take one for the team" -- with no regard for the interests of their own shareholders."

He comments, "How long would fund investing -- rooted in the trust of our investors -- thrive under such conditions? We do not know how long the consequences of SIFI designation would be confined solely to the largest funds or complexes. New costs and new regulations applied selectively will distort the competitive landscape of our industry, in ways that are both numerous and unpredictable.... Taken together, the consequences of SIFI designation could significantly impair fund investing. For our economy, they could undermine a key source of financing. For individual Americans, these new regulations could harm severely the single best vehicle for retirement saving and investment."

Finally, Stevens adds, "I am encouraged by recent remarks in this vein by SEC Chair Mary Jo White. She said: "We also will continue to engage with other domestic and international regulators to ensure that the systemic risks to our interconnected financial systems are identified and addressed -- but addressed in a way that takes into account the differences between prudential risks and those that are not.... We want to avoid a rigidly uniform regulatory approach solely defined by the safety and soundness standard that may be more appropriate for banking institutions." Substantial efforts already are underway to address regulators' systemic risk concerns in specific areas -- such areas as money markets, repurchase agreements, securities lending, and derivatives trading."

In other news, we're still waiting for Norm Champ's speech to be posted (we didn't go to the ICI's MFIMC so didn't see the speeches live), but the Twitter comments and reporting (or lack thereof) indicate that there wasn't much substance on money funds. (Champ's talk last year at MFIMC was light on specifics as well.) Comments indicate that the SEC is working on money fund regulations, reading comment letters, and planning on issuing rules this year.

In just the third entry of 2014 on the SEC's "Comments on Proposed Rule: Money Market Fund Reform; Amendments to Form PF" website, counsel Melanie L. Fein of the Fein Law Offices posted a comment paper entitled, "Missing the Mark on Money Market Funds. Fein writes, "Shortly after the financial crisis five years ago, senior Federal Reserve officials began a concerted campaign to blame money market funds ("MMFs") for the crisis and otherwise discredit the MMF industry. These officials argued, among other things, that MMFs were unregulated, part of a leveraged "shadow banking system," engaged in risky investment activities, prone to runs, a threat to the ability of banks to provide credit, and a source of instability in the financial system as a whole. These arguments went through various iterations, each of which, when examined closely, proved wrong. None of the arguments were supported by empirical data or credible economic arguments, and Federal Reserve officials lately have toned down their rhetoric on MMFs."

She explains, "Nevertheless, the Federal Reserve Bank of New York, in an apparent attempt to remedy the analytical deficiencies in the central bank's unseemly attack on MMFs, recently publicized the results of a study on MMFs by its economists. The study examines what the theoretical impact on the banking system might be if MMFs were the only depositors of banks. This implausible scenario is referred to by the economists as a "MMF-intermediated" banking system as opposed to the present "direct finance" banking system whereby banks receive deposits directly from individual, corporate and other depositors. The results of the Reserve Bank Study were highlighted on the Reserve Bank's economics blog. The Study, entitled "The Fragility of an MMF-Intermediated Financial System," (by Cipriani, Martin, and Parigi) concludes that a MMF-intermediated banking system can be "particularly fragile" and "more unstable" than a direct finance system."

Fein says, "The Reserve Bank Study appears intended to prove the following hypothesis: MMFs hold significant amounts of uninsured bank deposits that, if suddenly withdrawn by MMFs en masse, would be more destabilizing to the banking system than if individual and corporate depositors suddenly withdrew their deposits. The reason for this, the Study posits, is that MMF shareholders who become aware of adverse information about a troubled bank signal such information to MMFs by redeeming their MMF shares. The MMFs in turn react by withdrawing additional deposits from the bank, thus triggering larger withdrawals from the bank than would otherwise occur, exacerbating instability at the bank and the larger banking system."

She explains, "Apart from the improbability of the underlying scenario in which MMFs are the only holders of bank deposits, the Reserve Bank Study is based on assumptions that are demonstrably wrong. Among other things, MMFs at present do not hold any systemically significant amount of U.S. bank deposits. Thus, the central premise of the hypothesis is critically flawed."

Fein tells us, "A troubling implication of the Study is the suggestion that MMFs or other investors should not respond promptly to information indicating problems at a bank. Rather, according to the Study, it would be less destabilizing to a troubled bank and the rest of the banking system if depositors exercise "patience" and withdraw deposits "gradually." The Study does not envision ways of enforcing depositor patience or gradual withdrawal of deposits from a faltering bank -- an exercise fraught with difficulties."

She continues, "The Study reflects an exceedingly narrow range of financial regulatory considerations. Among other things, the Study fails to give any credence to market discipline as a check on undue risk-taking and unsafe and unsound practices by banks. The Study ignores the dangers of "moral hazard" by taxpayer-subsidized banking organizations operating free of market restraints. It fails to consider the potential for increased systemic risk in the financial system if uninsured deposits at "too-big-to-fail" banks grow in the absence of MMFs. Nevertheless, the implied suggestion is that depositors should bear more risk of loss in a failing bank situation than they do now. However, any action to impose more risk on depositors would require a radical change in national banking policy and affect depositor behavior in unpredictable ways, with potentially severe implications for banking stability that are not addressed by the Study."

Fein also writes, "Most importantly, the Study assigns no value to the regulatory framework under which MMFs operate that makes them safer investments than bank deposits for many investors. The Study aligns with other Federal Reserve studies that view the transparency of MMFs as a threat to banking stability, contrary to the disclosure-based regime of securities regulation. The Study reflects the bank-centric view -- inherent in comments of senior Federal Reserve officials -- that MMFs and their investors are second-class citizens in the financial world, whose interests are subordinate to those of banks and bank shareholders. Under this view, MMFs are mere props to support the regulated banking industry, not efficient investment vehicles that exist independently to meet important investment and liquidity needs in the financial system."

Finally, she adds, "This paper discusses these and other flaws in the Reserve Bank Study and shows why the Study fails to provide credible support for regulatory changes that would diminish the role of MMFs in the financial system."

On Wednesday, the Irish Funds Industry Association (IFIA), which represents mutual funds domiciled in Ireland for sale into Europe, held one of three "road shows" in Boston, where speakers and panelists discussed distribution, regulations and other "offshore" fund topics. Kevin Murphy, Chairman of the IFIA and Partner at Arthur Cox, commented about IFIA's "increasing profile in Brussels" and that "25% of Ireland's fund assets are in CNAV money funds." He said of the recently-stalled European money fund reform proposal, "We have fought tirelessly to get our message across. I'm delighted to say the vote in the [European Parliament's] ECON committee has been postponed." When [the proposal is] "revamped and reissued" [possibly in next year's session] he expected it "will include compromise positions significant for U.S. [managers, and] compromise that works." It is an "example of what we can do." Later, he added that he expected "mandatory gates & fees" to eventually be implemented instead of a "buffer". (Earlier this week, a committee again refused to take up money fund regulations, so the matter likely won't be addressed before new elections are held this spring. See our March 5 News "European Money Fund Regs Scuppered".)

Ted Hood, CEO of Source, added when asked about the regulations by our Peter Crane, "Investors [in Europe] are corporate treasurers. It's crazy that it's an issue [in Europe, since there are no retail investors]." BBH's Sean Tully commented, "The capital buffer will [likely] never see the light of day [in Europe]." But, he warned, "Bad ideas don't go away.... [It's] one less thing to worry about in the short-term."

This morning, U.K.-based publication Room 151 writes in "MMF reform dropped from ECON agenda", "The European Parliament has dropped proposals for the reform of money market firms which had raised fears for council investment strategies. A meeting of the parliament's economic and monetary affairs committee (ECON) had been due to vote on the reforms this week, but the matter was dropped from the agenda. The decision to abandon a vote follows a campaign by investment firms, local authorities and charities across Europe, concerned that the proposals would lead to the destruction of constant net asset value MMFs (CNAVs). The issue of MMF reform could return to the committee following the election of a new parliament in May, but the delay will mean that members will likely be able to take into consideration the verdict of US authorities, which is likely to arrive before June."

The piece adds, "Committee member Gay Mitchell, of the Irish Fine Gael Party, told Room151: "There has been very little effort to meet genuine concerns about CNAVs. They would not continue if MMF reform in its current format passed and the majority of MEPs feel this is too big a decision to rush and that CNAVs should continue, perhaps with some 'just in case' safeguards. Rushed legislation would be bad legislation and the attempt had been to have it on plenary agenda for April. The majority feel we should leave it to the new parliament to give it timely consideration." European elections are taking place in May, which are likely to change the membership of the ECON committee."

In other news, Crane Data published its most recent monthly Money Fund Intelligence Family & Global Rankings Monday, which ranks the asset totals and market share of managers of money funds in the U.S. and globally. (It's available to Money Fund Wisdom subscribers.) The latest reports show asset declines by almost all of major money fund complexes in February and in the latest quarter. BofA, Northern and Dreyfus were the only complexes among the 20 largest to show increases in February, rising by $1.6 billion, $1.0 billion, $23 million, respectively, while Morgan Stanley, Dreyfus, Goldman Sachs and Northern led the increases over the 3 months through Feb. 28, 2014, rising by $5.8B, $4.8B, $4.0B and $3.4B. Money fund assets overall declined by $45.8 billion in February, their first decline in 7 months, after rising by $568 million in January, $35.6 billion in December, $14.7 billion in November and $40.5 billion in October (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 $420.1 billion, or 16.3% of all assets (down $1.7 billion in Feb., down $9.9B over 3 mos. and up $4.3B over 12 months), followed by JPMorgan's $249.4 billion, or 9.7% (down $5.0B, down $619M, and up $8.2B for 1-month, 3-months and 12-months, respectively). Federated Investors ranks third with $218.4 billion, or 8.5% of assets (down $9.5B, down $2.7B, and down $16.9B), BlackRock ranks fourth with $201.5 billion, or 7.8% of assets (down $489M, down $3.3B, and up $44.2B), and Vanguard ranks fifth with $174.0 billion, or 6.8% (down $695M, down $1.2B, and up $8.1B).

The sixth through tenth largest U.S. managers include: Dreyfus ($171.4B, or 6.7%), Schwab ($164.9B, 6.4%), Goldman Sachs ($136.3B, or 5.3%), Wells Fargo ($114.5B, or 4.4%), and Morgan Stanley ($100.3B, or 3.9%). The eleventh through twentieth largest U.S. money fund managers (in order) include: SSgA ($78.6B, or 3.1%), Northern ($76.7B, or 3.0%), Invesco ($62.0B, or 2.4%), BofA ($50.2B, or 2.0%), UBS ($42.3B, or 1.6%), Western Asset ($39.6B, or 1.5%), First American ($37.5B, or 1.5%), DB Advisors ($34.8B, or 1.4%), RBC ($20.0B, or 0.8%), and Franklin ($18.6B, or 0.7%). Crane Data currently tracks 75 managers, the same number as last month.

Over the past year, Dreyfus showed the largest asset increase (up $18.9B, or 12.1%), followed by SSgA (up $13.6B, or 18.3%) and Morgan Stanley (up $10.9B, or 12.0%). Other big gainers since Feb. 28, 2013, include: JPMorgan (up $8.2B, or 3.3%), Vanguard (up $8.1B, or 4.9%), Schwab (up $6.0B, or 3.8%), Fidelity (up $4.3B, or 1.0%) and Reich & Tang (up $4.0B, or 52.0%). The biggest declines over 12 months include: `Federated (down $16.9B, or 7.1%), UBS (down $10.7B, or 19.2%) and DB Advisors (down $9.6B, or 20.6%). (Note that money fund assets are very volatile month to month.)

When "offshore" money fund assets -- those domiciled in places like Dublin, Luxembourg, and the Cayman Island -- are included, the top 10 managers match the U.S. list, except for BlackRock moving up to No. 3, Goldman moving up to No. 5, and Western Asset appearing on the list at No. 9. (displacing 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 families: Fidelity ($424.9 billion), JPMorgan ($379.0 billion), BlackRock ($302.7 billion), Federated ($227.9 billion), and Goldman ($203.8 billion). Dreyfus ($199.1B), Vanguard ($174.0B), Schwab ($164.9B), Western ($137.1B), and Morgan Stanley ($115.6B) round out the top 10. These totals include offshore US dollar funds, as well as Euro and Sterling funds converted into US dollar totals.

In other news, our March 2014 MFI and MFI XLS show net yields remained at record lows and gross yields inched higher in the month ended Feb. 28, 2014. Our Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 841), remained at a record low of 0.01% for both the 7-Day and 30-Day Yield (annualized, net) averages. (The Gross 7-Day Yield inched lower to 0.13%.) Our Crane 100 Money Fund Index shows an average yield (7-Day and 30-Day) of 0.02%, also a record low, and down from 0.05% at the start of 2013. (The Gross 7- and 30-Day Yields for the Crane 100 remained at 0.16%.) For the 12 month return through 2/28/14, our Crane MF Average returned a record low of 0.02% and our Crane 100 returned 0.03%.

Our Prime Institutional MF Index yielded 0.02% (7-day), the Crane Govt Inst Index yielded 0.01%, and the Crane Treasury Inst, Treasury Retail, Govt Retail and Prime Retail Indexes all yielded 0.01%. The Crane Tax Exempt MF Index also yielded 0.01%. (The Gross Yields for these indexes were: Prime 0.19%, Govt 0.10%, Treasury 0.06%, and Tax Exempt 0.13% in Feb.) The Crane 100 MF Index returned on average 0.00% for 1-month, 0.00% for 3-month, 0.00% for YTD, 0.03% for 1-year, 0.04% for 3-years (annualized), 0.08% for 5-year, and 1.65% for 10-years.

Crane Data released its March Money Fund Portfolio Holdings data earlier this week, and our latest collection of taxable money market securities, with data as of Feb. 28, 2014, shows a jump in Treasuries and big declines in Government agency securities and CDs (certificates of deposit), as well as continued heavy usage of Federal Reserve Bank of New York repos. Money market securities held by Taxable U.S. money funds overall (those tracked by Crane Data) decreased by $32.7 billion in February to $2.474 trillion. Portfolio assets decreased by $258 million in January, increased by $55 billion in December, and decreased by $10.7 billion in November and by $9.4 billion in October. CDs remained the largest holding among taxable money funds, followed by Repo, Treasuries, CP, Agencies, Other, and VRDNs. Money funds' European-affiliated holdings declined slightly after rebounding in January (they'd plunged in December on the Repo shift into the Fed from dealer balance sheets); European holdings are now 29.8% of holdings (down from 29.6% last month). Below, we review our latest portfolio holdings statistics.

Among all taxable money funds, Certificates of Deposit (CD) fell in February, decreasing $15.2 billion to $566.0 billion, or 22.9% of holdings. Repurchase agreement (repo) holdings declined by $8.8 billion to $478.9 billion, or 19.4% of fund assets. (Repo at the NY Fed jumped from $79.8 billion to $91.8 billion as funds shifted from Government repo to Treasury repo; it had spiked to $139.2 billion in December.) Treasury holdings, the third largest segment, jumped by $15.2 billion to $466.5 billion (18.9% of holdings). Government Agency Debt plunged by $26.0 billion. Agencies now total $340.6 billion (13.8% of assets). Commercial Paper (CP), the fifth largest segment, increased by $4.2 billion to $402.2 billion (16.3% of holdings). Other holdings, which include Time Deposits, inched up $3.2 billion to $185.6 billion (7.5% of assets). VRDNs held by taxable funds dropped by $5.3 billion to $34.3 billion (1.4% of assets). (Crane Data's Tax Exempt fund data will be released in a separate series later Thursday and our "offshore" holdings will be released Friday.)

Among Prime money funds, CDs still represent over one-third of holdings with 36.0% (down from 36.4% of a month ago), followed by Commercial Paper (25.6%, up from 24.9%). The CP totals are primarily Financial Company CP (15.4% of holdings) with Asset-Backed CP making up 5.8% and Other CP (non-financial) making up 4.4%. Prime funds also hold 5.7% in Agencies (down from 6.5%), 6.5% in Treasury Debt (up from 5.6%), 5.7% in Other Instruments, and 5.9% in Other Notes. Prime money fund holdings tracked by Crane Data total $1.573 trillion (down from $1.597T), or 63.6% (down from 63.7%) of taxable money fund holdings' total of $2.474 trillion. Government fund portfolio assets totaled $443.8 billion, down from $451.2 billion last month, while Treasury money fund assets totaled $457.8 billion, down slightly from $459.9 billion at the end of January.

European-affiliated holdings declined fractionally, down $4.5 billion in February to $737.3 billion (among all taxable funds and including repos); their share of holdings is now 29.8%. Eurozone-affiliated holdings also inched lower (down $9.8 billion) to $427.7 billion in Feb.; they now account for 17.3% of overall taxable money fund holdings. Asia & Pacific related holdings fell by $16.0 billion to $294.7 billion (11.9% of the total), while Americas related holdings declined $12.8 billion to $1.441 trillion (58.2% of holdings).

The overall taxable fund Repo totals were made up of: Treasury Repurchase Agreements (up $10.1 billion to $224.7 billion, or 9.1% of assets, Government Agency Repurchase Agreements (down $25.7 billion to $170.7 billion, or 6.9% of total holdings), and Other Repurchase Agreements (up $6.8 billion to $83.5 billion, or 3.4% of holdings). The Commercial Paper totals were comprised of Financial Company Commercial Paper (up $1.8 billion to $242.2 billion, or 9.8% of assets), Asset Backed Commercial Paper (down $1.4 billion to $91.5 billion, or 3.7%), and Other Commercial Paper (up $3.7 billion to $68.5 billion, or 2.8%).

The 20 largest Issuers to taxable money market funds as of Feb. 28, 2014, include: the US Treasury ($466.5 billion, or 18.9%), Federal Home Loan Bank ($211.3B, 8.5%), Federal Reserve Bank of New York ($91.8B, 3.7%), BNP Paribas ($80.5B, 3.3%), Bank of Tokyo-Mitsubishi UFJ Ltd ($61.7B, 2.5%), JP Morgan ($58.6B, 2.4%), Credit Agricole ($57.7B, 2.3%), Bank of Nova Scotia ($57.2B, 2.3%), Deutsche Bank AG ($52.2B, 2.1%), RBC ($50.4B, 2.0%), Barclays Bank ($49.0B, 2.0%), Sumitomo Mitsui Banking Co ($48.3B, 2.0%), Credit Suisse ($47.8B, 1.9%), Federal Home Loan Mortgage Co ($47.3B, 1.9%), Citi ($45.1B, 1.8%), Societe Generale ($44.8B, 1.8%), Wells Fargo ($44.3, 1.8%), Federal National Mortgage Association ($43.6B, 1.8%), Bank of America ($43.4B, 1.8%), and Federal Farm Credit Bank ($35.6B, 1.4%).

In the repo space, Federal Reserve Bank of New York's RPP program issuance (held by MMFs) remained the largest program. 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 ($91.8B, 19.2%), BNP Paribas ($52.1B, 10.9%), Bank of America ($33.7B, 7.1%), Deutsche Bank ($28.4B, 5.9%), Barclays ($25.8B, 5.4%), Goldman Sachs ($25.5B, 5.3%), Societe Generale ($25.1B, 5.2%), Credit Agricole ($22.0B, 4.6%), Citi ($20.2B, 4.2%), and Credit Suisse ($20.1B, 4.2%).

The 10 largest CD issuers include: Sumitomo Mitsui Banking Co ($42.8B, 7.6%), Bank of Tokyo-Mitsubishi UFJ Ltd ($41.7B, 7.4%), Bank of Nova Scotia ($32.1B, 5.7%), Toronto-Dominion Bank ($29.2B, 5.2%), Bank of Montreal ($27.4B, 4.9%), Rabobank ($25.1B, 4.5%), Mizuho Corporate Bank Ltd ($23.5B, 4.2%), Credit Suisse ($21.8B, 3.9%), Wells Fargo ($18.9B, 3.4%), and BNP Paribas ($17.9B, 3.2%).

The 10 largest CP issuers include: JP Morgan ($27.5B, 7.9%), Westpac Banking Co ($16.2B, 4.6%), Commonwealth Bank of Australia ($14.1B, 4.0%), Barclays PLC ($12.8B, 3.7%), FMS Wertmanagement ($12.3B, 3.5%), NRW.Bank ($12.1B, 3.5%), RBC ($11.8B, 3.4%), Skandinaviska Enskilda Banken AB ($11.1B, 3.2%), Lloyds TSB Bank PLC ($10.8B, 3.1%), and General Electric ($10.6B, 3.0%).

The largest increases among Issuers include: the US Treasury (up $15.2B to $466.5B), the Federal Reserve Bank of New York (up $12.0B to $91.8B), Credit Agricole (up $4.3B to $57.7B), CIBC (up $3.9B to $16.1B), and Barclays (up $3.8B to $49.0B). The largest decreases among Issuers of money market securities (including Repo) in February were shown by: Federal Home Loan Bank (down $19.5B to $211.3B), Deutsche Bank (down $11.4B to $52.2B), Federal Home Loan Mortgage (down $9.4B to $47.3B), and Mizuho Corporate Bank Ltd (down $6.4B to $30.2B). (Note: Sumitomo Mitsui Banking Co showed a decline of $13.4 billion to $48.3 billion, but this was due to Crane Data splitting out Sumitomo Mitsui Trust Bank as a separate ($13.5B) entity.)

The United States remained the largest segment of country-affiliations; it still represents 49.5% of holdings, or $1.224 trillion. France (10.0%, $246.6B remained in second place ahead of Canada (8.7%, $214.8B) and Japan (7.4%, $182.3B). The UK (4.8%, $119.4B) remained in fifth place, and Sweden (3.9%, $95.9B) moved back into sixth. Germany (3.7%, $92.6B) dropped to seventh, Australia (3.5%, $87.6B) fell to 8th, the Netherlands (3.1%, $75.5B) was ninth, and Switzerland (2.6%, $64.8B) was tenth 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 Feb. 28, 2014, Taxable money funds held 22.1% of their assets in securities maturing Overnight, and another 13.1% maturing in 2-7 days (35.3% total in 1-7 days). Another 19.0% matures in 8-30 days, while 28.9% matures in the 31-90 day period. The next bucket, 91-180 days, holds 12.9% of taxable securities, and just 4.0% matures beyond 180 days.

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

Nancy Prior, President of Fidelity's money market unit, was just promoted to President of the company's Fixed Income division and vice chairman of Pyramis Global Advisors (Fidelity's institutional investing arm). Prior spoke Tuesday morning at iMoneyNet's Money Market Expo, a money fund conference held in Orlando, Fla., on pending money market mutual fund regulations with a talk entitled, "Get It Right on Regulation." (Note: Crane Data hosts a competing event, Money Fund Symposium, which will take place June 23-25 in Boston, where Prior will also deliver a keynote speech.) Prior's released comments say, "A year ago at this conference, I spoke about the need to strike the right balance for regulation of MMFs. At that time, Fidelity and the entire fund industry had been engaged in deliberations for three years about whether further regulation was needed -- and if so, what shape it should take -- following the comprehensive rule changes adopted by the SEC in 2010. I discussed how the 2010 amendments to Rule 2a-7 had made all MMFs safer, more resilient to market stress, and more transparent … and how the regulations had been tested in the summer of 2011, with the European debt crisis, the U.S. debt ceiling showdown, and the eventual downgrade of the United States by S&P. I shared the results of stress tests that Fidelity had conducted on our funds and discussed the study the SEC had done in response to questions posed by Commissioners Aguilar, Paredes and Gallagher."

She continues, "Both our stress test results and the SEC study clearly demonstrated that the 2010 reforms significantly reduced risk across all MMFs. I noted that the SEC study independently confirmed that most types of MMFs were not subject to large, abrupt redemptions during the financial crisis and that the SEC's own analysis could provide a constructive framework for moving forward. The SEC study clearly identified the problem they were seeking to address -- namely that MMFs may be susceptible to "run risk" which can lead to financial instability and a significant advantage for first-movers. But more importantly, the SEC study unambiguously showed that the only type of MMFs that proved to be susceptible to run risk and experienced significant outflows both in 2008 and 2011 were prime funds purchased primarily by institutional investors. Fidelity's position was clear: Based on the facts, data and empirical evidence, we saw no justification, or benefit, for further regulation of Treasury, government, municipal or retail prime MMFs. We felt strongly that any further regulation should be limited to institutional prime funds ... and should be narrowly tailored to address the concern about run risk in this specific segment of the industry. And that position was widely shared by many others who were closely following this debate."

Prior explains, "Now, fast forward to today. The SEC issued its long-awaited rule proposal last June, and Fidelity and many of the firms represented here this morning filed comment letters. I will focus my remarks on Fidelity's assessment of the proposal and offer some specific suggestions based on the analysis set out in the SEC study for improvements that we believe the SEC should make before finalizing the rules. First, I want to thank everyone in this room who has remained engaged in the process -- the prolonged deliberations and complex discussions in search of the best solution to ensure the strength and stability of MMFs for our customers. I also want to give credit to the SEC for its thoughtful proposal, which reflects considerable research and thorough analysis. We appreciate the Commission's efforts to attempt to craft tailored regulations targeted at the limited set of MMFs that have proven susceptible to runs. Indeed, the Commissioners or staff used the word "targeted" nine times in the Open Meeting. We believe the SEC proposal strikes the right balance in certain areas, but misses the mark in others. Still, with some important modifications, it could provide a good framework for a final resolution that serves to strengthen the resiliency of MMFs and our financial system, while preserving the benefits these funds provide retail investors, issuers and our economy."

She tells us, "There is much at stake, however, so it's critically important that we continue to advocate for regulation that strikes the right balance and is based on sound cost-benefit analysis. We've come this far; it's important that we get it right. That said, we also believe it is important to bring closure to this long and comprehensive examination of how to regulate MMFs -- and to do so promptly. Uncertainty is not an investor's friend. MMF shareholders and issuers want and need clarity about the future of this vitally important financial product. It's time to move ahead ... and remove the cloud of uncertainty that has been hanging over the MMF industry for years. We call on the SEC to move quickly to complete its rules so investors know what to expect ... and the industry can begin planning for a smooth implementation."

Prior continues, "Now, let's review the proposed rules ... and assess how well the SEC achieves its stated goal of targeting only those funds that need further regulation.... The SEC absolutely gets it right by excluding both Treasury and government funds from structural changes, while including them in proposed provisions for enhanced disclosure.... Unfortunately, the SEC missed the mark in its proposed treatment of tax-exempt or municipal funds. In our view, based on the facts and the data (including the data laid out in the SEC study), muni funds should have been excluded from both the floating NAV and the fees and gates proposals. The SEC recognizes that muni funds are not susceptible to runs and that they serve as an important source of funding for state and local governments.... But, instead of excluding muni funds from structural regulation, the SEC attempts to limit the harm to these funds by proposing a definition of "retail" funds and excluding such newly defined retail funds from only the floating NAV proposal."

She states, "There are two big problems with the SEC's application of this approach. The first is that the SEC's proposed definition of "retail" does not work. The second is that retail funds are not excluded from the fees and gates proposal. As a result, both muni funds and retail prime funds are subject to structural regulation -- an outcome not supported by empirical evidence.... The stability of both of these categories during these periods points to the fact that they should be excluded from structural regulations. Since muni funds are not susceptible to runs, pose no systemic risk, and provide enormous benefits to the economy, the costs of imposing structural change on these funds certainly outweigh any perceived benefit. So, the solution is simple. The SEC should treat muni funds the same as it treats Treasury and government funds.... by excluding them from both the floating NAV and liquidity fees and redemption gates. But, at this time, it is unclear how the SEC will proceed.... This is why it is crucially important to get the retail definition right and just as important to make sure that retail investors do not face either a floating NAV or fees and gates."

Prior also says, "So the next important task for the SEC is to properly identify retail MMFs, so that individual investors can continue to enjoy the benefits of MMFs. This was the great innovation of MMFs nearly 40 years ago -- average investors gained access to professional money management for their cash and finally had a choice to compete with low bank deposit rates. In the proposed rules, the SEC recognized that retail funds were not the problem, and therefore should not be targeted for further regulation. However, the SEC's proposed retail definition, which would limit a shareholder's daily redemptions, fails to achieve their stated purpose. It is unduly complex, and a sizeable portion of retail assets are excluded from the proposed definition. What's more, implementing the daily redemption limit would create a host of issues for both funds and third-party intermediaries.... Such redemption restrictions clearly don't address any issue the SEC is trying to solve with further regulation."

Prior comments, "There has to be a simpler way, and we believe there is. Fidelity and eight other asset management firms submitted a joint comment letter to the SEC in October, proposing a simpler and more cost effective way to achieve the Commission's goal of providing an exemption for retail investors.... Specifically, we propose that a MMF would qualify as a retail fund as long as it limits beneficial ownership interest to natural persons -- individuals with a Social Security number. This would include anyone investing in MMFs through individual accounts, retirement accounts, college savings plans, health savings plans and ordinary trusts. It would not permit investments by accounts established by businesses, including small businesses, defined benefit plans, endowments or similar accounts where individuals do not represent the beneficial ownership interest of those accounts.... We urge the SEC to adopt this simple, workable approach to defining retail money market funds. If this workable definition is accepted, all retail funds -- muni and prime -- should be excluded from both the floating NAV and redemption gates and fees."

Prior then states, "Let's turn now to the final item for the SEC, which is how to address institutional prime funds. We continue to believe that the floating NAV proposal, which I addressed in detail here a year ago, simply does not provide an effective means to achieve the SEC's stated goal of stemming rapid and significant redemptions in times of market turmoil. Not only would a floating NAV fail to prevent massive redemptions, but the extent of the structural changes to institutional prime funds actually could cause significant redemptions, disrupt the financial marketplace, and increase systemic risk by increasing concentration of short-term assets in the banking system. The SEC has not provided, nor are we aware of, any empirical evidence to support the idea that in a period of market turmoil, funds with floating NAVs would be at lower risk of significant redemptions from shareholders. To the contrary, floating NAV funds in Europe experienced redemption pressures during the 2008 financial crisis as stable NAV MMFs. In addition, the floating NAV proposal would create new tax and record-keeping requirements for investors unless regulators provide additional administrative relief. For all these reasons, we believe the floating NAV proposal is simply a not a good idea. That said, it is apparent that some on the SEC and others clearly believe a floating NAV should be part of the final rule. If that's to be the case, then let's do all we can to make sure the rule is as effective and workable as possible."

She explains, "Let me offer a couple suggestions.... First, we urge the SEC to change the proposed transaction pricing standard for institutional prime and muni funds to three digits from four digits. The proposed transaction level is ten times more precise that that used by other mutual funds that typically hold securities with greater risk characteristics than MMFs. We believe this increased precision greatly exaggerates the risks of investing in a MMF as compared to other types of mutual funds with floating NAVs and it causes shareholders to suffer unnecessary recognition of gains and losses. Thus, we believe the SEC should apply the same transaction level pricing to MMFs that it applies to other mutual funds if it chooses to adopt a floating NAV structure ... and that MMFs transact at three digits rather than four. It is also important for the SEC to work with the Treasury, IRS, and others to resolve any tax and recordkeeping issues related to applying a floating NAV to MMFs. Applying current tax rules to floating NAV funds would result in substantial complexity and increased administrative costs and burdens for the funds, broker dealers, and shareholders. These issues must be resolved before any new rule takes effect."

Prior also says, "Turning to Alternative 2, we believe an objectively triggered standby liquidity fee and redemption gates presents the most effective means of achieving the Commission's objective of discouraging and ultimately halting significant redemptions from institutional prime MMFs during times of extreme market stress. This proposal is preferable to a floating NAV, which would be in effect at all times and would eliminate the fundamental stable NAV feature that makes MMFs so attractive to shareholders. As the SEC recognizes, liquidity fees would help offset the costs of the liquidity provided to redeeming shareholders, and any excess could be used to repair the NAV of the fund, if necessary. Yet, the SEC offers no data to support its proposal to set the liquidation fee at 2%. We have examined the liquidation costs for our MMFs that sold securities during the period immediately following the bankruptcy of Lehman Brothers and determined that the highest liquidation cost was less than 50 basis points of face value."

She continues, "Recognizing that liquidation costs in a future market stress scenario may be greater, we think it is reasonable to set a liquidation fee at 100 basis points. We are concerned that a 200 basis point liquidity fee rate will be unnecessarily punitive on shareholders willing to pay a fee in order to redeem their shares. We urge the SEC to reduce the liquidity fee rate to 1%, which will suffice to pay for any liquidation costs. Finally, we urge the SEC to extend the implementation period for any structural regulations to three years following the effective date of a final rule. The changes under consideration are significant. We need to allow money market funds and intermediaries sufficient time to implement systems modifications and other necessary changes, possibly including launching new MMFs or seeking board and shareholder approval to restructure existing funds."

Finally, Prior adds, "Let me close by reiterating Fidelity's commitment to ensuring the safety, stability and viability of the money market product. Our MMF portfolio management team is focused each and every day on researching and analyzing the short-term markets to help ensure that our funds deliver -- today and tomorrow, in stable and volatile markets -- the principal stability, ready liquidity and market-based return that our shareholders count on. We take our fiduciary responsibility to our shareholders very seriously, and we are proud of our track record over the past 30 years. And, I am proud of our industry's track record too -- as we all should be. We have all been actively engaged in the money market regulation debate for several years now, working closely with investors, issuers, providers, academics and policymakers. We have each done our best to represent the interests of our shareholders throughout this process. While there is more road to travel, the end of this lengthy journey is in sight. Still, important issues need to be addressed to make sure we strike the right balance between ensuring the strength and stability of money market mutual funds ... and preserving the many benefits they provide to investors, issuers and our economy. We've come this far. Let's get it done, but let's make sure we get it right."

Late last week, Fitch Ratings published a release entitled, "Fitch: Fed Reverse Repos Not Only About Rates for Money Funds," which says, "Money market funds (MMFs) may be more willing to rely on the Federal Reserve for future funding if the Fed's new overnight reverse repo facility becomes a more permanent fixture in money markets, Fitch says. If the Fed's facility becomes permanent and allows a full allotment allocation to eligible counterparties, we believe money funds will increase reliance on the facility and allocate larger amounts on a consistent basis. This could change the current environment in which money funds seek to maintain relationships with dealers even at below-market rates as a hedge against limited supply."

Fitch writes, "At year-end 2013, a time of very limited supply of money market instruments, 102 eligible counterparties lent the Fed $197.8 billion at a rate of 3 basis points set by the Fed. According to Crane Data, MMFs accounted for $139.2 billion of this amount. This exposure represented 7.1% of government money fund assets, 6.8% of Treasury funds and 4.7% of prime funds." (See here for the Federal Reserve's "Temporary Open Market Operations" page, which says, "To implement monetary policy, short-term repurchase and reverse repurchase agreements are used to temporarily affect the size of the Federal Reserve System's portfolio and influence day-to-day trading in the federal funds market.")

Fitch's release explains, "While the amounts of repo done with the Fed represent relatively large portions of money fund assets, the data also shows that money funds were willing to transact repo with other counterparties at the same, or lower, rates than with the Fed. As of the same date, taxable money funds transacted a total of $148.9 billion of overnight repo backed by Treasury or agency securities with counterparties other than the Fed for rates between 0 and 3 basis points."

It continues, "This dynamic may be partially explained by the Fed's eligibility criteria, which require that a money fund have net assets of at least $5 billion for six months before being able to participate in the Fed's reverse repo facility. Indeed, 82 money funds did not meet the eligibility requirements and accounted for $24.8 billion of overnight government repo at or below 3 basis points. Further, 20 money funds participated in the Fed's facility to the full extent permitted ($3 billion), and were forced to invest $60.1 billion of remaining funds in repo with non-Fed counterparties at 0 to 3 basis points."

Fitch adds, "However, 59 money funds that met the Fed's eligibility criteria did not participate in the Fed's facility, or did so partially without exceeding the $3 billion counterparty limit, yet they invested $63.7 billion in overnight government repo with non-Fed counterparties at rates of 3 basis points or less. This segment exemplifies the importance of maintaining access to repo supply even at disadvantageous rates. Fund managers employing this strategy may fear that if they invest with the Fed instead of with their regular repo counterparties, these counterparties would be less willing to allocate investments to the funds in the future. As the Fed's repo facility is not yet permanent, it may not be viewed as a reliable long-term source of supply."

Finally, they write, "The Fed has been taking steps to build additional confidence in the reverse repo facility and encourage participation. The Fed recently extended the testing phase of the facility by one year to January 2015, and has been continuously increasing the counterparty bid limit, up to $7 billion currently from $500 million at the program's inception."

The Federal Reserve's latest Z.1 "Financial Accounts of the United States" statistical release (formerly the "Flow of Funds") for the Fourth Quarter of 2013 was published late last week, and the four tables it includes on money market mutual funds show that the Household sector remains the largest investor segment, and that "Time and savings deposits" has just surpassed "Security repurchase agreements" as the largest investment segment. Table L.206 shows the Household sector with $1.100 trillion, or 41.1% of the $2.678 trillion held in Money Market Mutual Fund Shares as of Q4 2013. Household shares increased by $40 billion in the 4th quarter, but they fell by $10 billion during 2013. Household sector money fund assets remain well below their record level of $1.582 trillion at yearend 2008.

Funding corporations, which includes securities lenders, remained the second largest investor segment with $501 billion, or 18.7% of money fund shares. They decreased by $13 billion in the latest quarter and fell by $89 billion in 2013. (Funding corporations held over $1.025 trillion in money funds at the end of 2008.) Nonfinancial corporate businesses were the third largest investor segment, according to the Fed's data series, with $455 billion, or 17.0% of the total. Business assets in money funds were flat, rising by $1 billion in the quarter and by just $2 billion in 2013.

The Rest of the world category moved up to the fourth largest segment (up $5 billion in Q4) in market share among investor segments with 6.0%, or $161 billion, while Private pension funds, which held $149 billion (5.6%), moved up to 5th place. State and local governments held 4.2% of money fund assets ($142 billion), Nonfinancial noncorporate businesses held $81 billion (3.0%), State and local government retirement held $43 billion (1.6%), Life insurance companies held $24 billion (0.9%), and Property-casualty insurance held $23 billion (0.8%), according to the Fed's Z.1 breakout.

The Flow of Funds Table L.120 shows `Money Market Mutual Fund Assets largely invested in Time and savings deposits ($495 billion, or 18.5%), Security repurchase agreements ($493 billion, or 18.4%), and Treasury securities ($488 billion, or 18.2%). Money funds also hold large positions in Agency and GSE backed securities ($361 billion, or 13.5%), Open market paper (we assume this is CP, $352 billion, or 13.1%), and Municipal securities ($308 billion, or 11.5%). The remainder is invested in Corporate and foreign bonds ($102 billion, or 3.8%), `Foreign deposits ($34, or 1.3%), Miscellaneous assets ($32 billion, or 1.2%), and Checkable deposits and currency ($13 billion, or 0.5%).

During 2013, Time and savings deposits (up $60 billion), Treasury securities (up $30 billion), Agency securities (up $18 billion), and Open market paper (CP, up $11 billion) showed increases, while Security repos (down $52 billion), Municipal securities (down $28 billion), and Foreign deposits (down $10 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.)

In other news, Wells Fargo Advantage Funds published its latest "Overview, strategy, and outlook" last week. It says in its "Government sector update," "Years of quantitative easing and the attendant expansion of the Federal Reserve's (Fed's) balance sheet, coupled with myriad regulatory changes that have sparked demand for high-quality assets while driving supply lower, have gradually reshaped the U.S. government money markets. There now appears to be a wall of cash that seems sufficient to block any moves higher in yield that one might have expected, absent these influences. Activity to date in 2014 has tested the resilience of the wall several times."

Wells explains, "The repurchase agreement (repo) market has usually responded to increases in collateral supply by moving yields higher, but that effect has recently been largely absent.... The very modest uptick in repo levels that has occurred is more likely a result of the Fed increasing the rate on its reverse repo (RRP) facility from 3 bps to 5 bps during the last half of the month."

Finally, they add, "Also apparent ... is the degree to which repo levels are clinging to the Fed's RRP facility rate. It seems like a dream environment for the Fed -- the RRP facility rate is setting a floor, albeit a slightly porous one, while the wall of cash is setting a ceiling, conveniently at just about the same rate as the floor. Now that's optimal control! Based on only a few months of experience in 2014, and with the Fed RRP facility still officially in test mode, it's perhaps too early to reach the conclusion that the government money markets have permanently changed. However, it's easy to imagine this becoming the norm, as the Fed's great big balance sheet isn't shrinking anytime soon."

The March issue of Crane Data's Money Fund Intelligence was sent out to subscribers on Friday morning. The latest edition of our flagship monthly newsletter features the articles: "Commissioners Push Alternatives in Reform Debate," which reviews recent SEC comments on pending regulations; "Federated Investors Debbie Cunningham," which interviews Federated's CIO for Global Money Markets; and, "Cash Breaks $10 Trillion; Deposits Continue Surging," which reviews the continued growth in bank deposits. We also updated our Money Fund Wisdom database query system with Feb. 28, 2014, performance statistics and rankings last night, and we sent out our MFI XLS spreadsheet earlier. (MFI, MFI XLS and our Crane Index products are available to subscribers at our Content center.) Our February 28 Money Fund Portfolio Holdings data are scheduled to go out on Tuesday, March 11.

The latest MFI newsletter's lead article comments, "After SEC Chair White indicated last month that completing money fund regulatory reforms is a "critical priority for the Commission in the relatively near term of 2014," several other SEC Commissioners have weighed in on the topic in recent speeches. Commissioner Michael Piwowar told the Wall Street Journal that he advocated letting investors choose between a floating NAV and a gates and fees option, while Commissioners Gallagher and Stein blasted and defended the FSOC, respectively. Meanwhile, meetings and lobbying over the pending regulations continues."

As we wrote in our March 4 News , "The Journal commented late last week: As U.S. securities regulators move to finalize long-awaited rules aimed at reducing risks to the $2.7 trillion money-market mutual-fund industry, one official wants investors to have greater choice in the types of funds in which they can invest."

The "profile" with Federated's Cunningham says, "This month MFI interviews Federated Investors' Executive VP & CIO for Global Money Markets Deborah Cunningham. Our Q&A follows. MFI: Tell us about your history. Cunningham: From Federated's perspective, we've been involved in running cash since the beginning of time. We now have the oldest registered money market fund on the books of the SEC, Federated Money Market Management. It has 40+ years of history at this point. We ran cash before we even had funds, so we had risk-averse strategies from the very beginning."

Cunningham's intro continues, "As far as our historical involvement in the money fund industry, we've been involved in every step of the process, from the original exemptive orders that led to amortized cost, to the first go-round of 2a-7, to the '92 amendments, the '96 amendments, the 2010 amendments, etc.... I started at Federated in 1981, and began in our accounting department. I moved in to the Investment Management and began actively involved in the team management process for the money funds in 1986." (Watch for excerpts of this interview later this month, or write us to request the full article.)

The February MFI article on Cash Breaking $10 Trillion explains, "The latest Federal Reserve statistics show that bank deposits, the main competitor of money funds and main beneficiary of the financial crisis, continue to surge, even following last year's expiration of unlimited FDIC insurance. Overall cash, including bank deposits (in banks and thrifts), money fund assets and small time deposits, broke above the $10 trillion level late last year for the first time in history."

Crane Data's March MFI with Feb. 28, 2014 data shows total assets falling by $44.9 billion (after rising by $561 million last month) to $2.574 trillion (1,238 funds, the same number as last month. Our broad Crane Money Fund Average 7-Day Yield and 30-Day Yield remained at a record low 0.01% while our Crane 100 Money Fund Index (the 100 largest taxable funds) yielded 0.02% (7-day and 30-day). On a Gross Yield Basis (before expenses were taken out), funds averaged 0.13% (Crane MFA, down one bps) and 0.16% (Crane 100) on an annualized basis for both the 7-day and 30-day yield averages. (So Charged Expenses averaged 0.12% and 0.14% for the two main taxable averages.) The average WAM and WAL for the Crane MFA and the Crane 100 were 45 and 47 days, respectively, unchanged from last month. (See our Crane Index or craneindexes.xlsx history file for more on our averages.)

U.S. Securities and Exchange Commission Commissioner Daniel M. Gallagher took another opportunity to blast capital requirements and banking regulations for investment funds, and warn of the threat of FSOC, at "Remarks Given at the Institute of International Bankers 25th Annual Washington Conference Monday. He didn't say much on pending money fund regulations, but comments, "Before I begin, I'd like to point out that two years ago, I spoke at this conference and discussed the Financial Stability Oversight Council, or FSOC, in great detail. I spoke about the inherently political nature of FSOC, how it had been vested with tremendous power, and how it could threaten our capital markets. So, given everything that has happened since then, I have to say: I told you so." (See also, our Jan. 16 Crane Data News, "SEC Commissioner Gallagher Blasts Capital, Banking Paradigm for Mkts".)

Gallagher continues, "Today, I'd like to share some thoughts about regulatory capital requirements. I've spoken before about the significant differences between bank capital and broker-dealer capital, because I fear that these distinctions are all too often overlooked in the debates over regulatory capital.... In the capital markets, there is no opportunity without risk -- and that means real risk, with a real potential for losses. Whereas bank capital requirements are based on the reduction of risk and the avoidance of failure, broker-dealer capital requirements are designed to manage risk -- and the corresponding potential for failure -- by providing enough of a cushion to ensure that a failed broker-dealer can liquidate in an orderly manner, allowing for the transfer of customer assets to another broker-dealer."

He says, "As I said, it's counterintuitive, but the possibility -- and the reality -- of failure is part of our capital markets.... A safety-and-soundness bank-based capital regime simply doesn't work in the context of capital markets. To put it another way, when you deposit a dollar into a bank account, you expect to get that dollar back, plus a bit of interest.... When you invest a dollar through a broker-dealer account, however, the market determines how much you get back. You could break even, you could double your investment, or, of course, you could lose part or all of that initial investment. The point is that when we make a bank deposit, we expect, at a minimum, to receive the entirety of our principal back, while when we make an investment, we expect the market to dictate what we receive in return. It stands to reason, therefore, that the capital requirements for broker-dealers must be tailored accordingly."

Gallagher explains, "I'm sure you didn't need an SEC Commissioner to explain to you the difference between a deposit and an investment. And yet, when it comes to setting capital requirements, bank regulators seem increasingly determined to seek a one-size-fits-all regulatory construct for financial institutions. In addition, as noted by my friend Peter Wallison in an important recent op-ed in The Hill, both the Dodd-Frank-created FSOC and the G-20-created -- and bank regulator dominated -- Financial Stability Board seem intent on applying the bank regulatory model to all financial institutions they deem to be systemically important."

Gallagher tells us, "The recent FSOC intervention in the money market mutual fund space shined a spotlight on this newly expansive vision of the role of banking regulators. The money market mutual fund reform debates that raged through 2012 focused in large part on the concept of a "NAV buffer," which effectively is a capital requirement for money market funds. This debate culminated in the November 2012 issuance of a report by FSOC which incorporated the concept of a so-called "NAV buffer."

He adds, "The reasoning behind capital buffer requirements for money market funds is that they would serve to mitigate the risk of investor panic leading to a run on a fund. The figures under discussion, however, were far too low to promise any serious effect on panic, while the imposition of real, bank- or even broker-dealer-like capital requirements in this space, on the other hand, would simply kill the market for money market mutual funds. A 50 basis point buffer, to be phased in over a several year period, would hardly stem investor panic, unless one believes that investors would be comforted by the knowledge that for every dollar they had on deposit, the money market fund had set aside half a penny as a capital buffer."

Gallagher says, "Crucially, as I've noted before, there is no limiting principle to the application of this bank-based view of capital -- indeed, last September, Treasury's Office of Financial Research issued a fatally-flawed "Asset Management and Financial Stability" report featuring similar reasoning, as reflected in its implied support for "liquidity buffers" for asset managers. It remains unclear as to whether the Fed is indeed seeking to impose bank-based capital charges on non-bank entities in conjunction with granting them access to the discount window -- at the cost of submitting to prudential regulation -- or whether it is instead proposing those additional capital charges in order to prevent non-prudentially regulated financial entities from ever relying upon the "government safety net" provided by the discount window."

He continues, "Bank regulators and their wide-eyed admirers have spoken at length about the risks of "shadow banking," which they define broadly to include the types of "securities funding transactions," such as repo and reverse repo, securities lending and borrowing, and securities margin lending, used by both banks and broker-dealers for short-term funding. The loaded term "shadow banking" isn't exactly used as an honorific, and I find it concerning that so many bank regulators routinely use the term to describe the day-to-day transactions so crucial to ensuring the ongoing operations of our capital markets."

The Commissioner states, "To be clear, I respect the Fed's concerns about capital requirements for bank affiliated non-bank financial institutions, notwithstanding my fears as to the steps the Fed might take to address those concerns. Our financial institutions are interconnected as never before, increasing the importance of taking a holistic view of those institutions, subsidiaries and all. In doing so, however, it is crucial that we bring to bear the specialized experience and expertise of the regulators with primary oversight responsibility over the constituent parts of those institutions. In the case of broker-dealers, this means the Commission, with its nearly eight decades of experiences in this regulatory space."

Finally, he comments, "It's my hope that the bank regulators constructively participate in this dialogue as well. The last thing anyone wants is the old Washington cliche of a "turf war." For one thing, we'd lose -- the SEC will never have the resources of the banking agencies -- after all, it's hard to outspend agencies that can print their own money. More to the point, however, we'd never want to "win" -- not only are we busy enough as it is, with approximately sixty Dodd-Frank mandated rules yet to be completed along with the day-to-day, blocking-and-tackling work that's so critical to the agency's mission, but we recognize that the banking regulators are best situated to regulate banks. When it comes to the broker-dealer subsidiaries of banks, however, we stand ready to work with the Fed and other banking regulators to ensure that any new rules applicable to those entities are enhancements to our existing regime, not duplicative, contradictory or counterproductive regulations inspired by a regulatory paradigm designed for wholly different entities."

Late last week, U.K. local government publication "Room 151, wrote "MMF vote delay could see reforms hit the rocks," which says, "Proposed regulations which could hit local authority investments in money market funds (MMFs) could be scuppered by a decision to delay a vote on the matter during a stormy session of a European Parliament committee. Last month, representatives of the MMF investment industry, along with investors from the private and public sector visited Brussels to campaign against the changes. And last week, the European Parliament's economic and monetary affairs committee (ECON) voted 23 to 15 to delay a vote on the issue, after some members complained that the issue had not been discussed properly."

Room 151 explains, "A statement released by ratings agency Fitch following the vote said: "The ECON committee has a rescheduled vote to finalise draft rules on 10 March. With European Parliamentary elections due in May, it is by no means certain that the previous timetable, which envisaged a full European Parliament vote in April, can be met.""

The article quotes, "Michael Quicke, chief executive of CCLA, "During our discussions in Brussels, our principal interest was to make sure that the committee was fully aware of the landmine they were putting their foot on. What has happened is people are coming round to the fact that there is a real issue here. I think we played a small part in that."

Room151 adds, "He said that if the committee continued to find it difficult to reach a compromise on the proposals before European elections in May, the issue would have to be reconsidered by the new Parliament, with the potential that it goes back to the drawing board."

In other news, the Federal Reserve Bank of New York issued yet another "Statement to Revise Terms of Overnight Fixed-Rate Reverse Repurchase Agreement Operational Exercise," which tells us, "As noted in the September 20, 2013, Statement Regarding Overnight Fixed-Rate Reverse Repurchase Agreement Operational Exercise, the Open Market Trading Desk at the Federal Reserve Bank of New York has been conducting daily, overnight fixed-rate reverse repo operations as part of an operational readiness exercise. Beginning with the operation to be conducted tomorrow, Wednesday, March 5, the per counterparty bid limit for each operation will increase from $5 billion to $7 billion. All other terms of the exercise will remain the same."

It adds, "As an operational readiness exercise, this work is a matter of prudent advance planning by the Federal Reserve. These operations do not represent a change in the stance of monetary policy, and no inference should be drawn about the timing of any change in the stance of monetary policy in the future."

The Wall Street Journal's Andrew Ackerman wrote in a blog post late Friday, "SEC's Piwowar: Give Investors Money-Fund Choices," which revealed that one SEC Commissioner is pushing to give fund groups and investors a choice between a floating NAV and redemption gates and fees. The online version of the Journal comments, "As U.S. securities regulators move to finalize long-awaited rules aimed at reducing risks to the $2.7 trillion money-market mutual-fund industry, one official wants investors to have greater choice in the types of funds in which they can invest. Michael Piwowar, a Republican member of the Securities and Exchange Commission, said investors should be able to choose whether to invest in funds that float in value or those with stable share prices that can restrict redemptions during periods of market tumult."

Ackerman quotes Piwowar, "Funds should be able to offer investors the opportunity to make an informed choice. I think it's a reasonable alternative that is worthy of consideration." The piece adds, "Mr. Piwowar's suggestion comes as the SEC prepares to finalize rules floated last June to rein in risks in the money-fund industry. By giving investors a choice, Mr. Piwowar said, the agency would boost the appeal of the funds to the maximum number of investors. He joined the commission in August after the agency proposed its money-fund rule."

Finally, the Journal comments, "SEC staff are in the early stages of developing the contours of the finalized money-fund rules, according to people familiar with the matter who said the agency aims to finalize the rules in the first half of the year. Under the preliminary staff plan, the agency would scale back certain aspects of the proposal, including the definition of funds for mom-and-pop "retail" investors that would be allowed to maintain a fixed $1 share price, according to people familiar with the process. The changes would define any "natural person" as a retail investor, these people said, broader than the definition in the proposal. An SEC spokesman declined to comment."

In other news, a press release entitled, "Invesco Announces Inclusion on Bloomberg's New Money Market Trading Platform in North America," tell us, "Invesco announced today its presence on Bloomberg's recently launched North American Money Market Funds trading platform, conveniently allowing Bloomberg users who have been enabled by Invesco to view and exchange information about the Invesco institutional money market funds."

It quotes Bruce Simmons, National Sales Director for Invesco's Global Liquidity team, "Our institutional money market funds have long been sought after to meet a variety of cash management needs by institutional investors around the world. This new platform leverages the depth and breadth of Bloomberg's extensive network to offer greater access to our funds through a simple interface in a familiar trading environment."

Finally, Invesco adds, "The new trading platform is part of the Bloomberg Professional service, at no additional cost to Bloomberg subscribers, and provides a complete solution to efficiently trade and analyze Invesco's institutional money market funds by simply entering ('MMF' then 'GO') on the Bloomberg terminal."

Preparations are underway for Crane Data's 6th annual Money Fund Symposium, which will be held June 23-25, 2014 at The Renaissance Boston Waterfront. The Agenda and the brochure are now available via PDF and on the Symposium website (, and we are now accepting registrations ($750) and hotel reservations. (Brochures were recently e-mailed to past attendees and Crane Data subscribers, but contact us at to request the full one.) Last year's Money Fund Symposium in Baltimore attracted over 450 attendees and over 30 sponsors and exhibitors, making it the world's largest annual gathering of money fund and money market professionals. Participants include money fund managers, marketers and servicers, cash investors, money market securities dealers, issuers, and regulators.

After an initial "Welcome to Money Fund Symposium 2014" by Peter Crane, President & Publisher of Crane Data, this year's agenda in Boston will start the afternoon of June 23 with the keynote speech "Money Market Funds - Past & Future" by Fidelity Investment's Nancy Prior. The opening afternoon will also feature: "Strategists Speak '14: Fed Taper, Repos, Regs" with Brian Smedley of Bank of America Merrill Lynch, Joseph Abate of Barclays , and Garret Sloan of Wells Fargo Securities. This will be followed by a panel entitled, "The Growing Role of Online Trading Portals," moderated by Dave Agostine of Cachematrix and including: Greg Fortuna of State Street's Fund Connect, Justin Meadows of MyTreasury, and Jonathan Spirgel of BNY Mellon Liquidity Services. The first day will close with a panel, moderated by Fitch Ratings' Roger Merrritt entitled, "Major Money Fund Issues 2013," featuring Charlie Cardona of BNY Mellon CIS/Dreyfus, Andrew Linton of J.P. Morgan A.M., and Steve Meier of State Street. The opening reception will be sponsored by Bank of America Merrill Lynch.

Day 2 of Money Fund Symposium features: "The State of The Money Market Fund Industry" with Peter Crane of Crane Data, Debbie Cunningham of Federated Investors, and Alex Roever of J.P. Morgan Securities; "Senior Portfolio Manager Perspectives," moderated by Joel Friedman of Standard & Poor's Ratings and including Rich Mejzak of BlackRock, Rob Sabatino of UBS Global Asset Management, and John Tobin of J.P. Morgan Asset Management; "Government MF Issues & Repo Update," with Andrew Hollenhorst of Citi, Marques Mercier of Invesco, and Mike Bird of Wells Fargo Advantage Funds; and "Treasury Dept. on FRNs & Risk Agenda" with U.S. Department of the Treasury's Matt Rutherford.

The afternoon of Day 2 (after a Dreyfus-sponsored lunch) features: "Dealer Panel: Supply Outlook, New Products," moderated by Dave Sylvester of Wells Fargo Funds and featuring Chris Condetta of Barclays, John Kodweis of J.P. Morgan Securities, and Jean-Luc Sinniger of Citi Global Markets; "Accounting Issues, Disclosure & Floating NAVs," with Chris May of PriceWaterhouseCoopers; "Enhanced Cash, ETF & Ultra‐Short Bond Growth," with Alex Roever of J.P. Morgan Securities, Jonathan Carlson of BofA Global Capital Management, and Peter Yi of Northern Trust; and, "European & Global Money Fund Outlook" with Jonathon Curry of HSBC Global Asset Management and Dan Morrissey of William Fry. (The Day 2 reception is sponsored by Barclays.)

The third day of Symposium features: "Money Fund Reforms A Look at the Final Rule," with Stephen Keen of Reed Smith and Jack Murphy of Dechert LLP; "Regulatory Roundtable: Discussing New Rules" with Jane Heinrichs of the Investment Company Institute, Kevin Meagher of Fidelity, and Sarah ten Siethoff of the U.S. Securities & Exchange Commission; and, "Corporate Cash Investor Issues & Alternatives, with Tony Carfang of Treasury Strategies, Lance Pan of Capital Advisors, and Jamie Cortas of EMC Corp. Finally, the last session is entitled, "FDIC, Brokerage & Retail MMF Update," and features Rick Holland of Charles Schwab, Ted Hamilton of Promontory Interfinancial Network, and Tim Schiltz of Ameriprise Financial.

Money Fund Symposium 2014 promises to be "the" place to be for money market professionals -- register and reserve your spot today! Exhibit space for Money Fund Symposium is $3,000; and sponsorship opportunities are $4.5K, $6K, $7.55K, and $10K. Finally, our next "offshore" money fund event, European Money Fund Symposium, is scheduled for Sept. 22-23, 2014 in London, England, and our next Crane's Money Fund University is scheduled for Jan. 22-23, 2015, in Stamford, Conn. We hope to see you in Boston in June!

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