​

Simon Potter, executive vice president of the Federal Reserve Bank of New York, delivered a speech in Tokyo last week on "Implementation of Open Market Operations in a Time of Transition" in which he shared insights about the ON reverse repo facility, the Fed funds rate, and monetary policy normalization. He says, "​At last week'​s meeting, the FOMC also reaffirmed its view that it likely will be appropriate to maintain the current zero to 1/​4 percent target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee'​s 2 percent longer-​run goal, and provided that longer-​term inflation expectations remain well anchored. Meanwhile, as a matter of prudent planning, the Committee has been deliberating how it should proceed to remove policy accommodation (​often called "​normalization"), when it believes the appropriate time to do so comes.... In itself, an elevated level of reserve balances need not impede the FOMC'​s ability to effectively raise the level of short-​term interest rates because of the ability to pay interest on excess reserves."

He continues, "​Following last week'​s FOMC meeting, the Committee released a revised set of normalization principles and plans (​taking into account changes in the SOMA portfolio and enhancements in available tools since it originally issued such principles in June 2011) that it intends to implement when it becomes appropriate to begin normalizing the stance of monetary policy. According to the principles, the Committee will adjust the level of monetary accommodation primarily by utilizing policy tools to influence the level of short-​term interest rates -- in the first instance, using tools with rates directly administered by the Fed. Tools that can immobilize or drain large levels of reserves to tighten control over the federal funds rate also remain available."

Potter says, "Specifically, the FOMC indicated that the federal funds rate will continue to play a central role in the Fed'​s operating framework and communications during normalization, and that it will raise the target range for the federal funds rate when economic conditions warrant a less accommodative monetary policy stance. Adjustments in the interest rate that the Fed pays to depository institutions on excess reserve balances -- that is, the IOER rate -- will be the primary tool to move the federal funds rate into the target range. Raising the IOER rate should put upward pressure on a range of market interest rates and influence overall financial conditions in a way that fosters the Federal Reserve'​s macroeconomic objectives."

On RRP, he explained, "The Committee also indicated that an overnight reverse repurchase agreement (​ON RRP) facility and other supplementary tools will be used, as needed, to help control the level of the federal funds rate. An ON RRP facility will supplement the primary role of IOER in controlling the federal funds rate by providing an alternative safe, overnight asset for money market investors.... The Federal Reserve will continue to test some of these tools to gather additional information about their efficacy and to enhance their operational readiness prior to liftoff. For the past year, the Desk has been conducting an exercise of ON RRP operations."

He tells us, "Conducting ON RRPs for same-​day settlement with a broad range of counterparties -- including primary dealers, money funds, government-​sponsored enterprises, and banks -- allows the Federal Reserve to provide a safe, liquid investment to a wider range of money market participants than those able to earn IOER, and thus expands the universe of counterparties that should generally be unwilling to lend at rates below those available through the Federal Reserve. The increased competition that the availability of this instrument provides should help to firm the floor on the level of short-​term interest rates -- that is, the rate beneath which market participants should theoretically be unwilling to lend funds. All of the Desk'​s eligible counterparty types participate in the ON RRPs, with money funds accounting for the largest share of take-​up. Take-​up at the operations generally increases when the spread between market rates and the ON RRP offered rate narrows. Take-​up also rises substantially around quarter- and year-​end financial reporting dates, when some money market participants' access to other overnight secured investments is more limited. The increase in take-​up on these dates is especially large for prime money market funds."

He went on, "As of Monday, the per-​counterparty maximum bid limit was raised from $​10 billion to $​30 billion, and an overall size limit of $​300 billion was imposed for each operation. If the total amount of bids received in an operation is less than or equal to the $​300 billion size limit, awards will be made at a fixed offering rate. However, if the total amount of bids received exceeds the overall operation size limit, the $​300 billion in ON RRPs will be allocated through a single-​price auction using interest rates that counterparties now include with their bids. Awards are made at a "​stopout rate" -- the rate at which the overall size limit is achieved -- with all bids below this rate awarded in full and all bids at this rate awarded on a pro rata basis. The stopout rate is determined by evaluating all bids in ascending order by submitted rate up to the point at which the total quantity of offers equals the overall size limit. The Federal Reserve will be closely analyzing the results of the ON RRP exercise conducted under these new testing parameters in order to further its understanding of how an ON RRP facility might best be structured during the initial stages of the normalization process."

He says, "Finally, I should note that central banks -- like other financial market participants -- need to remain aware of changes in the financial market landscapes in which they operate. They may need to adapt their operations accordingly as they move away from asset purchases and back to money market instruments to implement monetary policy. For example, in addition to reflecting developments in its balance sheet since the financial crisis, the FOMC'​s approach to normalizing policy also reflects changes in U.​S. money market dynamics that have been influenced by various factors. These factors include the extraordinary level of liquidity that'​s been provided, access to IOER that is limited to depository institutions, and a number of international and domestic regulatory reforms. International regulatory reforms include the liquidity coverage ratio, leverage ratio, and net stable funding ratio. In the U.​S., changes in deposit insurance premium calculations, rules governing money market mutual funds, and the potential for a capital surcharge based in part on short-​term wholesale funding may also affect certain market participants."

Potter concludes, "Many of the changes in regulation -- along with changes in market structure, technology, and other factors -- may affect market participants' activity and relationships in money markets. On net, their balance sheet costs may be higher, which may prompt money market participants to require higher returns to engage in competition to arbitrage wedges in money market rates and to alter their participation in central bank operations and facilities. This outcome may affect the transmission of monetary policy or require central banks to adapt their operations to accommodate these realities."

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Several of the foremost money fund experts in the world shared the dais to discuss portfolio composition, supply, reforms, and other topics in a session called "​Senior Portfolio Manager Perspectives" at last week'​s European Money Fund Symposium in London. The panelists were Debbie Cunningham, chief investment officer, money markets, Federated Investors; Joe McConnell, portfolio manager, J.​P. Morgan Asset Management; and Jonathan Curry, global CIO for liquidity at HSBC Global Asset Management. Yaron Ernst, managing director, Moody'​s Investors Service, moderated the session. (Note: Crane Data would again like to thank all the sponsors, speakers and attendees of last week'​s event in London; our next European Money Fund Symposium will take place in Dublin, Sept. 24-​25, 2015.)

On securities, Cunningham said, "If you look at some of the main types of securities over the last several years from prime funds, several of them have been fairly stagnant to lower from a supply perspective, including CP. There has been some increase in structured types of products, including structured CDs. In the U.​S., repo is something that we use substantially in many of our portfolios. What has taken place though is a shift out of the traditional repo counterparties (​banks and broker-​dealers) into the NY Federal Reserve. They engage in reverse repo with 100 MMFs. We have eight of those. The offshore funds that we manage are not eligible for that particular program at the NY Fed, however, it is helpful because it allows us to save our traditional counterparts for repo in the bank world and dealer world for those dollar-​denominated products." McConnell added that they are having more conversations about structured products with calls and puts.

On portfolio composition, Cunningham said they have made some changes heading into what looks like a rising interest rate environment in 2015. "​We'​ve definitely reduced our maturity, increased our floating rate percentages, and shortened our barbells. Barbell is the structure that we use almost continuously with the long end of the barbell just changing depending on what the interest rate outlook is. At this point that long-​end of the barbell has been shortened pretty drastically." The long end of the barbell has been reduced to about 3-​6 months vs. the usual 6-​12 months.

She added, "​Given what we were talking about from a repo perspective, we'​ve modified: number 1, how we use repo, and number 2, the term of that repo. Whatever we need to do from a structural perspective to continue to be able to deal with traditional counterparties -- banks and broker-​dealers -- in addition to the Fed [​we'​re doing], simply because we don'​t want to become depending on the Fed because they'​re able to change that program or perhaps take it away. So we'​re trying to reduce our dependence on repo."

Curry added, "I am hopeful that we may see a recovery in asset-​backed commercial paper supply in Europe. At the moment it'​s counterintuitive to what'​s in the money fund regulation, but I think that'​s a reason why that part of the regulation may change. That'​s been a valuable asset class for money market funds. On the repo side, I would love to see some type of similar facility in Europe put in place to provide some supply to the market. Unless there are changes to the regulation, the only realistic supply that can step in is government."

On the potential for negative yields in Europe, McConnell said, "While maybe not everyone believed it was coming, it'​s been talked about for a long time now so it gave people a chance to get ahead of it. In terms of preparing for negative yields, we'​re prepared to do fee waivers -- it'​s something we'​ve done across currencies for several years when we have had to the need to do so." Negative yields are certainly possible as the ECB has made clear that "​they are going to throw the kitchen sink trying to avert deflation in the Eurozone," said McConnell. "It'​s not weeks away, but potentially in a few months, we'​re certainly going to see funds -- probably in the government space first -- get to a gross yield that'​s no longer zero or above."

Added Cunningham, the prospect of negative yields is highest in the Eurozone, although the U.​S. is not out of the woods with rates as low as they are. Sterling on the other hand seems to be holding its own. "​The mechanism that we'​ve been using, fee waivers, has worked and will continue to work through all three of these markets at this point with Sterling being impacted very little." She said an outgrowth of negative yields could be the closure of funds by some complexes.

"If you look back at when the zero rate environment was undertaken by the ECB in 2012, I think there was almost a worse reaction in the market to that announcement than there was for the negative rates that were announced over the last several months in 2014. Part of the reason for that is because of the credit improvement in the market." Curry added, "We did a survey last year and looked at our approved list and saw how much it changed between 2011 and 2013. We'​ve had to look farther afield -- geographically and across sectors."

The panelists also discussed the SEC reforms. Said Cunningham, "We were disappointed that floating NAV was undertaken, but I would express a lot of optimism for what ultimately became the rulemaking. Some of the positives associated with the 2014 rulemaking that maybe were not as apparent in the proposal is the retention of the amortized cost for everything but prime institutional and municipal institutional, so that'​s a good thing. If you recall, the proposal was to eliminate amortized costs even for retail and government money market funds. The retail definition they ultimately came up with is also very positive. If you went back to the proposal and the $​1 million cap they were placing on what was considered a retail account, when Federated did our initial assessment, it was about 1/​3 retail, 2/​3 institutional. Ultimately, their amended definition (​how it must be a '​natural person') gives us something that'​s more like 60% retail, 40% institutional. So, I think there'​s less impact because of that expanded retail definition."

She added that the IRS tax accounting proposal is good, but not as good as it could be. "​These are just proposals at this point and we will be responding before the middle of October to the IRS on their proposals. What they didn'​t do was put any kind of de minimus threshold in there. A '​de minimus' threhold would be a huge positive and eliminate further some of the complications." Also, she said the gates and fees proposal was amended appropriately.

Finally, on the proposed money fund reforms in Europe, McConnell said he hopes some of the positive develops that happened with reform in U.​S. happen in Europe. "What we like about what happened in the U.​S. was that they retained some of the options for investors in terms of, there'​s a version of CNAV, there'​s a version of VNAV. Clients have an option there. Maybe in Europe there'​s a potential for some retention of CNAV at least in government funds." He added, "It'​s a long road ahead still and there'​s a lot of people in this room who will spend a lot more time talking to regulators. I'​m more optimistic than I was say a year ago."

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The second annual Crane'​s European Money Fund Symposium is in the books with record attendance turning out to hear industry experts discuss the latest trends in European money market funds. The two day event, which took place Sept. 22-​23 at the Hilton London Tower Bridge, attracted some 125 attendees, up from 105 last year in Dublin. It kicked off with an address by Jonathan Curry, Global CIO for Liquidity at HSBC Global Asset Management, and Chairman of IMMFA, the London-​based Institutional Money Market Funds Association, on the State of MMFs in Europe. Curry told the audience to turn challenges into opportunities, which could include new products, consolidation, and outsourcing. (Note: Crane Data would like to thank all of the speakers, sponsors and attendees for participating in our London event earlier this week; we hope to see you next year in Dublin, Sept. 24-​25, 2015!)

Curry said, "At times I think we all feel a little bit gloomy, a little bit down, but I really believe that we have a real opportunity here. Change creates opportunity and we'​re in a period of change in the industry. I think we have to embrace it and move forward and take advantage of the opportunities that are out there today."

Curry opened by saying that money market funds have actually been a positive story the past 6 months with assets increasing over that time period. Crane Data'​s Money Fund Intelligence International shows total European money fund assets currently at $​751.​6 billion (​as of Sept. 23) up from $​702.​2 billion on March 1, 2014. Also, the CNAV industry is expected to have a larger market share than the VNAV for the first time this year. "​That'​s a testament to the CNAV product to all the providers who offer these products to the investors in Europe and elsewhere in the world," he said.

One of the big challenges on the horizon is money market reform, which were proposed in Europe last year but haven'​t yet been acted on by Parliament. "The current reform proposals are clearly stacked against the CNAV industry," he said, and if enacted as proposed, it will shake the industry. "​The 64,​000 [​pound] question is how much? I'​m probably more optimistic than some in that whatever the outcome of reform, when the industry gets together behind those reforms and explains it to our investors, I'​m pretty convinced that whatever that model is, that the industry, working together, promoting those reforms, it'​s not going to be quite as bad as people think," said Curry.

"One of the potential challenges is that I think reform could lead to further consolidation in the industry," he added. "​We'​re seeing consolidation in the asset management industry as a whole and that'​s been a trend that'​s been going on for a few years. Reform could lead to further consolidation in the money fund industry." Another challenge is it could lead to fewer investment options for investors and providers. Also, he added, "If the regulations aren'​t quite right, it could exacerbate run risks. There are parts of the current proposal in Europe that we believe will exacerbate run risk in money market funds if they go through as they are today."

But there are also opportunities with reforms. "​As an industry here in Europe, we are engaging with regulators to shape future regulations." There will also be opportunities to develop new products. "​We'​re already seeing it," he said. "If the regulation is right, we could be in a world where systemic risk is reduced -- that'​s a good thing for our investors, fund providers, and regulators. If we get it right, there'​s an opportunity here."

Another big challenge is ultra-​low yields. "​It'​s a challenge across all currencies but obviously particularly in the environment we'​re in today in the Eurozone. It'​s an increasing challenge. Since the middle of this year, it'​s become even harder for all of us to manage to these ultra-​low yields that we'​re seeing, particularly in the Eurozone. It reduces revenue for fund providers through fee waivers, means low income for investors in money market funds, and it has cost in resource allocations. It takes time to put in place mechanisms such as the cancellation of units to deal with negative yields. And now we'​re obviously moving into uncharted water in the Eurozone and that in itself could bring new risks. So, clearly it’​s a challenging environment for us all."

"​However," he added, "​again there are opportunities here. The industry has demonstrated that it is innovative and resourceful. We'​ve had to use our gray matter. It'​s been challenging to think of how to deal with some of these new challenges that the industry faces. We'​ve shared the pain of ultra-​low yields with our investors. I think that builds stronger relationships between fund providers and their investors.... Think how good that revenue numbers will look when that yield curve does actually turn up," he quipped.

The lack of supply is also a big issue, he said. The lack of supply is driven primarily by bank regulations, he added, which reduce their demands for short term funding. The downgrades for the credit rating agencies, on average, have shrunk the eligible supply for rated MMFs. "This is going to continue. This is not going to get better and it'​s going to be a growing change for all of us as we go into 2015 and beyond."

Another developing trend is the outsourcing of the management of cash. "​It has actually, in my opinion, become more attractive as risk has risen, the ability to get diversified more challenging on a day to day basis, the resources that are required to manage a short-​term pool of cash investments is more time consuming, more challenging every day. That points, to me, towards an outsourcing solution. In this type of environment, this is where money market providers can really come into their own, really add value to their investors beyond just providing them with a product." He continued, "​The importance of fundamental risk analysis is continuing to rise, again, pointing towards money funds as a clear option for outsourcing the investment in cash.... So there are clear opportunities for us an industry to take advantage of."

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Corporate treasurers are managing their cash investments strategically and more cautiously, according to a new survey by GT News, a publication for global treasury and cash management professionals, owned by the Association for Financial Professionals. Among the key findings; nearly eight in ten said their organizations have an investment policy for cash management, 70% view cash as an asset class, and more are concerned about Basel III than money market reforms.

The Investment Strategy Survey was conducted in June 2014, polling 238 GT News subscribers with 25% coming from Western Europe, 23% from the U.​S., 20% from Asia, 14% from Middle East/​Africa, and 6% from Latin/​South America. Sponsored by State Street Global Advisors, the primary purpose of the survey was to better understand trends and challenges surrounding short-​term investment strategies.

"While recent years have presented a number of challenges to cash investors, many treasury professionals have used this time to reflect on best practices and recalibrate their investment policy statements as needed. As the global economy returns to strength and new cash investments come to market, we believe cash investors with strong, updated investment policy statements in place will be much better prepared to take advantage of investment opportunities as they arise," writes Barry F.​X. Smith, global head of cash management at SSgA in the welcome remarks.

The introduction says, "Prior to the banking crisis, the focus of short-​term investing was on risk management versus yield management. Holding cash as an investment class was unheard of several years ago, but as seen in this survey report it is much more common now. Today, companies face a number of challenges when developing their investment strategy. They are operating in a low, short-​term interest rate environment. They continue to do more with less -- perhaps a lingering result from the recession. Consequently, their reliance on prudent investment methods and processes are even more important."

As previously mentioned, 79% said their organizations have a formal, written investment policy that sets guidelines and parameters for managing their cash and short-​term investments. Among companies with more than $​1 billion in annual revenues, 88% have an investment policy compared to 68% of companies with less than $​1 billion in annual revenues. Companies that are net investors are also more likely than net borrowers to maintain a formal investment policy. Also, 56% of companies that have an investment policy review it on an as-​needed basis. "​Key factors that could impact investment policies may include changes in an organization'​s financial condition, revisions in a company'​s risk tolerance, developing market conditions and evolving preferences of a company'​s senior management and/​or Board of Directors. Further, 29 percent review it annually, while 15 percent monitor their policies quarterly or semiannually."

Seventy percent of survey respondents say their organizations classify cash as an asset class in their companies' investment policies -- that includes 71% of large companies and 74% of small companies. "​Banks are important repositories for an organization'​s cash holdings. A large majority of companies currently place significant shares of their cash balances in bank products such as bank accounts, time deposits, demand notes and certificates of deposits. Thirty-​five percent of survey respondents report that at least three-​quarters of their companies' short-​term cash holdings are placed in bank products. Slightly more than half indicate the same for less than 50 percent of their organizations' short-​term cash holdings. Despite improved fundamentals in the banking sector, investment options are limited given the current low-​rate environment."

The survey also asked what regulations most influence or impact cash management decision-​making. Basel III is by far the highest (​76%), while only 27% said the SEC'​s money market reform. Ahead of money market reform are Dodd-​Frank (​48%) and EMIR (​30%). "​Organizations are most concerned about credit-​driven products and the segmentation and utilization of deposits under Basel III.... Basel III ranks as the most important regulation impacting a company'​s investment decision making. The capital ratio rules will ultimately require banks to hold up to eight percent of tier 1 capital. The net stable funding ratio will require banks to hold greater liquidity in the medium- and long-​term funding of assets. Additionally, the liquidity coverage ratio will require banks to hold high-​quality liquid assets accessible within 30 days. Eventually, Basel III regulations will mean that organizations can expect higher costs for credit-​driven products since their bank partners will need to hold more capital as well as greater liquidity. Banks will value longer term, stable deposits and will most likely segment their clients accordingly. Consequently, the bank-​relationship dynamic will change over time. While Basel III regulations have a phased timeline over the course of several years with full compliance by 2019, many companies are already beginning to feel their impact."

On money fund reforms, they wrote: "In July 2014, the SEC announced final money market fund reforms. These reforms include a floating NAV for institutional prime funds and municipal funds along with redemption fees and gates that could be used at the discretion of a fund'​s Board in certain situations for any fund. The floating NAV is to be implemented over a two-​year period. This will allow the marketplace to adapt to the changes and, most importantly, will give investors time to consider possible changes to their investment policy, consider alternatives and evaluate any accounting impacts from floating NAV funds. Fees and gates are now options for a fund'​s Board of Directors to consider but they are not mandated and are open to all funds to implement. The fees and gates are additional tools at the disposal of the Board of Directors should they need to act in the best interests of fund shareholders at that point in time. The reforms clarified existing proposals and only impact U.​S.-​based 2a-​7 funds. It remains to be seen if other countries will adopt similar regulations going forward."

The survey also polled respondents on what factors are most influencing liquidity, safety, and yield of cash investments. The most (​54%) said the low interest rate environment, while 40% said the risk-​return tradeoff. Further, 39% said rating changes of financial counterparties outside of investment policy limits, while 29% said lack of supply investment selections in higher quality names. Just 19% said onerous regulations driving down liquidity.

In conclusion, they write, "Regulations continue to play a key role in a company'​s investment strategies. Indeed, money fund reforms will have a compelling effect on the short-​term liquidity industry. As the investment world watches the U.​S. SEC implement changes to the treatment of money funds, the European Commission may reconsider proposals for reforms that it had suggested earlier this year. With more enhanced reporting and the implementation of redemption fees and redemption limits/​gates on potentially any money market fund, it is fairly certain that due diligence and prudent investment policies and process will be just as important now if not more important than when the implementation timeframe rolls around. With money market fund reform in the U.​S. scheduled to be implemented by 2016 and full implementation of Basel III by 2019; companies have to make decisions that will support their investment principles in a prudent manner. Having both a sound investment policy that is reviewed on a regular basis and the ability to adapt to market conditions using a disciplined, yet flexible framework will help investors weather any storm that develops during any business cycle."

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Last week, the Federal Reserve announced that effective Monday, September 22, it was revising the terms of its Overnight Reverse Repo Agreements. (​See our Sept. 18 "​Link of the Day" for more details.) In short, each eligible counterparty will now be limited to one bid of up to $​30 billion per day, an increase from the current $​10 billion per-​counterparty maximum bid limit, and each operation will be subject to an overall size limit of $​300 billion. Money fund strategists say the changes will have a negative effect on MMFs. In his most recent Short Duration Strategy newsletter, Citi Research'​s Vikram Rai, who also spoke yesterday at our European Money Fund Symposium in London, forecasts rough weather ahead for money markets.

He says, "The aggregate cap of $​300 billion spooked money market investors given that ON RRP usage has reached as high as $​339 billion during the last quarter end and investors, quite rightfully, are worried that U.​S. money markets rates will dip lower. Essentially, during quarter ends, dealers typically pull back from the repo market to shrink their balance sheets and cash that doesn'​t get placed with the Fed (​on days that bids for the Fed'​s reverse repos exceed $​300 billion, the Fed Bank of New York would use a bidding process where the lowest rates submitted are accepted first until the cap is reached) will make its way into the asset scarce money fund sector and put further downward pressure on yields."

JP Morgan'​s Alex Roever discusses the "​somewhat disappointing" outcomes from the September FOMC meeting for money markets in his weekly market commentary. "The release of the Fed'​s exit principles and revisions to the terms of the Fed'​s overnight reverse repo facility (​RRP), while not surprising, could make it considerably more challenging for money market funds (​MMFs) to find a home for their cash going forward, particularly through this upcoming quarter-​end. As of 9/​18, there was $​2.​3tn of assets in MMFs $​1.​4tn in prime funds and $​0.​9tn in government funds)."

He says, "​Already we'​ve seen accounts actively bidding on CP/​CDs with maturities in early October or early January to help them get invested through quarter-​end/​year-​end. In the land of bills, supply is even scarcer. Typical quarter-​end technicals and changes to the Fed RRP facility have now pushed 1-​3m bills into negative territory. Unfortunately, we still have slightly more than a week to go before actual quarter-​end. During this time, the supply and demand imbalance in the money markets will only intensify, pressuring overall rates to move towards to zero or even into slightly negative territory."

Roever continues, "Even capped, ON RRP will drain reserves and support a higher funds rate. During normalization the Committee intends to use the ON RRP facility and other supplementary tools as needed to help control the Federal funds rate, adding that it "will use an overnight reverse repurchase agreement facility only to the extent necessary and will phase it out when it is no longer needed to help control the federal funds rate." The Committee'​s statement was not especially surprising considering the tone of the ON RRP comments in the June and July minutes."

Roever writes, "​However, shortly after the FOMC meeting the NY Fed -- which administers the ON RRP program -- released a statement outlining substantial changes to the program, effective September 22. Among the changes is the introduction of an aggregate facility cap of $​300bn, the introduction of a daily Dutch-​auction process for determining both the overall facility rate and allotments among counterparties, and an increase in the individual counterparty cap to $​30bn from $​10bn. Exhibit 3 compares the new ON RRP facility terms with the prior terms. Relative to its prior configuration, the changes adopted by the Fed should contribute to higher average usage of the ON RRP -- up to the cap."

Further, he adds, "Changes to the ON RRP will depress yields on T-​bills and GC repo.... Before the ON RRP changes were announced this week, we had speculated demand for the program at the end of this quarter could approach $​500bn. With the new program size cap, usage obviously won'​t reach this level. But interestingly the increase in individual counterparty cap to $​30bn will probably increase the intensity of demand for ON RRP by allowing some of the larger counterparties to take bigger bites. If the overall cap was not in place, but the user cap had been $​30bn instead of $​10bn, and the offer rate fixed at 5bp, we estimate overall demand for the ON RRP at September 30 could have easily reached $​400bn just from the MMF counterparties."

JPM also comments, "Now, with the overall cap and the higher counterparty limit, we think average daily demand for ON RRP use will rise and test the overall program limit at quarter-​ends and other low liquidity periods. As this happens, the new Dutch auction format should push down yields on the ON RRP, and increase demand for alternative assets like GC repo, t-​bills and similar assets, pushing down these yields to a point. As money market yields approach 0bp, fund managers will be inclined to leave more balances at custodial banks, basically earning nothing. Although custodians have generally been willing bear these balances, regulations like LCR and SLR make doing so costly. As a result we may see custodians to more actively pass on costs to clients via higher fees and leading investors to choose between paying fees or accepting even lower market-​based yields."

He concludes, "While the Fed'​s future plans for the ON RRP may help lift the Funds rate, the new format poses problems for other short term rates. Money market investors are disappointed, as they had hoped that the ON RRP would be source of reliable supply at a time when regulatory changes are both leading banks to push cash from deposits into the money markets and decreasing the availability of investible bank liabilities. The net result is there is a growing glut of cash in the money markets that doesn'​t have a good place to go. As the ON RRP is still technically in a testing phase, it is possible the Fed could reconsider its overall program cap, but given the tone of the exit "​Principles" it seems unlikely for now."

Garrett Sloan, director, Well Fargo Securities, in his commentary, said the latest move by the Fed draws an interesting analogy <​b:>`​_. "​There is a great commercial on television that shows two kids standing over a seemingly lifeless opossum. We later find out that their dad bought the animal as a pet, as it was cheaper than buying a dog. It turns out that the opossum is not lifeless but is just playing dead. As the kids poke and nudge the animal progressively harder, it eventually reacts with a hiss. The New York Federal Reserve is acting towards money market investors in a manner that I might compare to a child poking an animal with a stick. For those of you following along, the stick is the reverse repo facility and yes, money market participants are opossums (​which is probably not too far off, really). This quarter-​end we may see whether this last poke is the one that wakes up the animal with a startling hiss."

Continues Sloan, "​Under a fixed-​rate full-​allotment operational system, the RRP offering level (​currently 0.​05 percent) represented an almost de-​facto hard floor that would shift, along with its companion policy rate the Interest on Excess Reserves, the general level of money market rates. Under the revised operational system, the $​300 billion cap creates a situation, albeit currently rare, where strong demand for access to the Fed'​s balance sheet (​i.​e. quarter-​end or during times of market stress) could force money market funds and other counterparties to bid well below the reverse repo offering rate (​currently 0.​05 percent). In fact, in its statement the New York Fed has approved transactions with negative rates, indicating its understanding of the potential ramifications of this policy shift."

He concludes, "​The Fed has attempted to reassure us that this is just another operational exercise, and we believe this is likely the case. However, the trends in overall average daily usage of the RRP suggest that as dealers shrink balance sheets and repo availability to cope with regulatory changes (​even though compliance for many of the reforms remains months/​years away), the squeeze for collateral is growing and the $​300 billion cap that has heretofore been an anomaly could actually become a regularity. In that situation, the lower bound for the Fed'​s policy implementation channel (​i.​e. the RRP) could become rather sloppy and we might expect to see further revisions to the RRP cap as it tries to walk the fine line between moral hazard and market volatility."

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The Federal Reserve'​s latest Z.​1 "​Financial Accounts of the United States" statistical release (​formerly the "Flow of Funds") for the Second Quarter of 2014 was published last week, and the four tables it includes on money market mutual funds show that the Household sector remains the largest investor segment, and Credit Market Instruments is the largest investment segment. Table L.​206 shows the Household sector with $​1.​072 trillion, or 42.​5% of the $​2.​522 trillion held in Money Market Mutual Fund Shares as of Q2 2014. Household shares decreased by $​42.​2 billion in the 1st quarter. They rose by $​21.​3 billion during 2013. Household sector money fund assets remain well below their record level of $​1.​581 trillion at year-​end 2008.

Nonfinancial corporate businesses were the second largest investor segment, according to the Fed'​s data series, with $​493.​4 billion, or 19.​5% of the total. Nonfinancial corporate business assets in money funds decreased $​3.​7 billion in the quarter and increased by $​40.​5 billion in 2013. Funding corporations, which includes securities lenders, remained the third largest investor segment with $​362.​3 billion, or 14.​3% of money fund shares. They decreased by $​35.​1 billion in the latest quarter and fell by $​58.​8 billion in 2013. (​Funding corporations held over $​906 billion in money funds at the end of 2008.)

State and local governments held 6.​8% of money fund assets ($​173.​7 billion). Private pension funds, which held $​139 billion (​5.​5%), moved to 5th place. The Rest of the world category was the sixth largest segment in market share among investor segments with 4.​6%, or $​116.​3 billion, while Nonfinancial noncorporate businesses held $​81.​7 billion (​3.​2%), State and local government retirement held $​44.​8 billion (​1.​8%), Property-​casualty insurance held $​20 billion (​0.​8%), and Life insurance companies held $​18.​8 billion (​0.​7%), according to the Fed'​s Z.​1 breakout.

The Flow of Funds Table L.​120 shows Money Market Mutual Fund Assets largely invested in Credit market instruments ($​1.​387 trillion, or 55.​0%), Security repurchase agreements ($​564 billion, or 22.​4%), Time and savings deposits ($​508 billion, or 20.​1%), and Treasury securities ($​370 billion, or 14.​7%). Money funds also hold large positions in Open market paper (​we assume this is CP, $​341 billion, or 13.​5%),`​Agency and GSE backed securities <​b:>`​_ ($​328 billion, or 13.​0%), and Municipal securities ($​281 billion, or 11.​1%). The remainder is invested in Corporate and foreign bonds ($​66 billion, or 2.​6%), Foreign deposits ($​27 billion, or 1.​1%),`​Checkable deposits and currency <​b:>`​_ ($​19 billion, or 0.​7%), and Miscellaneous assets ($​16 billion, or 0.​6%).

During Q2, Security repos (​up $​58 billion), Time and Savings Deposits (​up $​16 billion), Agency and GSE Backed Securities (​up $​2 billion), Foreign Deposits (​up $​7 billion), and Checkable Deposits and Currency (​up $​3 billion) showed increases. Credit market securities (​down $​133 billion), Open Market Paper (​down $​13.​2 billion), Treasury securities (​down $​84 billion), Corporate and foreign bonds (​down $​24 billion), Municipal securities (​down $​15 billion), and Misc. Assets (​down $​21 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, law firm Stradley Ronon published a report called "What You Need to Know About Money Market Reform - Ratings." The report looks at what money market fund board of directors need to know about the ratings reproposal that was part of the SEC'​s money market reform. Authors Joan Ohlbaum Swirsky, counsel, and Jamie Gershkow, associate, write, "On July 23, the U.​S. Securities and Exchange Commission (​SEC) reproposed amendments removing the requirement that a money market fund (​a fund) limit its investments to those rated within the top two categories by rating agencies (​or to unrated securities of comparable quality). In place of that requirement, the fund'​s board of directors or its delegate (​such as the investment adviser) must determine whether each security presents minimal credit risks."

They continue, "In making that determination, the board of directors or its delegate must find that the security'​s issuer has an exceptionally strong capacity to meet its short-​term obligations. While the minimal credit risks determination is currently required by Rule 2a-​7 (​the Rule) under the Investment Company Act of 1940, as amended (​the 1940 Act), the only basis for that determination is "​factors pertaining to credit quality." The current limit on securities rated in the second-​tier short-​term rating category to three percent of the portfolio (​1/​2 percent in any one second-​tier issuer) would be eliminated, as there would be no distinction between first-​tier and second-​tier securities under the Rule."

Stradley explains what needs to be done to comply. "If the Reproposal is adopted, several actions will be necessary to comply. "​Advisers will need to consider whether they will excise ratings from their credit analysis or continue to consider ratings as an independent third-​party viewpoint that may bring to bear expertise not otherwise readily available to each adviser. An adviser should take steps to understand the rating agencies' methodology if the adviser takes ratings into account. Funds may need to update their amortized cost and stress-​testing procedures, compliance policies and systems, disclosure, and board reports."

Finally, they add, "Among other things: Funds should ensure they have written policies to keep written records of their minimal credit determination that includes the factors considered and an analysis of such factors; Funds must ensure they have written procedures requiring the fund adviser to undertake ongoing review of the credit quality of each portfolio security to determine that the security continues to present minimal credit risks; Funds may establish procedures for the adviser to notify the board should the adviser decide to keep a portfolio security that has been downgraded from second-​tier status; Advisers may wish to consider whether it is necessary for them to perform additional credit analysis to satisfy the new subjective credit quality standard based on ability to meet short-​term financial obligations. Funds will need to reconsider their reporting of ratings on portfolio securities on Form N-​MFP." Comments on the Reproposal are due by October 14, 2014.

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The following is a reprint from our September MFI "​profile".... This month, Money Fund Intelligence interviewed Susan Hindle Barone, Secretary General of IMMFA, the London-​based Institutional Money Market Funds Association. IMMFA is "the trade association which represents the European triple-​A rated constant net asset value (​CNAV, both distributing and accumulating) money market fund industry," and Barone has been among those leading the fight to prevent drastic regulatory change from critically injuring the money fund business in Europe. Our Q&​A follows. (Note: Hindle Barone will also be speaking Monday morning at Crane'​s European Money Fund Symposium, which takes place today and tomorrow in London at the Hilton London Tower Bridge. For those attending, we hope you have a good show and welcome to London!)

Q: Tell us about the history of IMMFA? How long have you been involved with money funds? IMMFA was set up in 2000. The original thought behind it was that some standardization would be good for the product in the sense that if investors were more familiar with what money funds were, what they represent, then it would be good for the product overall. A lot of the people that were involved then are involved today. Some of the original members are people like Peter Knight and David Hynes; Mark Hannam was involved back then.... So was Jonathan [​Curry], so it'​s a good group of people. I'​ve been working for IMMFA since June of 2012.

Q: Did they bring you in to provide more structure? They originally shared resources with the IMA [​Investment Management Association] and they felt they wanted some dedicated resources. The fact that I have a reasonably technical knowledge of the products as well, given the debates we'​ve been going through, was very helpful. I think in normal circumstances, there wouldn'​t be as much regulation or technical content as there is at the moment. The whole time I'​ve been involved, regulations have been virtually all we'​ve thought about, and have dictated, certainly, what I'​ve done.

Q: Back when IMMFA was formed, there weren'​t any European MMF regulations, right? No. And even now, the European regulation specifically for money market funds is relatively light. There are the UCITS rules, but they cover a wide range of funds. Then there are the ESMA MMF Guidelines, which were published in 2010. These cover the IMMFA style funds, designated as "​Short Term Money Market Funds," but also the more generic "​Money Market Funds," which wouldn'​t meet the IMMFA Code of Practice.

Q: What'​s new with IMMFA? I joined in the summer of 2012 and then my colleague Jill [​Moffatt] joined in January 2013. It'​s been good that we'​ve got more people around. We put out a newsletter and have a completely overhauled website (www.​immfa.​org). Certainly, from my own perspective, we have better contacts than we had. For example, we have a good dialogue with a variety of regulators and politicians and with other associations such as the Irish Funds Industry Association and the ICI. So developing the contacts has been very helpful for me to understand how to engage and really get things done.

We have been hugely focused on the regulatory debate. IMMFA only represents CNAV triple-​A rated funds, yet both those features are ones which are opposed in the European Commission'​s proposal. We'​re very conscious of that. We'​ve also been thinking about what does IMMFA represent? Does it represent the short term fund industry? Does it represent the funds that are CNAV? Does it represent only Europe? We'​ve been considering lots of different options. It'​s definitely still evolving.... We can'​t really come to any conclusions until we know what the regulations are going to look like.

Q: What'​s the current status of regulations in Europe? First, about the [​delay, or lack of action in the previous Parliament on a proposal for a buffer or floating NAV for CNAV funds] -- it was good and bad. It was good in the sense that we felt that we got some traction. A lot of the things that we discussed are very common sense arguments. They started to get some traction with people who may have been influenced in the past by the sound bites or the arguments they'​ve heard somewhere else -- not necessarily appreciating the fundamental differences or implications of what we were trying to do. That'​s the good news. The bad news is when you change Parliament, when you change your MEPs. We'​ve lost a lot of people who had become knowledgeable on the subject matter. They may not have agreed with us, but at least they understood the arguments -- and we'​ve lost many of those people. So we'​ll be starting from scratch with a lot of people who may not be familiar with what money funds are, what they do, and why people value them.

The focus right now is on the Council of Ministers, considering how they think the Commission documents should be amended to reflect how they think money funds should be governed. We'​re focusing on it in three ways -- the Commission, the Council of Ministers, and the Parliament. All three are still involved. My sense is there'​s definitely a will to get this piece of work completed. Nobody wants to rush investors into something they don'​t like. But at the same time, the money fund debate has been going on a long time, so I think there is definitely a will politically. I won'​t be surprised if we have a clearer picture of what the new money market fund regulation might look like by the end of the year.

Q: How might SEC reforms influence the decision? Now that the SEC has decided to have a VNAV solution for prime institutional [​money funds], the European objection to being harmonized may be less. Europe has got a different situation. The SEC'​s changes only impact roughly 1/​3 of AUM of money funds [​in the U.​S.]. The existing proposal from the European Commission, to have a 3 percent capital buffer, would effectively kill all CNAV. I think the Europeans recognize that there is still a CNAV option in the States. I think there is a lot of negotiating to be done this autumn.

Q: Any other challenges that members are facing? Supply? Fee waivers? Definitely. I'​d say the interest rate environment is probably number one. There is certainly a shortage of supply either because many corporates are cash rich and therefore not issuing debt, or because the overall migration of the ratings. If you imagine all the debt instruments that would have qualified to go into money market funds say 10 years ago, there'​s been an overall reduction across the board of the credit rating of a great deal of that debt. Businesses are running high levels of cash so the need for debt is less. Banks have been encouraged to have less short-​term debt, so they are issuing longer, which may or may not fit into the parameters for a money fund. So yes, the supply of assets is tough.... If the ECB lowers rates further, it becomes increasingly difficult to generate a positive yield.

Q: Any word on regulations surrounding triple-​A ratings? Technically, the European Commission proposal still recommends a ban on fund level ratings. However, as it was debated in Parliament, many MEPs agreed that such a ban may not be helpful. The ESMA guidelines were updated last Friday [​August 22] to reflect the fact that the mechanistic reference to ratings should be reduced. But as far as the new Regulation is concerned, we'​re hoping that good sense will prevail. I think people will realize a ban on fund level ratings wouldn'​t be helpful and it'​s just too hard for the investors.

Q: What'​s on your immediate agenda going forward? We'​re going to be really busy for the next 6 months. Personally, I really get the sense that this is the run-​up to deciding what it'​s going to look like. I see us being very busy on regulation between now and, let'​s say, the end of the year. We'​re also looking at a couple of projects that are aligned with reforming IMMFA; being ready to adapt to what the new situation looks like. Whichever way we go with regulation, we want to be clear about what IMMFA should represent and where we should be positioned. That'​s over the next 6 months to a year. In terms of setting direction, it'​s quite tough. I'​m very conscious that it has to be what the members want. Even though there have been some really tough issues for people to think about, we'​ve managed to be fairly unanimous on most of the major points. I think there will be an interesting period of investor education once we know what the funds are going to look like because we know people will come out with products that meet the new rules.

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Corporations have been hoarding record numbers of cash in recent years, but will money market fund reforms impact corporate treasurers' cash management strategies? Fitch Ratings explored the question in a new report, "Money Fund Reforms Will Have Uneven Impact on Corporations." The report, written by Greg Fayvilevich and Kamil Kopec says money market reforms will impact corporate treasurers unevenly and should prompt companies to review their cash strategies. "​While some corporate treasurers utilize money funds extensively, including for daily cash flow management and strategic cash buffers, others use them sparingly or not at all. Those corporations that use prime or municipal money funds will have to review their cash investment policies in light of significant structural changes implemented by the Securities and Exchange Commission (​SEC)."

The floating NAV stipulation for prime institutional and municipal funds may revamp liquidity management. "​We expect that investments in institutional prime and municipal money funds will contract as the two-​year implementation deadline set by the SEC approaches. The reforms will require the funds to float their net asset values, as well as impose redemption fees and gates at times of stress. This represents a significant overhaul for the liquidity management industry, and will likely prove too burdensome for many users of these funds, which are heavily represented by corporate cash managers. A survey conducted by Treasury Strategies found that 79% of treasurers would either decrease or discontinue their investments in money funds if a floating NAV was implemented. Moreover, Treasury Strategies estimates that money fund assets held by corporate, government and institutional investors would decline by 61% under this scenario." (​Note: This survey was done prior to the final reforms being passed, so these numbers likely would be modified downward substantially given the accomodations made by the SEC in the final rules.)

Fitch continues, "In the first quarter of 2014, nonfinancial corporate businesses held $​497 billion in money market funds, according to the Federal Reserve -- down 32% from 2008 but still a significant portion of firms' short-​term assets. Money funds comprised 31% of the nonfinancial corporates' short-​term portfolios, which also include time and savings deposits (​41%), checkable deposits and currency (​19%), private foreign deposits (​4%), as well as smaller holdings of Treasuries, commercial paper, repo, and agencies."

Guidelines for investing in MMFs differ from company to company, the authors say. "A 2014 survey conducted by the Association for Financial Professionals found that 47% of treasurers are allowed to invest in Treasury money funds while 41% are allowed to invest in other diversified money funds (​typically '​prime' funds) -- implying that 53% of treasurers cannot buy money funds at all. Further, many of these treasurers are restricted in their maximum allocations to money funds. The survey found that 32% of treasurers can invest a maximum of 25% of their short-​term portfolios in diversified money funds. With many treasurers constrained in their money fund investments by policy or choice, a smaller number of companies are disproportionally exposed to these products and are going to be most impacted by reform. These dynamics are particularly visible when looking at individual companies' balance sheets. For example, consider Apple Inc., which reported holding $​164.​5 billion in "​cash, cash equivalents and marketable securities" in its most recent 10-​Q as of June 30, and Amazon, which reported $​8.​4 billion in the same category. Of Apple'​s cash hoard, only $​1.​3 billion, or 1%, is held in money funds. Conversely, Amazon, having significantly less total cash, allocates $​2.​5 billion, or as much as 29% of the total, to money funds. If considering as "​cash" only those securities that mature in less than one year, then money funds make up 3% of Apple'​s cash and 38% of Amazon'​s."

It concludes, "Corporate treasurers who invest in institutional prime and municipal money funds will need to review and update their cash investment policies in light of reform. For example, some policies specifically dictate that money funds must have a stable NAV, and treasurers will have to determine whether they would be comfortable investing cash in a floating NAV fund. Alternatively, money fund managers are expected to introduce new liquidity products, and treasurers may choose to add some of these to their lists of approved investments. In either case, this may prove to be a time-​consuming process involving board-​level approval. The challenge will be greatest for corporations that rely heavily on money funds."

The Wall Street Journal'​s CFO Journal elaborated on the report, quoting Fitch'​s Roger Merritt. "Everybody is still quite frankly trying to sort this out," said Merritt.... "​Historically, the attractiveness of money-​market funds has been the fact that you could put your money in at $​1, have same-​day liquidity, and take it back out at $​1," Merritt told the blog. "If a lot of the cash isn'​t really needed for operating and is more strategic, they may put it somewhere else, or manage cash in-​house rather than make a deposit in a money-​market fund," he said. However, it is unclear if banks will want more corporate cash because they would need thicker capital cushions to meet regulatory requirements, Merritt added.

GT News, a source for expert commentary on global treasury, published a couple of pieces on the subject of corporate cash last week. Martin Smith, senior markets analyst for East & Partners, Sydney, AU, wrote "Scaling the Mountain: Will Corporates put Unspent Cash to Work?." Wrote Smith, "A massive unspent US$​2.​8 trillion corporate cash mountain has accumulated since the financial crisis. When will the hoarders finally put this cash to work? The bulk of the growing '​cash mountain' -- conjuring images of Scrooge McDuck -- resides chiefly among US technology and IT multinationals, including Google, Microsoft, Oracle and Apple. Apple'​s cash reserves, approaching US$​160bn, equate to the greatest unallocated capital stockpile among US corporates ahead of Microsoft (​nearing US$​90bn), Google (​close to US$​60bn) and Oracle (​US$​37bn). Much of these funds are held offshore for '​tax minimisation' reasons, totalling close to US$​2 trillion abroad. Greater emphasis on regulation, stringent compliance procedures and crisis prevention protocols is reflected in shorter dated performance ratings and sales expectations among boardrooms the world over.... An expectation that low interest rates will not remain in place in perpetuity has resulted in greater usage of cheap, revolving credit for business operations, instead of the desired application to capex or paying down of existing debt. Lessons learnt from the 2007-​09 global financial crisis are clearly not long forgotten as mountains of underutilised corporate cash grow higher, seemingly to the detriment of continued economic stability and growth across the globe."

Also in GT News, Nishami Dharmaratne, regional head of liquidity and investments solutions -- multinational client segment in Asia Pacific for Citi Treasury and Trade Solutions, wrote "Unspent Cash is King: Why Corporations Aren'​t Letting Go" on why the cash hoarding will continue. "The cash levels are at record highs, with estimates of cash hoarding by corporations ranging between US$​1.​5 trillion to US$​5 trillion, according to CNBC. From an industry perspective, information security or technology companies tend to be amongst the top non-​financial companies with high cash levels, with pharmaceuticals and biotech companies following suit... This trend is not only seen in the United States or Europe, but in Asia as well. Nearly US$​500bn of excess cash is held by nonfinancial companies, primarily from Japan, Korea and China, the Wall Street Journal noted."

She continues, "​While companies are inclined to hold more cash position, with the Basel III liquidity considerations in the industry, banks are focused on improving liquidity coverage ratios (​LCR) as a primary goal. Therefore, banks are far more likely to pay rewards for LCR-​friendly deposits versus excess cash positions, which has not been the situation in the previous years. As a result, companies are challenged to benefit from high returns on their cash positions and are looking at other investment products such as money market funds (​MMFs) and short-​term funds to ensure returns on their cash positions. In conclusion, corporations are expected to continue to accumulate cash positions with different motivating factors, from the need to reserve cash for research and development to tax considerations. More importantly, changes in banking regulations or the interest rate environment will certainly make a difference and allow companies to make choices with this excess cash. Overall, if the economic indicators work favourably and business confidence grows, there will be an opportunity for companies to channel cash to right investments. Until then, cash will indeed continue to be king."

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The Investment Company Institute released its latest "Money Market Fund Holdings" report, 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 August 31, 2014). ICI'​s "​Prime and Government Money Market Funds' Daily and Weekly Liquid Assets table shows Prime Money Market Funds' Daily liquid assets at 26.​1% as of August 31, 2014, up from 23.​2% on July 31. "Daily liquid assets" were made up of: "​All securities maturing within 1 day," which totaled 21.​9% (​vs. 19.​0% last month) and "​Other treasury securities," which added 4.​2% (​same as last month). Prime funds' Weekly liquid assets totaled 39.​2% (​vs. 37.​9% last month), which was made up of "​All securities maturing within 5 days" (​32.​4% vs. 31.​6% in July), Other treasury securities (​4.​1% vs. 4.​2% in July), and Other agency securities (​2.​7% vs. 2.​1% a month ago). (Note: For earlier Portfolio Holdings coverage, see Crane Data'​s Sept. 11 News, "​Sept. MF Holdings Show Jump in Time Deposits, Fed Repo; CDs Flat". Also, see the Irish Examiner'​s "​Ireland set to oppose EU plans on cash buffers for funds", which discusses regulations in Europe ahead of our European Money Fund Symposium which starts Monday in London.)

ICI'​s Holdings update says that Government Money Market Funds' Daily liquid assets total 60.​6% as of August 31 vs 59.​1% in July. All securities maturing within 1 day totaled 29.​0% vs. 25.​4% last month, while Other treasury securities added 31.​7% (​vs. 33.​7% in July). Weekly liquid assets totaled 80.​6% (​vs. 79.​8%), which was comprised of All securities maturing within 5 days (​41.​2% vs. 37.​4%), Other treasury securities (​29.​5% vs. 31.​7%), and Other agency securities (​9.​9% vs. 10.​7%).

ICI'​s "​Prime and Government Money Market Funds' Holdings, by Region of Issuer" table shows Prime Money Market Funds with 42.​0% in the Americas (​vs. 41.​6% last month), 19.​6% in Asia Pacific (​vs. 19.​9%), 38.​1% in Europe (​vs. 38.​2%), and 0.​2% in Other and Supranational (​same as last month). Government Money Market Funds held 83.​9% in the Americas (​vs. 83.​1% last month), 1.​0% in Asia Pacific (​vs. 1.​0%), 15.​4% in Europe (​vs. 15.​9%), and 0.​1% in Supranational (​vs. 0.​1%).

The table, "​Prime and Government Money Market Funds' WAMs and WALs shows Prime MMFs WAMs at 45 days as of August 31 vs. 44 days in July. WALs was at 77 days, down from 78 last month. Government MMFs' WAMs decreased to 44 days, down from 45 last month, while WALs dropped to 73 days from 74 days. ICI'​s release explains, "​Each month, ICI reports numbers based on the Securities and Exchange Commission'​s Form N-​MFP data, which many fund sponsors provide directly to the Institute. ICI'​s data report for August covers funds holding 94 percent of taxable money market fund assets." Note: ICI doesn'​t publish individual fund holdings.

Meanwhile, JP Morgan Securities U.​S. Fixed Income Strategy also released its August "​Prime Money Market Fund Holdings Update" late last week. JP Morgan Strategist Alex Roever and his team said Prime MMF sector allocations in August changed very little from July. "Prime MMFs slightly increased their bank holdings as well as US Agency holdings. On margin, they also added some positions of non-​financial corporates and foreign SSAs. As of month-​end, prime MMF holdings of US Treasuries stood at $​61bn, the lowest amount we have on record since we began collecting monthly data. This is to be expected given the substantial decline in bill outstandings we have seen over the past couple of years, not to mention the relative unattractiveness of bill yields versus Fed RRP, both of which are eligible to be included in their liquidity buckets."

Further, "​Total bank exposures in prime MMFs increased by $​10bn in August, a small uptick relative to July which grew by $​85bn following quarter-​end. Time deposit holdings increased $​33bn month-​over-​month, driven largely from time deposits issued by Swedish banks (+$​16bn) as well as US banks (+$​10bn). However, the gains were offset by decreases in repo of $​10bn, CP/​CDs of $​9bn and other securities of $​6bn. By jurisdiction, prime MMFs increased their exposures to Canadian banks by the largest amount. In spite of how rich they trade relative to other credits, even in longer maturities, balances of Canadian banks continue to be ranked among the highest in prime MMFs. Conversely, holdings of Chinese banks remained small, at a modest $​5bn, in spite the nearly 20bp pickup in yield available over other credits in similar maturities."

Also, they said Fed RRP allotment at the end of August increased $​7bn month-​over-​month. "As of August month-​end, MMFs allotted $​138bn to the Fed RRP, representing about 80% of total RRP usage. Government institutional MMFs continue to be the primary users of the facility, accounting for roughly 69% of total MMF Fed RRP usage. Meanwhile, prime institutional MMFs represented about 27%. However, by count, there were 31 prime MMFs that participated in the facility versus 24 government funds. As a percentage of AuMs, government MMFs continued to allot a greater portion of their portfolios to the Fed RRP facility than prime MMFs. In fact, there are some government MMFs that consistently allocate over 50% of their assets at month-​end. Meanwhile, with the exception of quarter-​ends, prime MMFs on average allocate less than 10% of their portfolios to the Fed RRP facility. As the pool of government supply continues to shrink, government MMF'​s reliance on the Fed RRP facility is likely going to increase."

With the increased usage of Fed'​s RRP, prime MMF holdings of dealer GC repo remained low, they added. "​Prime MMFs held $​148bn of dealer repo as of August month-​end, $​25bn less than what they held at year-​end and $​165bn less than their peak in November 2012. As a percentage of AUM, repo holdings remained at a subdued level of 10.​4%, coming close to its lowest at 10.​2% in April 2011 when the new FDIC insurance fee assessment rate went into effect. In all likelihood, prime MMF holdings of dealer repo holdings will continue to decline as banks adjust to further regulations that impact the securities financing markets. In particular, the impending release of the final net stable funding ratio rule, the capital rule on short-​term wholesale funding as well as the imposition of minimum haircuts on securities financing transactions will continue to exert pressure on the repo market to shrink."

Also, MMFs held $​18.​83bn in Treasury floaters at the end of August, they wrote. "​The pace at which MMFs have been adding Treasury floaters have slowed dramatically this past month, adding only $​0.​66bn in August versus a monthly average of $​2.​75bn previously, most likely a reflection of how rich Treasury FRNs have become. Indeed ... the discount margins of Treasury FRNs have rallied significantly this summer and are now trading at their tightest levels ever. Still, in spite of this pricing, demand for Treasury FRNs across market participants remained strong as the bid-​to-​cover ratio for the most recent auction was 4.​38, above the prior bid-​to-​cover ratio of 4.​09."

Finally, JPM writes, "Looking ahead, overall supply constraints later this month should continue to keep MMF'​s usage of Fed RRP elevated. Indeed, as our Treasury strategists noted, T-​bill supply are expected to fall by about $​90bn over the coming weeks as Treasury receives their seasonal corporate tax receipts. Tack on the expected shrinkage in dealer repo as banks continue to grapple with leverage ratios at quarter-​ends, it'​s possible that we could see another record usage of Fed RRP from eligible MMFs at the end of September. This supply and demand imbalance could very well push money market rates such as bills, discos, and cash repo through the Fed'​s RRP rate, in the days leading up to quarter-​end, if not already. However, ON GCF repo rates should remain elevated as dealers seek to trade in the GCF inter-​dealer repo market versus the tri-​party repo market with cash lenders given the netting benefit available with GCF repos."

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The Independent Adviser, a newsletter covering Vanguard funds, discussed money fund fee waivers and the possibility of fee "​recapture" in a recent story, "Vanguard'​s Million-​Dollar Decision is the Industry'​s Billion-​Dollar Problem." Editor Daniel Wiener writes, "​Vanguard is facing a multi-​million dollar decision. Its competitors are facing the same decision, but for them it'​s measured in billions. The decision: To allow money fund yields to rise as the Fed begins raising interest rates, or to begin paying themselves back for years of self-​imposed fee waivers. You can be sure that fund marketers at Vanguard and elsewhere are debating the merits of "​Which comes first, the chicken or the egg?" right now.... First, around the middle of 2009 Vanguard began to waive certain operating expenses on its money market funds. Vanguard called these "​temporary limits" on some expenses but the bottom line is the bottom line. Vanguard was cutting back on expenses to make sure money market yields stayed above zero. At first they didn'​t disclose the numbers but over the past couple of years the level of these fee waivers has been disclosed in the footnotes to its money funds' semi-​annual and annual reports."

The article goes on, "Over the most recently-​reported six months Vanguard waived a bit less than $​9.​2 million on Prime Money Market, a fund with approximately $​131 billion in assets (​at the time of the waiver). Now, take a look at Charles Schwab'​s Cash Reserves money fund, with a bit less than $​40 billion in assets. Schwab waived $​87.​7 million to "​maintain a positive net yield" as they write in the fine print of their semi-​annual report. This makes Vanguard'​s waiver look like chicken scratch. One thing you won'​t see in Vanguard'​s filings, but you do at Schwab (​and they aren'​t alone) is language giving the company the ability to claw back waived fees. To give you a sense of the magnitude of this potential windfall, Schwab says that between 2014 and 2017 it has the right to recoup as much as $​522.​2 million in fees. These are called "​reimbursement payments." Will they take them? Probably not. But the option is there."

Wiener explains, "Now, here'​s the money market conundrum for the entire industry: When interest rates finally begin to rise, and yields on the short-​term bonds and commercial paper and other securities that Vanguard and its peers invest their money market assets in begin to rise as well, will fund operators cut back on the waivers first, or keep the waivers in place while allowing their money funds' yields to begin rising? ... Right now, with most money fund yields anchored at 0.​01% there'​s little to distinguish one fund from the next. But that'​s bound to change. Imagine a scenario where the Fed begins hiking rates, money-​fund securities begin paying higher yields and Vanguard uses those higher yields in the market to quickly reduce or eliminate its waivers. Will other fund companies follow suit? If they try to reduce their waivers their yields will remain stuck at 0.​01% while Vanguard'​s will begin rising. Or, fund companies could keep their waivers in place and try to bump their money fund yields in an effort to stay competitive."

Money market fund managers waived $​5.​8 billion in fees in 2013, a record number up from $​4.​9 billion in 2012, and $​5.​1 billion in 2011, according to the Investment Company Institute. Since 2009, a total of $​23.​9 billion in money market fees have been waived. Money market fund advisers increased fee waivers to ensure that net yields (​the yields after deducting fund expense ratios) did not fall below zero in the low interest rate environment. At the end of 2013, 99% of money fund share classes had waived at least some expenses. Historically, money market funds often have waived expenses for competitive reasons. For example, in 2006, $​1.​3 billion in fees were waived and 62 percent of money market fund share classes waived at least some expenses, according to ICI'​s study.

With the expectation that the Federal Reserve will begin raising interest rates in 2015, some money fund advisors will reduce or eliminate fee waivers as yields increase. However, given the billions in waivers over the last 5 years, some advisors will seek to recapture some of the lost revenue. Some fund companies have included language in their prospectuses that gives them the ability to recapture lost fees. Schwab is one, Oppenheimer is another.

In its money market fund disclosure, Schwab states: "In addition to the contractual expense limitation discussed in the prospectus, Schwab and the investment adviser also may voluntarily waive and/​or reimburse expenses in excess of their current fee waiver and reimbursement commitment to the extent necessary to maintain a positive net yield (​in the case of Schwab U.​S. Treasury Money Fund, Schwab Treasury Obligations Money Fund, and Schwab Government Money Fund, a non-​negative net yield). Under an agreement with each fund, Schwab and/​or the investment adviser may recapture from any fund or share class any of these expenses or fees they have waived and/​or reimbursed until the third anniversary of the end of the fiscal year in which such waiver and/​or reimbursement occurs, subject to certain limitations. These reimbursement payments by a fund or share class to Schwab and/​or the investment adviser are considered "​non-​routine expenses" and are not subject to any net operating expense limitations in effect at the time of such payment. This recapture could negatively affect a fund'​s future yield."

In other news, Fitch Ratings released, "The Fed'​s RRP Program: Where'​s the Money Coming From?" Fitch writes that since the launch of the Federal Reserve Bank of New York'​s overnight reverse repurchase exercise a year ago, investments by money market funds in RRP have climbed from $​45 billion on September 30, 2013 to a peak of $​275 billion on June 30, 2014. Writes Fitch, "​The Fed'​s interest in using RRP as a monetary policy tool has prompted considerable interest in the question of how big the RRP program could eventually become, and where the new RRP money is coming from."

Fitch sees a shift to RRP from European Banks. "​Government and prime money funds have consistently been the primary RRP investors since the start of the exercise, and they have accounted for 75% of RRP volume on average. MMFs have re-​allocated investment balances to RRP from other short-​term asset categories, in particular European bank certificates of deposits (​CDs), time deposits (​TDs) and repurchase agreements (​repos). Smaller reallocations from other short-​term investments have also occurred."

Further, "Fitch Ratings' analysis of MMF asset shifts since the start of the overnight RRP exercise (​based on Crane Data LLC data) indicates that the rise in RRP allocations by money funds has been accompanied by consistent quarter-​end declines in allocations to European bank CDs, TDs and repos. The quarter-​end declines in European bank borrowings, while small in relation to balance sheet totals, may reflect increased investor focus on European bank leverage. At present, average metrics are rarely reported, especially in quarterly statements; but beginning in 2015, the banks will be required to report the European equivalent of Basel III leverage and liquidity coverage ratios on an average basis, helping to enhance investor insight. No significant shifts in allocations out of other asset categories, including short-​term US bank instruments, Treasury and agency securities, or commercial paper, were evident in the MMF data."

​

With U.​S. money market reforms now on the books and pending, the global money fund industry'​s attention turns to European reforms, first proposed by the European Commission in September 2013. The European Parliament has not acted on the proposal yet, postponing a vote this past March. But the expectation is that Parliament will act at some point in coming months. The issue will be front and center at Crane'​s European Money Fund Symposium, which takes place next week (​Sept. 22-​23) in London. But in advance of that, we have come across some good articles written about European reforms in the past week. The first, called "Money Market Reform: Keeping Your Eye on the Ball," was published by Treasury Today, and quotes Euro Symposium keynote speaker and IMMFA Chairman Jonathan Curry. (​We also "​profile" IMMFA Secretary General Susan Hindle Barrone in the latest issue of our Money Fund Intelligence newsletter.)

The Treasury Today piece focuses on where the proposal stands and how it differs from US reforms. It says, "It has been a long time coming for the US and it will be a while yet for Europe, but the full extent of money market fund (​MMF) reform is slowly being realised. However, with the US having shown its hand and Europe still debating the issue, it may seem like a two-​part play; either way reform is coming and investors need to understand what the changes mean to be able to make the most of them."

The article continues, "The new parliament is yet to commence its deliberations on MMF reform but progress is nonetheless being made, notes Curry (​Jonathan Curry, Global Chief Investment Officer – Liquidity at HSBC Global Asset Management). Membership of the Committee on Economic and Monetary Affairs (​ECON) has already been agreed. This is an important step as ECON bears responsibility for MMF reform from a European Parliament perspective. This committee had previously seen a fairly balanced set of views with support for both the European Commission'​s key proposals and for an alternative approach to these key proposals focused on the use of liquidity fees and redemption gates."

It explains, "The loss of certain key figures, including the Chair of the ECON, the rapporteur (​the person appointed as the lead Member of the European Parliament [​MEP] on the '​file' and the official report author) and three out of the four shadow rapporteurs (​the persons appointed to assist the rapporteur) has led to a significant loss of knowledge of this file in the Parliament. The new cohort will need to get up to speed with the issues before making any pronouncements. The expectation, says Curry, is that the work will commence in earnest sometime in September 2014."

Further, "​Discussion has recently got underway within the European Council which brings together the heads of state or government of every EU country. It requires input from representatives of all 28 member states; coming up with a united position on the proposal will take time as all stakeholders will seek to air their voice in the light of analysis by bodies such as the European Systemic Risk Board (​ESRB) and the International Organisation of Securities Commissions (​IOSCO). The seemingly glacial movement of the overall debate means there is still a lot of work to be done by interested parties in this debate, notes Curry."

The article tells us, "​With a new European Parliament now in situ there will need to be considerable engagement on behalf of the industry with the yet-​to-​be announced rapporteur and his or her shadows. "​I can see the second half of this year being very busy for all those wishing to have their opinions heard," he comments.... Once the proposals have been accepted there will be a transition period for all concerned. Whereas the US is allowing two years, the European Commission'​s proposal is for six months. "Our view is that this is significantly shorter than it needs to be for all parties," states Curry, suggesting that a minimum of 18 to 24 months may be required for migration. "It is unlikely we will see a conclusion before the first half of next year."

The Treasury Today piece expounds on the key differences between the US and European proposals. "There are a number of similarities between the changes now set for the US market and those proposed for the European industry. The switch to VNAV for part of the US industry and rules around diversification and transparency are, for example, broadly in line with European Commission thinking. But major differences also exist. The SEC makes no provision for the use of capital buffers for funds whereas the EC is proposing a 3% buffer for funds not switching to VNAV. To date there are no plans in Europe for liquidity fees and redemption gates. And where amortised cost accounting for assets with maturities shorter than 60 days is permissible for US MMF investors, there will be no such cost accounting at all in Europe."

It goes on, "Regardless of similarities or differences, there does not appear to be any statement of intent by the regulatory bodies on either side of the Atlantic to align their respective approaches to MMF reform. However, Curry suggests that as the US has been the first to break cover, it will now give one side or other of the debate in Europe "​some ammunition." Although convergence is unlikely, he believes that it would be "​unhelpful" for the industry if the two sets of reform diverge substantially. "​Obviously we need a situation where both regulatory bodies implement reforms that are necessary; we would not support consistency for consistency'​s sake. But we want the right reforms to be in place and if that only happens in one jurisdiction then that is preferable to consistency that is consistently wrong."

It concludes, "Asset managers will continue to play a vital role in delivering information and offering informed views on actual and proposed market changes. In this respect, HSBC Global Asset Management has a number of educational approaches including one-​to-​one sessions, group meetings, '​treasury breakfasts' and articles in the industry press. "​We have a clear view on these reforms and we are sharing that with our investors," states Curry. By encouraging investors to understand the impact of MMF reform, and by individually helping them to formulate the most appropriate response, key players such as HSBC Global Asset Management are offering a solid foundation upon which investment strategies can be built. Ultimately, with the protection that these reforms are designed to offer investors, they are also helping to deliver the industry safely into the next phase of its development."

Also, in its September issue, Treasury Today penned an editorial on reforms called "Beginning of the End for CNAV Funds." The editorial says, "[​T]​he odds are now heavily stacked in favour of similar legislation being adopted in Europe." They go on, "​When polled, corporate treasurers say they like CNAV funds and will not use VNAV funds, but alternatives will be limited. Before dismissing the VNAV option, the wiser treasurer will investigate and understand the impact of the new legislation.... Any new money fund legislation must be accompanied by realistic rules on tax and accounting treatment of VNAV funds.... Providing this happens as new legislation is adopted in Europe, corporates will find VNAV funds are an attractive short-​term investment. They will educate their treasury committees and amend their treasury policies accordingly. Our bet is that the MMF industry we know today will survive and may well, over time, see higher volumes than today. This may the beginning of the end of CNAV funds but it is also the beginning of VNAV funds becoming an investment in which corporates should and will invest."

Another update, this one from the Financial Services Team at Irish law firm LK Shields, focuses on the European Central Bank'​s position on the reform proposal. "The ECB notes the importance of achieving "​substantial convergence at international level" in order to avoid the regulatory arbitrage which has the potential to arise were there to be different MMF regulatory regimes in the most important MMF markets; the EU and the United States. In relation to the controversial proposal that all CNAV MMFs hold a NAV buffer of 3%, the ECB notes that the proposal runs contrary to the recommendations of the European Systemic Risk Board and notes that were such a provision to be introduced, the European Commission would be mandated to review the adequacy of the rules three years after the implementation of the Proposed Regulation. The ECB highlights what it sees as two weaknesses with the NAV buffer proposal; the fact that the NAV buffer is not proposed to be risk-​based, i.​e. that for MMFs needing to build up or replenish the buffer, there may be an incentive for such MMFs to take increased risks in their investment policies; and the short period of time within which it is proposed the NAV buffer would need to be replenished were the buffer to fall below 3%."

LK Shields continues, "The points raised by the ECB in relation to the proposed NAV Buffer and the need for substantial convergence at international level are interesting when the new US rules on MMF reform are taken into consideration. The US MMF Rules distinguish between MMFs on the basis of the types of investors investing in the MMFs. The EU'​s MMF reform proposals do not follow the US approach. Instead, the EU rules focus on the liquidity profile of an MMF. Under the Proposed Regulation, only Short-​Term MMFs (​MMFs holding portfolios of assets with short-​term maturities) will be able to use a CNAV. Standard MMFs (​those MMFs with a portfolio of assets with a weighted average maturity of between 60 days and 6 months) will be required to use a VNAV."

The firm goes on to say, "​Furthermore, if there was to be a run on a CNAV MMF, the purpose of the proposed reforms is to ensure that MMFs have sufficient liquid assets to enable them to meet investor redemptions, while the NAV buffer provides a backstop to protect investors by acting as a source of funds to compensate redeeming investors for any shortfall between the published CNAV and the actual value of the MMF'​s net assets. However, the combined costs of complying with the proposed rules and of maintaining a NAV buffer in what is a low-​margin industry, throws doubt on the viability of CNAV MMFs in the EU. It is possible that MMFs could choose to convert to VNAV MMFs to avail of a lighter regulatory regime, a scenario which would achieve through the backdoor, what was originally advocated for at the height of the economic crisis; that all MMFs should publish VNAVs." LK Shields concludes. "As previously noted, the ECB thinks it crucial that differences in MMF regulation in the EU and the US do not create regulatory arbitrage. The EU authorities will need to be very careful of their next steps."

​

Late last week, we learned about the launch of a new family of money market funds, as well as the liquidation and outsourcing of another one. TCG Financial Services out of Miami appears to be attempting to create money funds comprised of FDIC-​insured deposit blocks with the launch 10 new government money market funds, according to recent SEC Edgar filings. A story on ignites.​com, entitled, "Small Shop Sees Massive Opportunity in Money Fund Rule," explains that TCG says the move is fueled by the SEC'​s money market reform. Writes Ignites author Peter Ortiz, "​In part, the move reflects the shop'​s hopes to help its funds grow by attracting investors uncomfortable with another major provision of the rule: moving institutional prime funds away from a stable, $​1 per share price." The 10 funds are: TCG Cash Reserve Money Market Fund (​TCHIX), TCG Daily Liquidity Government Money Market Fund (​TCDIX), TCG Liquid Assets Government Money Market Fund (​TLAIX), TCG Liquidity Plus Government Money Market Fund (​TLPIX), TCG US Government Select Money Market Fund (​TUSIX), TCG US Advantage Money Market Fund (​TUAIX), TCG US Government Primary Liquidity Money Market Fund (​TUPIX), TCG US Government Max Money Market Fund (​TUMIX), TCG US Premier Government Money Market Fund (​TURIX), and TCG US Government Ultra Money Market Fund (​TUUIX). Each of these funds has institutional shares and may add up to 4 other share classes.

Jorge Coloma, managing director at TCG, tells ignites, "I think because of the new rule there is going to be more demand for U.​S. government money market funds.... We think it will be a shift from prime institutional funds to U.​S. government money market funds." Coloma adds that, with interest rates expected to rise, money market funds are likely to become more profitable. States the Ignites article, "​Each of the 10 TCG funds now has $​102,​600, but that should grow to $​5 million per fund by the end of the week, says Coloma. By the end of the month, TCG expects to have $​100 million in total assets under management across its line of first-​ever mutual funds, he says."

The prospectus from the TCG Cash Reserve Government Money Market Fund, submitted September 2 to the SEC, explains the investment objectives of the fund: "Under normal conditions, the TCG Cash Reserve Government Money Market Fund (​the "​Fund") seeks to achieve its objective by investing in short-​term money market instruments that, at the time of investment, have remaining maturities of 397 calendar days or less from the date of acquisition. The Fund'​s portfolio will maintain a dollar-​weighted average maturity of 60 days or less and a dollar-​weighted average life of 120 days or less. Under normal circumstances, at least 99.​5% of the Fund'​s assets will be invested in certain obligations of the U.​S. Government, its agencies and instrumentalities and repurchase agreements with regard to such obligations."

It continues, "The Fund will invest in deposits ("​Deposits") which are exclusively in accounts with Federal Deposit Insurance Corporation ("​FDIC") insured banks or savings and loan associations which are backed by the full faith and credit of the U.​S. Government. Deposits that are backed by the full faith and credit of the U.​S. Government are those that the resources of the U.​S. Government stand behind. Further, each of the Fund’​s Deposits will not exceed the FDIC'​s Standard Maximum Deposits Insurance Amount ("​SMDIA") which currently is $​250,​000 per depositor, per insured bank inclusive of the principal and accrued interest for each Deposit. Accordingly, because each of the Fund'​s Deposits will fall within these FDIC amount limits, the entire amount of each of the Fund'​s Deposit will be fully insured by the FDIC. The Fund may invest in other money market funds that have substantially the same investment objective and strategies as the Fund."

In other news, we learned that Williams Capital is will be liquidating its Williams Capital Government Money Fund and outsourcing the management of its money market fund to Northern Trust, which has launched new share classes for Williams. A Sept. 5 prospectus filing says, "Northern is introducing the Prime Obligations Portfolio Williams Capital Shares (​WCPXX), and the US Government Select Portfolio Williams Capital Shares (​WCGXX). The funds are available to clients of Williams Capital Group LP.... The Prime Obligations Portfolio "​is a money market fund that seeks to maintain a stable net asset value ("​NAV") of $​1.​00 per share. The Portfolio seeks to maximize current income to the extent consistent with the preservation of capital and maintenance of liquidity by investing exclusively in high quality money market instruments."

It adds, "The Portfolio seeks to achieve its objective by investing in a broad range of high-​quality, U.​S. dollar-​denominated government, bank and commercial obligations that are available in the money markets, including: Obligations of U.​S. banks (​including obligations of foreign branches of such banks); Obligations of foreign commercial banks; Commercial paper and other obligations issued or guaranteed by U.​S. and foreign corporations and other issuers; Corporate bonds, notes, paper and other instruments that are of high quality; Asset-​backed securities and asset-​backed commercial paper; Securities issued or guaranteed as to principal and interest by the U.​S. government or by its agencies, instrumentalities or sponsored enterprises and custodial receipts with respect thereto; Securities issued or guaranteed by one or more foreign governments or political subdivisions, agencies or instrumentalities; Repurchase agreements; and Municipal securities issued or guaranteed by state or local governmental bodies."

The U.​S. Government Select Portfolio "​is a money market fund that seeks to maintain a stable net asset value ("​NAV") of $​1.​00 per share. The Portfolio seeks to maximize current income to the extent consistent with the preservation of capital and maintenance of liquidity by investing exclusively in high quality money market instruments. The Portfolio seeks to achieve its objective by investing, under normal circumstances, substantially all (​and at least 80%) of its net assets in securities issued or guaranteed as to principal and interest by the U.​S. government or by its agencies, instrumentalities or sponsored enterprises.... The Portfolio makes significant investments in securities issued by U.​S. government-​sponsored entities. Such securities are neither issued nor guaranteed by the U.​S. Treasury."

No doubt there be more changes in the coming months and leading up the implementation of the SEC money market reforms on October 14, 2016. Five years ago on Sept 1, 2009, Crane Data tracked 85 fund families with money funds, 3 years ago on Sept. 1, Crane tracked 78 fund families, and today we track 74 fund families. For our last story on fund liquidations and consolidation, read our June 27, 2013, News, "​More MFs Liquidate: Calvert, Hartford Exit; Bad Timing for Bond Funds."

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Crane Data published its latest Money Fund Intelligence Family & Global Rankings Wednesday, which ranks the asset totals and market share of managers of money funds in the U.​S. and globally. The September edition, with data as of August 31, shows sizeable asset increases for the majority of money fund complexes in the latest month, and modest gains over the past three months and year. This comes after several months of decreases. (​These "Family" rankings are available to our Money Fund Wisdom subscribers.) JP Morgan, BlackRock, Federated, Fidelity, and Morgan Stanley were the biggest gainers in August, rising by $​7.​3 billion, $​6.​9 billion, $​5.​5 billion, $​5.​3 billion, and $​4.​8 billion respectively, while Morgan Stanley, BofA Funds, Wells Fargo, Franklin, and Fidelity led the increases over the 3 months through August 31, 2014, rising by $​4.​2B, $​3.​8B, $​2.​5B, $​2.​3B, and $​1.​5 billion respectively. Money fund assets overall jumped by $​40.​8 billion in August, increased by $​6.​6 billion over the last three months, and increased by $​15.​2 billion over the past 12 months (​according to our Money Fund Intelligence XLS).

Our latest domestic U.​S. money fund Family Rankings show that Fidelity Investments remained the largest money fund manager with $​410.​0 billion, or 16.​4% of all assets (​up $​5.​3B in August, up $​1.​5B over 3 mos. and down $​16.​9B over 12 months), followed by JPMorgan'​s $​238.​5 billion, or 9.​5% (​up $​7.​3B, down $​269M, and down $​908M for the past 1-​month, 3-​months and 12-​months, respectively). Federated Investors ranks third with $​202.​4 billion, or 8.​1% of assets (​up $​5.​5B, down $​1.​8B, and down $​20.​0B), BlackRock ranks fourth with $​188.​4 billion, or 7.​5% of assets (​up $​6.​9B, down $​1.​4B, and up $​41.​4B), and Vanguard ranks fifth with $​171.​9 billion, or 6.​9% (​up $​592M, down $​125M, and down $​1.​7B).

The sixth through tenth largest U.​S. managers include: Schwab ($​159.​6B, 6.​5%), Dreyfus ($​157.​0B, or 6.​3%), Goldman Sachs ($​133.​3B, or 5.​3%), Wells Fargo ($​111.​9B, or 4.​5%), and Morgan Stanley ($​106.​1B, or 4.​2%). The eleventh through twentieth largest U.​S. money fund managers (​in order) include: SSgA ($​83.​1B, or 3.​3%), Northern ($​76.​2B, or 3.​0%), Invesco ($​59.​5B, or 2.​4%), BofA ($​50.​7B, or 2.​0%), Western Asset ($​40.​7B, or 1.​6%), UBS ($​36.​3B, or 1.​5%), First American ($​36.​1B, or 1.​4%), Deutsche ($​32.​2B, or 1.​3%), Franklin ($​20.​7B, or 0.​8%), and RBC ($​18.​2B, or 0.​7%). Crane Data currently tracks 74 managers, the same number as last month.

Over the past year, BlackRock showed the largest asset increase (​up $​41.​4B, or 28.​3%; note that most of this though is due to the addition of securities lending shares to our collections), followed by Goldman Sachs (​up $​12.​8B, or 10.​0%), and Morgan Stanley (​up $​11.​4B, or 12.​1%). Other gainers since August 31, 2013, include: BofA (​up $​9.​4B, or 22.​2%), SSgA (​up $​6.​6B, or 8.​6%), American Funds (​up $​4.​3B, or 30.​9%), and SEI (​up $​1.​7B, or 14.​8%). The biggest declines over 12 months include: Federated (​down $​20.​0B, or -​9.​1%), Fidelity (​down $​16.​9B, or -​4.​0%), UBS (​down $​11.​1B, or -​22.​8%), and Deutsche (​down $​7.​8B, or -​18.​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 Islands -- are included, the top 10 managers match the U.​S. list, except for BlackRock moving up to No. 3, Goldman moving up to No. 4, and Western Asset appearing on the list at No. 9. (​displacing Wells Fargo from the Top 10). Looking at these largest Global Money Fund Manager Rankings, the combined market share assets of our MFI XLS (​domestic U.​S.) and our MFI International ("​offshore), we show these largest families: Fidelity ($​416.​4 billion), JPMorgan ($​361.​4 billion), BlackRock ($​311.​2 billion), Goldman Sachs ($​213.​8 billion), and Federated ($​210.​9 billion). Dreyfus ($​180.​9B), Vanguard ($​171.​9B), Schwab ($​160.​8B), Western ($​137.​6B), and Morgan Stanley ($​125.​3B) 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 August 2014 Money Fund Intelligence and MFI XLS show that both net and gross yields remained at record lows for the month ended August 31, 2014. Our Crane Money Fund Average, which includes all taxable funds covered by Crane Data (​currently 848), 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 was also unchanged at 0.​13%.) Our Crane 100 Money Fund Index shows an average yield (​7-​Day and 30-​Day) of 0.​02%, also a record low, down from 0.​03% a year ago. (​The Gross 7- and 30-​Day Yields for the Crane 100 remained unchanged at 0.​16%.) For the 12 month return through 8/​31/​14, our Crane MF Average returned a record low of 0.​01% and our Crane 100 returned 0.​02%.

Our Prime Institutional MF Index yielded 0.​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.​18%, Govt 0.​9%, Treasury 0.​06%, and Tax Exempt 0.​12% in August.) The Crane 100 MF Index returned on average 0.​00% for 1-​month, 0.​00% for 3-​month, 0.​01% for YTD, 0.​02% for 1-​year, 0.​04% for 3-​years (​annualized), 0.​05% for 5-​year, and 1.​61% for 10-​years.

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Crane Data released its August Money Fund Portfolio Holdings Wednesday, and our latest collection of taxable money market securities, with data as of August 31, 2014, shows a jump in Time Deposits and Fed Repo, but little change in almost every other asset category. Money market securities held by Taxable U.​S. money funds overall (​those tracked by Crane Data) increased by $​28.​2 billion in August to $​2.​392 trillion. Portfolio assets decreased by $​6.​2 billion in July, $​18.​0 billion in June, $​3.​7 billion in May, and $​39.​1 billion in April. CDs remained the largest portfolio composition segment among taxable money funds, followed by Repo, CP, then Treasuries, Agencies, Other (​Time Deposits), and VRDNs. Money funds' European-​affiliated holdings held steady at 29.​6%. Below, we review our latest Money Fund Portfolio Holdings statistics.

Among all taxable money funds, Repurchase agreement (​repo) holdings increased by $​4.​3 billion to $​512.​3 billion, or 21.​4% of fund assets, after dropping $​83.​6 billion in July, rising $​76.​1 billion in June and $​32.​9 billion in May. (​Holdings of Federal Reserve Bank of New York repo increased by $​17.​9 billion to $​133.​9 billion.) Certificates of Deposit (​CDs) were flat in August, increasing $​1.​6 billion to $​566.​5 billion, or 23.​7% of holdings. Commercial Paper (​CP), the third largest segment, increased by $​2.​1 billion to $​377.​5 billion (​15.​8% of holdings). Treasury holdings, the fourth largest segment, decreased by $​454 million to $​368.​1 billion (​15.​4% of holdings). Government Agency Debt was down $​2.​7 billion. Agencies now total $​344.​0 billion (​14.​4% of assets). Other holdings, which include primarily Time Deposits, jumped sharply (​up $​25.​6 billion) to $​198.​7 billion (​8.​3% of assets). VRDNs held by taxable funds decreased by $​2.​2 billion to $​25.​3 billion (​1.​1% of assets).

Among Prime money funds, CDs still represent over one-​third of holdings with 37.​5% (​down from 37.​7% a month ago), followed by Commercial Paper (​25.​0%). The CP totals are primarily Financial Company CP (​15.​0% of holdings) with Asset-​Backed CP making up 5.​8% and Other CP (​non-​financial) making up 4.​2%. Prime funds also hold 6.​3% in Agencies (​up from 6.​2%), 3.​9% in Treasury Debt (​same as last month), 6.​7% in Other Instruments, and 6.​2% in Other Notes. Prime money fund holdings tracked by Crane Data total $​1.​510 trillion (​up from $​1.​499), or 63.​1% of taxable money fund holdings' total of $​2.​392 trillion.

Government fund portfolio assets totaled $​435.​7 billion up from $​425.​6 billion last month, while Treasury money fund assets totaled $​446.​4 billion, up from $​439.​7 billion at the end of July. Government money fund portfolios were made up of 56.​8% Agency securities, 24.​2% Government Agency Repo, 3.​3% Treasury debt, and 15.​2% Treasury Repo. Treasury money funds were comprised of 66.​0% Treasury debt and 33.​2% Treasury Repo.

European-​affiliated holdings increased $​596 million in August to $​708.​8 billion (​among all taxable funds and including repos); their share of holdings is now 29.​6%. Eurozone-​affiliated holdings also increased (​up $​2.​7 billion) to $​404.​2 billion in August; they now account for 16.​9% of overall taxable money fund holdings. Asia & Pacific related holdings dropped by $​3.​3 billion to $​291.​5 billion (​12.​2% of the total), while Americas related holdings increased $​31 billion to $​1.​391 trillion (​58.​1% of holdings).

The overall taxable fund Repo totals were made up of: Treasury Repurchase Agreements (​up $​13.​0 billion to $​262.​4 billion, or 11.​0% of assets), Government Agency Repurchase Agreements (​down $​6.​3 billion to $​165.​9 billion, or 6.​9% of total holdings), and Other Repurchase Agreements (​down $​2.​3 billion to $​83.​9 billion, or 3.​5% of holdings). The Commercial Paper totals were comprised of Financial Company Commercial Paper (​down $​3.​6 billion to $​225.​8 billion, or 9.​4% of assets), Asset Backed Commercial Paper (​up $​2.​7 billion to $​87.​8 billion, or 3.​7%), and Other Commercial Paper (​up $​3.​0 billion to $​63.​9 billion, or 2.​7%).

The 20 largest Issuers to taxable money market funds as of August 31, 2014, include: the US Treasury ($​368.​1 billion, or 15.​4%), Federal Home Loan Bank ($​208.​7B, 8.​7%), Federal Reserve Bank of New York ($​133.​9B, 5.​6%), BNP Paribas ($​62.​7B, 2.​6%), Bank of Nova Scotia ($​59.​6B, 2.​5%), Credit Agricole ($​58.​6B, 2.​5%), Bank of Tokyo-​Mitsubishi UFJ Ltd ($​57.​7B, 2.​4%), Wells Fargo ($​55.​7, 2.​3%), RBC ($​54.​3B, 2.​3%), JP Morgan ($​49.​6B, 2.​1%), Deutsche Bank AG ($​48.​6B, 2.​0%), Federal National Mortgage Association ($​48.​1B, 2.​0%), Sumitomo Mitsui Banking Co ($​47.​8B, 2.​0%), Citi ($​47.​7B, 2.​0%), Federal Home Loan Mortgage Co ($​47.​6B, 2.​0%), Bank of America ($​42.​5B, 1.​8%), Credit Suisse ($​42.​1B, 1.​8%), Toronto-​Dominion ($​41.​8B, 1.​8%), Barclays PLC ($​39.​6B, 1.​7%), and Societe Generale ($​37.​9B, 1.​6%).

In the repo space, Federal Reserve Bank of New York'​s RPP program issuance (​held by MMFs) remained the largest program with 26.​1% of the repo market. The 10 largest Repo issuers (​dealers) (​with the amount of repo outstanding and market share among the money funds we track) include: Federal Reserve Bank of New York ($​133.​9B, 26.​1%), Deutsche Bank AG ($​37.​7B, 7.​4%), BNP Paribas ($​37.​6B, 7.​4%), Bank of America ($​33.​2B, 6.​5%), Societe Generale ($​30.​2B, 5.​9%), Credit Agricole ($​25.​8B, 5.​0%), Barclays PLC ($​25.​6B, 5.​0%), RBC ($​22.​5B, 4.​4%), Credit Suisse ($​20.​6B, 4.​0%), and JP Morgan ($​20.​3B, 4.​0%).

Crane Data shows 55 funds (​up from 51 last month) and 17 fund complexes participating in the NY Fed repo program with just 3 money funds holding over $​7 billion (​the previous cap). The largest Fed repo holders include: Morgan Stanley Inst Liq Trs ($​9.​1B), JP Morgan US Govt ($​7.​9B), Goldman Sachs FS Trs Obl Inst ($​7.​8B), State Street Inst Lq Res ($​6.​9B), Dreyfus Tr&​Ag Cash Mgmt Inst ($​6.​7B), Fidelity Instl MM Treasury Port ($​6.​5B), Northern Trust Trs MMkt ($​5.​2B), Dreyfus Govt Cash Mngt ($​6.​0B), Northern Inst Gvt Select ($​5.​2B), and BlackRock Cash Inst MMkt ($​5.​0B).

The 10 largest CD issuers include: Sumitomo Mitsui Banking Co ($​40.​4B, 7.​2%), Bank of Tokyo-​Mitsubishi UFJ Ltd ($​39.​9B, 7.​1%), Bank of Nova Scotia ($​36.​6B, 6.​5%), Toronto-​Dominion Bank ($​35.​9B, 6.​4%), Wells Fargo ($​26.​6B, 4.​7%), Mizuho Corporate Bank Ltd ($​26.​1B, 4.​6%), Bank of Montreal ($​25.​7B, 4.​6%), Rabobank ($​22.​4B, 4.​0%), Citi ($​19.​8B, 3.​5%), and Natixis ($​18.​0B, 3.​2%).

The 10 largest CP issuers (​we include affiliated ABCP programs) include: JP Morgan ($​21.​8B, 6.​7%), Westpac Banking Co ($​16.​1B, 5.​0%), Commonwealth Bank of Australia ($​15.​9B, 4.​9%), Lloyds TSB Bank PLC ($​13.​0B, 4.​0%), RBC ($​12.​8B, 4.​0%), BNP Paribas ($​11.​9B, 3.​7%), NRW Bank ($​10.​3B, 3.​2%), HSBC ($​10.​0B, 3.​1%), Australia & New Zealand Banking Group ($​9.​2B, 2.​9%), and Caisse des Depots et Consignations ($​9.​2B, 2.​8%).

The largest increases among Issuers include: Federal Reserve Bank of New York (​up $​17.​9B to $​133.​9B), Federal National Mortgage Association (​up $​5.​7B to $​48.​1B), Bank of New York Mellon (​up $​6.​2B to $​13.​4B), Bank of Nova Scotia (​up $​4.​0B to $​59.​6B), RBC (​up $​3.​7B to $​54.​3B), and NRW Bank (​up $​3.​5B to $​10.​3B). The largest decreases among Issuers of money market securities (​including Repo) in August were shown by: Federal Home Loan Bank (​down $​8.​8B to $​208.​7B), Barclays PLC (​down $​6.​0B to $​39.​6B), Societe Generale (​down $​5.​9B to $​37.​9B), JP Morgan (​down $​4.​5B to $​49.​6B), and Bank of Tokyo-​Mitsubishi (​down $​4.​1B to $​57.​7B).

The United States remained the largest segment of country-​affiliations; it represents 48.​7% of holdings, or $​1.​165 trillion. France (​9.​5%, $​227.​4B) moved into second place ahead of Canada (​9.​3%, $​223.​0B). Japan (​7.​4%, $​177.​8B) remained the fourth largest country affiliated with money fund securities. The U.​K. (​4.​5%, $​106.​9B) was in fifth place, ahead of Sweden (​4.​3%, $​103.​4B) and Germany (​3.​7%, $​87.​5B). Australia (​3.​6%, $​85.​7B) ranked 8th while Netherlands (​3.​0%, $​71.​4B) dropped to 9th place. Switzerland (​2.​5%, $​59.​1B) 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 August 31, 2014, Taxable money funds held 27.​1% of their assets in securities maturing Overnight, and another 11.​8% maturing in 2-​7 days (​38.​9% total in 1-​7 days). Another 22.​4% matures in 8-​30 days, while 23.​1% matures in the 31-​90 day period. The next bucket, 91-​180 days, holds 12.​2% of taxable securities, and just 3.​5% matures beyond 180 days.

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

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Federated Investors' CEO Chris Donahue talked about money market fund reform -- and the potential opportunities going forward -- at Barclays Global Financial Services Conference on Monday in New York City. He discussed how Federated and other public commenters helped make the reforms better, new products they are developing, growth opportunities in the money fund space, and plans for future acquisitions. In his 40 minute address, available for replay on Federated'​s website, Donahue said money funds at Federated have accounted for, on average, 38% percent of revenues, reaching a high of 58% in the second quarter of 2009 and a current low of 26% at present. Of Federated'​s $​352 billion in total assets under management, $​245 billion are in money market fund assets. About $​114 billion are in government funds, $​80 billion are in prime funds, $​16 billion are in tax-​free funds, and $​33 billion are in separate accounts.

Said Donahue, "One of the things we'​ve learned over the years is that the clients are convinced and have convinced the marketplace that they want the daily cash management service that is offered inside a money fund, which is to say, daily liquidity at par. And even though they may have various concerns at various times about yield or price, it is overwhelmingly driven by the demands for the service of dollar in and dollar out."

He spent the bulk of his speech talking about the SEC money fund reforms. "The first thing that happened from our perspective is that our franchise was preserved. If you remember back in the FSOC days, they had launched a missive that indicated that they wanted to kill all money funds in three different ways. I had articulated that it was death by poison, death by bullet, and death by hanging. We have been told by various government officials that what has been done is not killing us, but simply waterboarding us. And if you think about waterboarding, though an unpleasant experience, debate whether you think its torture or not, it eventually ends, so that'​s about the stage that we are in right now."

On Federated'​s leadership, he said: "​We have maintained a leadership role throughout this, because, I have 8 children and I was never willing to sacrifice one of them to try and preserve the others. So we were not in a position of willing to throw our institutional prime clients under the bus in order to save the other clients; alas, we did not succeed in that venture. But our leadership role continued. We were able to dramatically, I think, improve the result because the SEC ran a very thorough process that incorporated a lot of the comments that were made from the marketplace."

Donahue continued, "​We were quoted 250 times inside the SEC release. We were able to preserve the existence of amortized cost in those funds that are retail and those funds that are government. We were able to accomplish something even better than that, which is a long time frame in which to analyze and come up with other products and responses to the rule -- two years. Now mind you, as we stand here today, the two years has not started. The 2 years begins 60 days after the entire rule is published in the Federal Register . So the 2 years begins October 14 and runs until October 14, 2016. This is good because it keeps clients cool. Now they can understand, they can be curious, but they are not doing anything untoward in the marketplace. We also think we have improved the concept of gating built into the funds, [​and] we don'​t think [​it] will get used that much if at all."

He talked about how Federated intends to remain a major player in the space. "​We look at it next as an opportunity. Yes, there will be some consolidation. There are some 80 firms offering money funds today -- that'​s down from over 200 before 2008. We think it will continue to whittle down as every time another gang of regulations comes out, more people throw in the towel. The liquidity coverage ratios that have just been published for banks will have an effect on the banks' bidding the money out of money funds. Over the last several years, the bank deposit numbers have gone up much more than the money market funds. So even though the MMFs have stayed level with the assets they'​ve had -- around 2.​6 or 2.​7 trillion, bank deposits have climbed smartly. Now those banks are going to have to analyze the costs of that money and whether they want to bid it in or not. We think there are going to be opportunities over the long term for more cash management for Federated."

He also talked about new product opportunities. "​The other opportunities are going to be in response to the rule and what kind of products and new ideas you come up with... We are going to create private funds for qualified investors. That means you have to have $​25M of investable assets.... You would only go there if you are not qualified to stay in the regular retail prime fund. We may, in a different interest rate environment where rates are higher, come up with a 60 day and under fund because a 60 day and under fund can basically stay at amortized cost [​if it buys] no instrument longer than 60 days. But you have to have more of a yield than you have today to make that a viable product. We'​ll also be offering separate accounts, where a large customer can come into that type of account. Then you have the obvious answer of switching people into government funds. Though they take a sacrifice in yield, they retain the daily liquidity at par feature."

He also spoke about the definition of retail. "​Now forget whatever you think about retail and institutional, those words don’​t count anymore. The only words that count are what the SEC'​s definition of retail is related to a natural person. So there will be no '​unnatural' persons in any money market fund from now on. Furthermore they said a natural person was someone that eventually you could find had a social security number. Our market share in terms of money funds since the rules came out has remained just about flat at 8.​2%. The industry hasn'​t lost a bunch of assets either. As I said, everyone is staying cool."

Donahue spoke about prime institutional, floating NAV, and the focus going forward. "​We have $​80 billion in prime.... Of that $​80 billion, 42% of it is in wealth management. We think the lion'​s share of that is going to be qualified as retail because there is a going to be a natural person or a social security number behind the substantial majority of that money. In broker-​dealer, we have $​21 billion worth of prime and we think almost all of that is going to qualify as retail.... Next we have $​10 billion in institutional. Of that $​10 billion, we don'​t know the answer to this yet. But a number of them are qualified to go into these private funds."

He adds, "We are certain, a number will go into government funds, and there may even be some that can re-​characterize themselves and turn up as retail. So we'​re working hard on all of these items -- the definition of retail, working it through with the customers in order to get to the goal of being able to satisfy the SEC rule.... My own belief is there will not be much market place need for a floating NAV money market fund that'​s being created. We are going to spend the vast majority of our time and effort on product development and looking at improving our funds to have them be retail, coming up with the private funds I mentioned, looking at separate accounts, and going down those roads."

Finally, Donahue says, "I believe as we look at our franchise out a couple of years, we will be back on to growing this franchise and having higher highs and higher lows as the regular cycle of money market funds has done for us over the 40 years that we have been in this business.... In terms of rollups [​acquisitions], we are continuing to work on other rollups. I mentioned that there were probably more coming on the money market fund side." Note: The Pittsburgh Tribune-​Review also covered the speech in its article, "Federated CEO Says Investment Manager Won'​t Give Up Money Market Fund Business."

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Since the SEC passed its Money Market Fund Reforms in July, the big question from investors shifted from "What will reforms look like?" to "How will reforms impact money funds?" While implementation is still over two years away, money managers are already planning their strategies for the new realities. The SEC certainly took this into account and offered some guidance in its new rules. We explore the potential implications a little further, excerpting from the section of the final rules titled, "​Certain Macroeconomic Consequences of the New Amendments" (​which starts on page 593).

On the potential for outflows, the SEC explains, "The Commission recognizes that imposing fees and gates on non-​government money market funds and an additional floating NAV requirement on institutional prime funds will likely affect the willingness of investors to commit capital to certain money market funds. On the one hand, the fees and gates requirements will have little effect on funds and their investors except during times of fund distress. On the other hand, we recognize many current investors in non-​government funds, especially institutions, may prefer products that offer guaranteed liquidity and a stable NAV rather than non-​government funds that will be subject to fees and gates and a floating NAV requirement after the reforms.... Investors also may be prohibited by board-​approved guidelines, internal policies, or other restrictions from investing in products that do not have a stable value per share. A floating NAV also could drive investors with a more limited loss tolerance away from money market funds."

Where might assets flow? "​The Commission acknowledges, and many commenters concur, that, as a result of our reforms, some investors may reallocate assets to either government money market funds or other investment alternatives. We do not anticipate our reforms will have a substantial effect on the total amount of capital invested, although investors may reallocate assets among investment alternatives, potentially affecting issuers and the short-​term financing markets. We anticipate few investors in retail funds will reallocate assets to other investment choices, given that retail funds will continue to offer price stability, yield, and liquidity in all but exceptional circumstances.... We expect, however, that at least some investors who are natural persons that currently are invested in non-​government funds that are not designated retail may reallocate their assets to retail funds. We anticipate these investors will likely move to retail funds that have investment objectives that are similar to the objectives of their current funds."

Outflows will likely hit institutional prime funds. "​Institutions invested approximately $​1.​27 trillion in non-​government money market funds as of February 28, 2014. Of this $​1.​27 trillion, institutional prime funds, other than tax-​exempt funds, managed approximately $​1.​19 trillion in assets and institutional tax-​exempt funds managed $​82 billion. Under the reforms, these funds will be subject not only to fees and gates, but also to an additional floating NAV requirement. As such, we believe as much as $​1.​269 trillion in assets could be at risk for being reallocated to government funds and other investment alternatives." However, the SEC continues, "neither the Commission nor most commenters believe that all institutional investors in non-​government funds will reallocate their assets. Institutional prime funds typically offer higher yields than government funds, and certain investors receive tax advantages from investing in tax-​exempt funds."

The Treasury/​IRS tax accounting proposal will mitigate some of the outflows, they say. "Additionally, the Commission, which has authority to set accounting standards, has clarified that an investment in a floating NAV money market fund generally meets the definition of a "​cash equivalent." And according to one commenter, more than half of survey respondents indicated the likelihood of using a floating NAV money market fund would increase if such a fund'​s shares are considered cash equivalents for accounting purposes. Thus, we believe these factors and actions taken by the Commission and other regulatory agencies should help preserve the attractiveness of institutional prime funds to investors, perhaps reducing the assets reallocated to alternatives."

How much will flow out? "It is difficult to estimate the amount of assets that institutional investors might reallocate from non-​government funds to either government funds or other investment alternatives. One commenter estimated that 64% or $​806 billion could shift from prime funds to government funds, whereas another commenter estimated that 25% of assets in its institutional prime funds would transfer permanently into government funds. A third commenter estimated a shift in assets of between $​500 billion and $​1 trillion." However, notes the SEC, these and other estimates were made before the tax accounting relief was approved. For these reasons the estimates "may overstate how investors are likely to actually behave under the final amendments that we are adopting today .... Commenters specifically noted that a combination of proposals would force most money market fund sponsors to exit the prime space, and would cause many investors to invest their cash assets in government money market funds, direct investments, bank deposits, or other investment alternatives."

Should flows increase to government funds, the SEC says, "To the extent that assets under management in government funds increase, we anticipate investors will have more government funds from which to choose than they do today. This expected increase in the number government funds could be because complexes that currently offer government funds will offer additional government funds or because other complexes will offer new government funds. In either case, competition among government funds should increase although the impact on competition likely should, at the margin, be larger if new complexes enter the government fund market. If an increase in demand for government funds, which must largely invest in eligible government securities, subsequently increases the demand for these securities, the rates on eligible government securities and hence yields on government funds might fall."

How might portfolio managers of institutional prime funds be impacted? "We anticipate that some institutional investors will continue to demand a combination of relative price stability, liquidity, and yields that are higher than the yields offered by government funds. Managers of floating NAV money market funds may respond to these investors in one of several ways. Some managers may respond by altering their portfolio management and preferentially investing portfolio holdings in shorter-​maturity, lower-​risk securities than they do today. They would do so to reduce NAV fluctuations and lessen the probability the fund'​s weekly liquid assets decline sufficiently for a fee or gate to be possible. These portfolio management changes may affect competition within the institutional prime money market fund industry (​or broader money market fund industry) if these funds more favorably compete with other less conservatively managed funds. They also could affect capital formation to the extent they shift portfolio investment away from certain issuers or certain maturities or lessen the yields passed through to investors from their money market fund investments. In addition, an increase in these types of funds could encourage issuers to fund themselves with shorter term debt."

Here'​s more on portfolio management of institutional prime. "Some portfolio managers of institutional prime money market funds may seek to competitively distinguish their funds post-​reform by altering their portfolio management and investing in relatively longer-​term or riskier securities than they do today. These funds may seek to appeal to investors that, if investing in a floating NAV money market fund that could be subject to fees or gates, now may be willing to sacrifice liquidity in times of stress or some principal stability for greater yield. The emergence of these types of money market funds may enhance competition in the money market fund industry among different types of institutional prime money market funds along the risk-​return spectrum. It also would affect changes in capital formation post-​reform to the extent that it shifts investment to issuers of longer-​term or riskier securities or increases yields paid to investors (​or increases management fees paid to certain types of fund complexes). Thus, depending on the magnitude of the primary reforms' effect on the assets managed by different types of money market funds, the type and number of institutional prime funds may contract overall, potentially limiting investors' choices among them, or may expand, potentially enhancing investors' choices among them. Accordingly, competition among institutional prime funds may increase or decrease with an impact that will likely be stronger if the number of complexes offering institutional prime funds changes."

On the competitive landscape, the SEC says "fund complexes that primarily advise government money market funds may benefit competitively as these funds are generally not affected by our primary reforms and may experience inflows, which would raise these fund advisers' management fee income. Similarly, fund complexes that manage mostly retail money market funds may be competitively advantaged post-​reform over those that primarily manage institutional prime funds. These latter funds will be subject to both our floating NAV and fees and gates reforms and thus may experience a greater decline in assets than retail money market funds as a result of our primary reforms. We thus anticipate our primary reforms may significantly alter the competitive makeup of the money market fund industry, producing related effects on efficiency and capital formation. We believe, however, that these changes are necessary to accomplish our policy goals."

Finally, they talk about the potential effects on CP. "​Historically, money market funds have been a significant source of financing for issuers of commercial paper, especially financial commercial paper, and for issuers of short-​term municipal debt.... Thus, we acknowledge that a shift by investors from non-​government money market funds to other investment alternatives could cause a decline in demand for commercial paper and municipal debt, reducing these firms and municipalities' access to capital from money market funds and potentially creating a decline in short-​term financing for them. If, however, money market fund investors shift capital to investment alternatives that demand the same assets as prime money market funds, the net effect on the short-​term financing markets should be small."

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The September issue of Crane Data'​s Money Fund Intelligence was sent out to subscribers Monday morning. The latest edition of our flagship monthly newsletter features the articles: "MMF Assets Jump in August; SEC Reforms Loom in 10/​16," which discusses how MMF assets have increased since new regulations were passed; "IMMFA'​s Susan Hindle Barone on MMFs in Europe," our monthly "​profile" with the Secretary General of the Institutional Money Market Fund Association; and, "MFI Intl Review: Sterling, USD MFs Gain; Euro Down," which looks at assets, market share, and trends among "​offshore" money market funds. We also updated our Money Fund Wisdom database query system with August 31, 2014, performance statistics, and sent out our MFI XLS spreadsheet this morning. (MFI, MFI XLS and our Crane Index products are available to subscribers via our Content center.) Our August 31 Money Fund Portfolio Holdings are scheduled to go out on Wednesday, Sept. 10.

The latest MFI newsletter'​s lead article comments, "When the Securities & Exchange Commission adopted money market fund reforms on July 23rd -- and subsequently posted in the Federal Register on August 14 -- there was an expectation among many that the new rules would result in outflows from money market funds. But here we are, about a month and a half later, and we haven'​t seen any yet. In fact, there have actually been inflows into money market funds, and more specifically, prime institutional MMFs, since July 23. Of course, the new rules have not yet kicked in and won'​t until October 2016. But still, it'​s a development that not everyone expected, given the level of concerns about the SEC proposal."

Our monthly "​profile" featuring IMMFA'​s Susan Hindle Barone. "Tell us about the history of IMMFA? How long have you been promoting money funds? IMMFA was set up in 2000. The original thought behind it was, some standardization would be good for the product in the sense that if investors were more familiar with what money funds were, what they represent, than it would be good for the product overall. A lot of the people that were involved then are involved today. Some of the original members are people like Peter Knight and David Hynes; Mark Hannam was involved back then; so was Jonathan [​Curry]. So it'​s a good gang of people. Back in 2000, I was working at Goldman Sachs on the short-​term debt desk, but I knew of them. I'​ve only been working for them since June of 2012."

She continued, "We have been hugely focused on the regulatory debate. IMMFA only represents CNAV triple A rated funds yet there'​s a possibility that they just won'​t exist in two years, so we'​re very conscious of that. We'​ve also been thinking about what does IMMFA represent? Does it represent the short term fund industry? Does it represent the funds that are CNAV? Does it represent only Europe? Does it represent anything to do with short-​term investing? We'​ve been throwing around a lot of ideas of what we think IMMFA should do and what people want it to do. Does it exist on a standalone basis? Are there other trade associations out there that cover our space but not with the same focus? It'​s definitely still evolving. We can'​t really come to any conclusions until we know what the regulations are going to look like."

The September MFI article on international money market trends says, "​With Crane'​s 2nd Annual European Money Fund Symposium just around the corner, we thought we'​d look at the international money fund management landscape -- from largest managers, to largest funds, to the regulatory environment. Of course, the international money market industry will be discussed in depth at the Euro Symposium, which will be held Sept. 22-​​23 at the Hilton London Tower Bridge in London, England. Visit www.​euromfs.​com for more details."

Crane Data'​s September MFI with August 31, 2014, data shows total assets increasing $​40.​1 billion (​after decreasing by $​20.​9 billion in July and decreasing by $​20.​6 billion in June) to $​2.​499 trillion (​1,​245 funds, 7 more than 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, unchanged) and 0.​16% (​Crane 100) on an annualized basis for both the 7-​day and 30-​day yield averages. (​Charged Expenses averaged 0.​12% and 0.​14% for the two main taxable averages.) The average WAM for the Crane MFA and the Crane 100 were 42 and 45 days, respectively, unchanged from the prior month. (​See our Crane Index or craneindexes.​xlsx history file for more on our averages.)

Finally, last-​minute preparations are being made for our European Money Fund Symposium, which will take place Sept. 22-​23 in London at the Hilton London Tower Bridge. Though there has been no word from European regulators and the newly elected European Parliament has yet to even commence, we expect them to eventually craft legislation similar to the SEC'​s. This will be a main topic of discussion at Euro MFS, along with other issues impacting Euro, Sterling, USD and "​offshore" money market funds domiciled in Dublin, Luxembourg and other European and global financial centers.

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The Federal Reserve Board and the FDIC finalized a rule on Wednesday to strengthen the liquidity positions of large financial institutions. The rule, called the Liquidity Coverage Ratio or LCR, was adopted under the international Basel III standards for banking. The Fed'​s new LCR rules, which go into effect, in part, January 1, 2015, are designed to ensure banks have sufficient funding to withstand a crisis. But Treasury Strategies, in an alert released Wednesday, believes it could be disruptive for corporate treasurers.

According to the Fed'​s press release on the LCR, "​The rule will for the first time create a standardized minimum liquidity requirement for large and internationally active banking organizations. Each institution will be required to hold high quality, liquid assets (​HQLA) such as central bank reserves and government and corporate debt that can be converted easily and quickly into cash in an amount equal to or greater than its projected cash outflows minus its projected cash inflows during a 30-​day stress period. The ratio of the firm'​s liquid assets to its projected net cash outflow is its "​liquidity coverage ratio," or LCR. The LCR will apply to all banking organizations with $​250 billion or more in total consolidated assets or $​10 billion or more in on-​balance sheet foreign exposure and to these banking organizations' subsidiary depository institutions that have assets of $​10 billion or more."

The final rule is quite similar to the proposed rule with a few key adjustments in response to public comments. "Those adjustments include changes to the range of corporate debt and equity securities included in HQLA, a phasing-​in of daily calculation requirements, a revised approach to address maturity mismatch during a 30-​day period, and changes in the stress period, calculation frequency, and implementation timeline for the bank holding companies and savings and loan companies subject to the modified LCR. The final rule does not apply to non-​bank financial companies designated by the Financial Stability Oversight Council for enhanced supervision. Instead, the Federal Reserve Board plans to apply enhanced prudential liquidity standards to these institutions through a subsequently issued order or rule following an evaluation of the business model, capital structure, and risk profile of each designated nonbank financial company."

The rule is based on a liquidity standard agreed to by the Basel Committee on Banking Supervision. "The LCR will establish an enhanced prudential liquidity standard consistent with section 165 of the Dodd-​Frank Wall Street Reform and Consumer Protection Act. The rule is generally consistent with the Basel Committee'​s LCR standard, but is more stringent in certain areas, including a shorter transition period for implementation. The accelerated transition period reflects a desire to maintain the improved liquidity positions that U.​S. institutions have established since the financial crisis, in part as a result of supervisory oversight by U.​S. bank regulators. U.​S. firms will be required to be fully compliant with the rule by January 1, 2017."

Tony Carfang, partner, Treasury Strategies Inc., provided some perspective Wednesday afternoon in a bulletin to his clients, corporate treasurers, saying the rules could impact their relationship with banks. He writes, "​The LCR requires banks to segregate your demand deposits into "​operational" and "​non-​operational" categories. Operational demand deposits are those arising from your day-​to-​day cash management and payments activities. Non-​operational demand deposits are those in excess of your daily activities, or rate-​sensitive deposits not subject to withdrawal limitations. In other words, non-​operational deposits are those you can quickly move in the event of a problem at your bank."

He continues, "Under LCR, banks are free to use your operational deposits to make loans, leases and other general banking activities, much as they do today. Non-​operational deposits can no longer be used in that manner. They must be backed only by high-​quality, highly liquid assets, most likely US government securities. Thus, they are far less valuable to your banks and will be a drag on your banks' overall rates of return. Not all banks will be impacted in exactly the same way, however."

What does it mean for treasurers? "As banks look to attract operational demand deposits and discourage non-​operational deposits, the economics of your banking relationship will change. We expect to see changes in bank service pricing and earnings credit rates, as well as entirely new deposit products. Depending on your banks, your cash flow volatility, service mix and absolute deposit levels, you may need to redesign your operational banking structure or reallocate your deposits."

Joe Abate, money market strategist at Barclays, commented on Fed Governor Tarullo'​s plans to tie supplemental capital requirements to a bank'​s reliance on short-​term funding. He writes, "​Fed Governor Tarullo noted that while requiring banks to hold more immediately accessible liquidity was a strong step in the right direction toward reducing systemic risk, additional work remains. Regulators "intend to incorporate reliance on short-​term wholesale funding as a factor in setting the amounts of capital surcharges applicable to the most systemic banking organizations.""

He continues, "​It is unclear how the Fed intends to proceed. For example, it might recommend an additional 1% capital surcharge based on the volume of wholesale funding a bank has under 30 days above a pre-​determined limit. However, it is unclear what that "​comfort threshold" might be. His statement refers explicitly to banking organizations in which, short-​term wholesale funding has fallen sharply since the financial crisis. Indeed, 20% of their liabilities are funded in repo. By contrast, the institutions with the biggest repo financing as a share of their liabilities are not banks, but broker/​dealers where repo still accounts for 50% of their liabilities. And the composition of their liability mix hasn'​t changed much in the past few years."

Abate adds, "Moreover, Fed Governor Tarullo mentioned that there is an international effort to "​develop proposals for minimum collateral haircuts" in secured funding transactions. The Fed, among other regulators has long been concerned by the pro-​cyclical nature of repo margins that were in a "​race to the bottom" ahead of the financial crisis and then abruptly (​and sharply) moved higher as the crisis unfolded. The Fed'​s concern centers particularly on the haircuts for non-​government collateral. Both proposals -- capital surcharges based on the reliance on short-​term funding and minimum secured funding haircuts -- have been mentioned in the past by Fed officials. Together with last month'​s repo conference, it seems the Fed is edging closer to releasing a proposal."

Finally, in other news, the European Central Bank cut the interest rate on its deposit facility by 10 basis points to -​0.​20%, further into negative territory than its already historic lows. (​The ECB lowered the deposit rate to -​0.​10% on June 11, see Crane Data'​s News, "ECB Negative Deposit Rate Unlikely to Impact, Push Euro MFs Negative." Also, the main refinancing operations of the Eurosystem will be decreased by 10 basis points to 0.​05% and the rate on the marginal lending facility will be decreased by 10 basis points to 0.​30%, effective September 10, 2014.

In addition, ECB president Mario Draghi also announced plans to buy private sector assets. "​The Governing Council decided to start purchasing non-​financial private sector assets. The Eurosystem will purchase a broad portfolio of simple and transparent asset-​backed securities (​ABSs) with underlying assets consisting of claims against the euro area non-​financial private sector under an ABS purchase programme. This reflects the role of the ABS market in facilitating new credit flows to the economy and follows the intensification of preparatory work on this matter, as decided by the Governing Council in June. In parallel, the Eurosystem will also purchase a broad portfolio of euro-​denominated covered bonds issued by MFIs domiciled in the euro area under a new covered bond purchase programme. Interventions under these programmes will start in October 2014."

​

Money market pros have had time to take in and process the latest actions from the Federal Reserve and have detected an attitude adjustment by the Fed with respect to interest rates and the reverse repo program. Specifically, Federated'​s Debbie Cunningham, chief investment officer, global money markets, suggests a possible shift in the Fed'​s thinking on interest rates in latest "Month in Cash" column, "Fed Shifting to the Other Side of Average." Writes Cunningham, "​While reflecting on the recently released minutes of the July Federal Open Market Committee (​FOMC), I felt one good way to explain the Federal Reserve'​s slight shift in policy language is to imagine a line that represents the average of the members' opinions on when the federal funds rate will raise and to what level. This year to date, the majority of the officials have fallen below the mean, so the Fed has tended to be the "​dovish" side of the average, in need of continued accommodative policy to reach target employment and inflation levels. This is why the Fed is likely to further draw out the inordinate amount of time rates are extremely low. Lately, however, more policymakers have crossed over that magic line, pushing the Fed to watch out for overstimulation instead in light of an improving economy."

She explains, "​It is such a subtle shift, but has a huge impact. Chair Janet Yellen'​s keynote address at the recent Jackson Hole symposium encapsulated this. She was much less dovish than she has been in past speeches and I think that has to be indicative of a growing debate and discussion within the FOMC of the risk of overshooting targets. The minutes of the last FOMC meeting stated, "Indeed some participants viewed the actual and expected progress toward the committee'​s goals as sufficient to call for a relatively prompt move toward reducing policy accommodation...." In Fed-​speak, "​some" is generally thought to be as many as five, which is a pretty big number of members."

Adds Cunningham, "We continue to assert that the Fed will not raise the benchmark rate until probably second quarter of 2015. For some time, the consensus prediction for a rise was firmly at the end of the second quarter. It is now trending toward May and April, a response to that shift across the mean. For the most part, our Prime portfolios are on the short end of the weighted average maturity (​WAM) range, while their weighted average lives (​WAL) on the long end. That'​s due to our desire to own floating-​rate securities and sell longer-​dated, fixed-​rate paper. The implication is that, later in the year, we will start to see a slight rise in yields in the 1- to 3-​month sector. We think that will be a good balance for the portfolio to keep in line with market rates."

Wells Fargo'​s Dave Sylvester, head of money funds, and his team published a column on the Fed'​s reverse repo program. "​In the minutes of the July 30–​31, 2013, meeting of the Federal Open Market Committee (​FOMC) released in August 2013, we learned the FOMC had been briefed "​on the potential for establishing a fixed-​rate, full allotment overnight reverse repurchase agreement facility as an additional tool for managing money market interest rates.... The purpose of this new overnight reverse repurchase agreement facility (​ON RRP) would be to place a floor under interest rates to improve the effectiveness of the monetary policy implementation when the FOMC chooses to raise short-​term rates."

Continues Sylvester, "In addition to achieving its monetary policy goal of placing a floor under rates, ON RRP has also given money market funds some much needed supply, considering other sources of liquid investments, such as bank deposits and Treasury bills, continue to contract.... Some money market fund managers have hailed ON RRP as the solution to the supply woes that have plagued the money markets for the past half-​decade or more, but it now appears the Fed may not be quite as enthusiastic about ON RRP as these money market funds."

He says, "The minutes from the FOMC'​s June 17-​18 meeting revealed that some members had concerns about "​potential unintended consequences" of the ON RRP facility. Writes Sylvester, "​According to the minutes, "most participants expressed concern that in times of financial stress, the facility'​s counterparties could shift investments toward the facility and away from financial and nonfinancial corporations, possibly causing disruptions in funding that could magnify the stress." In other words, by providing an indirect alternative to bank deposits that was unlimited in size (​full allotment), ON RRP could exacerbate a bank run."

The Wells piece explains, "Further, "... a number of participants noted a relatively large ON RRP facility had the potential to expand the Federal Reserve'​s role in financial intermediation and reshape the financial industry in ways that were difficult to anticipate." The minutes also revealed that, "a number of participants expressed concern about conducting monetary policy operations with nontraditional counterparties." We also learned that where many money market participants saw the rate on ON RRP being set at or near IOER, the FOMC saw a wider spread, "... perhaps near or above the current level of 20 basis points [​bps; 100 bps equals 1.​00%]..." would be more effective."

Sylvester continues, "As market participants were digesting this rejection by their new BFF, the minutes of the July 29–​30, 2014, FOMC meeting revealed an even more diminished role for ON RRP. The committee reaffirmed the role of the "... federal funds rate as the key policy rate ..." and its support of "... a target range of 25 bps for this rate at the time of liftoff and for some time thereafter." ON RRP was pushed further back in line as "​participants agreed that adjustments in the IOER rate would be the primary tool used to move the federal funds rate ... and influence other money market rates." Gone was the promise of a permanent new source of unlimited supply implied by the term full allotment used in the initial discussion of ON RRP a year ago. As tests revealed that the facility has been effective in establishing a floor under rates even with a limit on the allocation to each counterparty, the FOMC was comfortable now saying, "... the ON RRP facility should be only as large as needed for effective monetary policy implementation and should be phased out when it is no longer needed for that purpose.""

Why the change in attitude toward RRP? "​We think there are several answers to that question. For one thing, the change is probably not all that sudden and the discussion stems from an evaluation by the FOMC of the results of its now year-​long test of ON RRP. It would probably be more disturbing if, after a year of tests, it made no changes to the original layout of the facility. One of the downsides to a more transparent process at the Fed is there can be a lot of cross talk. For those of us used to speaking in one corporate voice, this can sometimes be confusing. We must also recognize this is a sea change in the mechanics of monetary policy and the Fed is a fundamentally conservative organization that may not handle radical change all that well. That the necessity of such a dramatic change stems from the explosion in its own balance sheet, of its own doing, probably doesn’​t alter that basic feature of the Fed."

He continues, "The idea of ON RRP as a potential facilitator of a bank run probably looms larger in the minds of the FOMC members than in those of money market participants. Low probability, high negative outcome events are of utmost interest to the Fed, and because unlimited size does not appear to be necessary in order to establish a floor under money market rates, there is no need to even open the possibility -- better to limit the size now than to scramble to find the right formula and do so in the midst of a crisis. The idea that the Fed is uncomfortable with taking on a role as financial intermediary should not be discounted. These are, after all, the same folks who sponsored the transparently titled "Workshop on the Risks of Wholesale Funding" at the New York Fed this past month, and several Fed presidents have consistently been outspoken critics of money market funds during the recent debate on regulatory change. So the idea of actually transacting with money market funds and becoming an integral part of the woefully misnamed shadow banking system is likely an anathema to some of the FOMC members."

So where does this leave us, asks Sylvester? "​If the Fed is still interested in placing a reasonably firm floor under money market rates -- and every indication is that it is -- then we will likely see a continuation of the ON RRP facility beyond the end of the test period. Regulatory changes mandating holdings of high-​quality liquid assets by banks, money market funds, derivative markets participants, and others, along with a continued strong investor preference for liquidity, point to a strong demand for overnight investments. Prior to the test of the ON RRP, we did see repo rates dip into negative territory on occasion, so it would appear that ON RRP fixes that particular problem.... So, we are put on notice that the Fed is adopting ON RRP with reservations and will not keep the program in place a moment longer than is absolutely necessary. But we are not as optimistic as the Fed about its ability to shrink its balance sheet, which now stands at an astounding $​4.​5 trillion and consists mostly of U.​S. Treasury, agency, and mortgage-​backed securities acquired in the implementation of its quantitative easing programs. So we would expect, absent a better idea, ON RRP will be a feature through this entire next cycle of tightening of monetary policy and up to the next time the Fed chooses to ease -- or, in money market lives, well over a thousand overnight maturity rolls. Who knows? By the time it'​s all over we may all become BFFs yet!"

​

Attorney Stephen Keen from the law firm Reed Smith released a series of papers on fair valuation and mutual fund directors. The fourth in the series, released August 29, deals specifically with "Fair Valuation and Mutual Fund Directors: New Guidance from the SEC." Keen, who spoke at Crane'​s Money Fund Symposium in June on pending (​at the time) SEC reforms, has more to say now that they are reality. "In June, I began a series of Client Alerts on Fair Valuation and Mutual Fund Directors. The third installment in the series was released in July. Although I was not certain what path the series would take, I knew where it would end -- with an irrefutable argument that it was past time for the SEC to address the use of pricing services to fair value securities, particularly fixed-​income securities."

He writes, "​In policy arguments, as in comedy, timing is everything. The SEC stole my punch line when it recently issued new guidance on the use of pricing services. The guidance is buried in the bowels (​an apt phrase in this instance) of the SEC'​s July 23 release adopting money market fund reforms. A section providing "Guidance on the Amortized Cost Method of Valuation and Other Valuation Concerns" begins at page 270 of the 869-​page release. The SEC tacked much of the 11 pages of guidance onto section 404.​05 of the Codification of Financial Reporting Policies (​CFRP)."

Keen provides a summary of the guidance. The first part is on "​Previous Guidance Codified by the Release," referring to the July 23rd reforms. "​Much of the guidance included in the Release is already in section 404 of the CFRP. In fact, the amount of repetition in the revised section may confuse a first-​time reader. For example, subsection 404.​03.​b.​iv (​Securities Valued "​in Good Faith") already stated, "​it is incumbent upon the board of directors to satisfy themselves that all appropriate factors relevant to the value of securities for which market quotations are not readily available have been considered and to determine the method of arriving at the fair value of each such security." New subsection 404.​05.​c.​2 (​Other Valuation Matters) quotes this statement verbatim, both in footnote 896 and in the sentence immediately following this footnote. Like Lewis Carroll'​s Bellman, when it comes to valuation guidance, "​What [​the SEC] tell[​s] you three times is true," he writes.

The new subsection also includes guidance not previously part of the CFRP, particularly: 1) "Directors cannot delegate their statutory duty to determine the fair value of fund portfolio securities," although the SEC reaffirmed that directors "​may appoint persons to assist them in the determination of such value, and to make the actual calculations pursuant to the board'​s direction." 2) Money market funds may not use amortized cost for purposes of "​shadow pricing" their portfolios, that is, monitoring deviations of the fund'​s net asset value "​calculated using available market quotations (​or an appropriate substitute that reflects current market conditions)" from its amortized cost value. 3) Fair value cannot be based on what a buyer might pay at some later time, such as when the market ultimately recognizes the security'​s true value as currently perceived by the portfolio manager. Funds also may not fair value portfolio securities at prices not achievable on a current basis on the belief that the fund would not currently need to sell those securities."

He adds, "​This last statement comes from the Heartland Directors Order discussed in the first Client Alert. This may be a useful reminder for attorneys to take care when negotiating offers of settlement, as they may be creating new standards for all funds and their directors."

The second part is on "​Guidance Regarding the Use of Pricing Services." Writes Keen, "This new subsection of the CFRP begins by noting, "​evaluated prices provided by pricing services are not, by themselves, '​readily available' market quotations or fair values '​as determined in good faith by the board of directors'.... It is important to understand that not all prices obtained from a pricing service are "​evaluated prices." ... The third Client Alert also showed why market quotations are generally not available for most fixed-​income securities or other securities traded over the counter. For these securities, pricing services provide "​evaluated prices": prices based on the pricing service'​s proprietary pricing models and, typically, observable market inputs. With regard to evaluated prices, pricing services "​acknowledge that they provide only '​good faith' opinions on valuation." ... As the second Alert explained, this precludes funds from treating an evaluated price as the "​value" of a portfolio security for purposes of the Investment Company Act of 1940."

He continues, "Pricing services therefore must fall within the category of persons whom directors "​may appoint ... to assist them in the determination of such value, and to make the actual calculations pursuant to the board'​s direction." In selecting a pricing service to provide such assistance, new subsection 404.​5.​c suggests that directors may want to consider: "​the inputs, methods, models, and assumptions used by the pricing service to determine its evaluated prices;" how changes in market conditions may affect these factors; "​the quality of the evaluated prices provided;" and "​the extent to which the service determines its evaluated prices as close as possible to the time as of which the fund calculates its net asset value." Finally, directors have an ongoing duty continuously to review the appropriateness of the method used in fair valuing a portfolio security. Directors should not rely on evaluated prices if they do "​not have a good faith basis for believing that the pricing service'​s pricing methodologies produce evaluated prices that reflect what the fund could reasonably expect to obtain for the securities in a current sale under current market conditions."

The third section is on "​Guidance Regarding Use of Amortized Cost." Keen states, "This new subsection of the CFRP begins by discussing money market funds in particular, but then refers to the possibility that "​managers of floating NAV money market funds may have an incentive to use amortized cost valuation whenever possible in order to help stabilize the funds' NAV per share." Apparently, the SEC intends for the new guidance in this subsection to apply to all mutual funds that use amortized cost as a fair value.

Finally, Keen discusses the "​Implication for Independent Directors." He explains, "​As noted in the introduction, an in-​depth discussion of this new guidance must await further Client Alerts. Nevertheless, it is possible to make a few superficial observations. First, directors should review their existing policies and procedures for determining the fair value of securities. Directors should consider whether revisions to these policies and procedures might be necessary to: 1) Avoid any implication that the board of directors has delegated its responsibility to fair value securities to a pricing service, a valuation committee or any other person. 2) Explicitly treat evaluated prices from pricing services at inputs into fair values, rather than as fair values "​by themselves." 3) Conform the process for selecting and monitoring pricing services to the new guidance. 4) Identify any difference between the time as of which a pricing service determines its evaluated prices and the time as of which a fund calculates its NAV. 5) Require the daily shadow pricing of all securities with remaining maturities of 60 days or fewer valued at amortized cost."

Keen concludes, "​Regarding this last point, insofar as non-​money market funds typically hold small amounts of securities with remaining maturities of 60 days or fewer, directors may want to consider simply using the shadow price of these securities, rather than amortized cost, as their fair value <​b:>`​_. Second, directors should request a review of current disclosures regarding their funds' fair valuation process. Such disclosures should not imply that the board of directors has delegated its responsibility to fair value securities or that evaluated prices are market quotations. Finally, if they have not done so already, directors should study the "​inputs, methods, models, and assumptions used by" their funds' pricing services. This is a necessary step for assessing the feasibility of independent directors complying with the SEC'​s new guidance on fair valuation."

In other news, JP Morgan launched a new RMB money market fund in China, according to The Asset, an Asian investment publication. The article says, "J.​P. Morgan Asset Management (​JPMAM) has launched the China International Fund Management'​s (​CIFM) second renminbi money market fund for institutional investors in China. Following the successful launch of their first institutional money market fund (​MMF) in China in 2005, CIFM, a joint venture of JPMorgan Asset Management (​UK) and Shanghai International Trust Co., has again leveraged the platform of JPMAM'​s short-​term fixed income investment arm J.​P. Morgan Global Liquidity (​JPMGL)." The Asset article goes on, "​The IPO raised more than 620 million renminbi (​US$​100 million) from over 200 initial institutional investors and the fund opened to institutional investors in China for regular investment on August 27 2014."

​

Late Thursday, ICI posted its latest weekly "Money Market Fund Assets" report, which showed that money fund assets rose for the 4th week in a row in August. Month-​to-​date through August 28, total money fund assets have increased by $​54.​2 billion, according to Crane'​s Money Fund Intelligence Daily. (​Note: these numbers are inflated by about $​13 billion, since we added several new funds to our MFI Daily last week, so the adjusted gain for August is up $​41 billion.) Prime Institutional assets, which are the most impacted by the SEC'​s recent reforms have increased by $​17.​5 billion month-​to-​date through August 28 (​or up $​11 billion when we remove the new funds added). ICI also released its latest "Trends in Mutual Fund Investing, July 2014" late last week, which tells us that total money fund assets decreased by $​16 billion in July to $​2.​54 trillion after decreasing $​17 billion in June, increasing $​3.​8 billion in May, and decreasing $​57.​9 billion in April. Below, we review ICI'​s latest monthly and weekly assets survey, and our daily numbers, as well as ICI'​s July Portfolio Composition statistics.

ICI'​s latest weekly "​Money Market Fund Assets" release says, "Total money market fund assets increased by $​10.​80 billion to $​2.​60 trillion for the week ended Wednesday, August 27, the Investment Company Institute reported today. Among taxable money market funds, Treasury funds (​including agency and repo) increased by $​7.​02 billion and prime funds increased by $​5.​52 billion. Tax-​exempt money market funds decreased by $​1.​74 billion." Assets have risen for four consecutive weeks and have increased by $​40.​9 billion, but they have decreased by $​124 billion, or 4.​5% YTD.

The release explains, "Assets of retail money market funds decreased by $​2.​81 billion to $​902.​83 billion. Among retail funds, Treasury money market fund assets decreased by $​1.​41 billion to $​201.​35 billion, prime money market fund assets decreased by $​700 million to $​514.​87 billion, and tax-​exempt fund assets decreased by $​700 million to $​186.​61 billion. Assets of institutional money market funds increased by $​13.​61 billion to $​1.​69 trillion. Among institutional funds, Treasury money market fund assets increased by $​8.​43 billion to $​731.​07 billion, prime money market fund assets increased by $​6.​22 billion to $​890.​20 billion, and tax-​exempt fund assets decreased by $​1.​04 billion to $​70.​97 billion."

The latest numbers from our Money Fund Intelligence Daily show that total money fund assets are $​2.​49 trillion through August 28, up $​52.​4 billion month-​to-​date and down $​121.​8 billion (​4.​6%) year-​to-​date (​through August 28). The Crane Money Fund Average, which tracks all taxable funds, has jumped $​52.​3 billion month-​to-​date to $​2.​24 trillion through August 28. Year-​to-​date, the Crane Money Fund Average is down $​108.​7 billion; over the last 7 days it'​s down $​12.​6 billion. The Crane Retail Money Fund Index has increased $​10.​9 billion MTD to $​767.​9 billion but is down $​26.​9 billion YTD through August 28. The Crane Institutional Money Fund Index is up $​41.​5 billion to $​1.​47 trillion MTD and down $​81.​7 billion YTD.

ICI'​s July "​Trends" says, "The combined assets of the nation'​s mutual funds decreased by $​212.​48 billion, or 1.​4 percent, to $​15.​45 trillion in July, according to the Investment Company Institute'​s official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI.... Bond funds had an outflow of $​9.​09 billion in July, compared with an inflow of $​10.​66 billion in June. Taxable bond funds had an inflow of $​7.​64 billion in July, versus an inflow of $​8.​35 billion in June. Municipal bond funds had an inflow of $​1.​45 billion in July compared to an inflow of $​2.​31 billion in June."

It adds, "Money market funds had an outflow of $​16.​12 billion in July, down 0.​6%, compared with an outflow of $​17.​15 billion in June. In July, funds offered primarily to institutions had an outflow of $​19.​88 billion and funds offered primarily to individuals had an inflow of $​3.​77 billion." Money funds represent 16.​5% of all mutual fund assets while bond funds represent 22.​5%. For the 12 months through 7/​31/​14, ICI'​s monthly series shows money fund assets down by $​66.​2 billion, or 2.​5%.

ICI also released its latest "Month-​End Portfolio Holdings of Taxable Money Funds," which verified our reported plunge in Repo and Treasurys in July, and jump in CDs. (​See Crane Data'​s July 14 News, "​August MF Holdings Show Plunge in Repo, Drop in Treasury, Jump in TDs.") ICI'​s latest Portfolio Holdings summary shows that Holdings of Certificates of Deposits increased by $​59.​9 billion in July (​after decreasing $​60.​7 billion in June, and increasing $​9.​9 billion in May and $​50.​3 billion in April) to $​601.​5 billion (​or 26.​3% of taxable MMF holdings). CDs once again became the largest segment of taxable money fund portfolio holdings in July, bumping Repo out of first place, according to ICI'​s data series.

Repos fell by $​71.​9 billion, or 12.​5%, after rising by $​63.​9 billion in June and $​33.​5 billion in May, to $​501.​5 billion (​21.​9% of assets). Repos are now the second largest composition segment. Treasury Bills & Securities, the third largest segment, fell $​16.​7 billion (​after dropping $​3.​6 billion in June, dipping $​29.​7 billion in May, and plunging $​52.​7 billion in April) to $​359.​9 billion (​15.​7%).

Commercial Paper, which increased by $​6.​9 billion, or 2.​0%, remained the fourth largest segment just ahead of U.​S. Government Agency Securities. CP holdings totaled $​353.​8 billion (​15.​5% of assets) while Agencies grew by $​16.​7 billion, or 5.​0%, to $​350.​0 billion (​15.​3%). Notes (​including Corporate and Bank) fell by $​1.​6 billion to $​66.​0 billion (​2.​9% of assets), and Other holdings dropped by $​675 million to $​48.​0 billion (​2.​1%).

The Number of Accounts Outstanding in ICI'​s Holdings series for taxable money funds decreased by 3,​798 to 23.​640 million, while the Number of Funds decreased by 2 to 373. Over the past 12 months, the number of accounts fell by 971 million and the number of funds declined by 14. The Average Maturity of Portfolios increased by 1 day to 45 days in July. Over the past 12 months, WAMs of Taxable money funds declined by 4 days.

Note: Crane Data updated its August MFI XLS to reflect the 7/​31/​14 composition data and maturity breakouts for our entire fund universe on August 20. 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 latest version of this new file.)

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