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The Investment Company Institute released its latest weekly "Money Market Mutual Fund Assets" report and its latest monthly "Trends in Mutual Fund Investing, December 2014" yesterday. The former shows money fund assets dropping for the 4th week in a row, while the latter shows that total money fund assets increased by $​81.​4 billion in December, or 3%, to $​2.​762 trillion. Money market funds posted 5 straight months of asset gains to end the year, increasing by $​21.​6 billion in November, $​19.​2B in October, $​22.​7B in September, and $​34.​0 billion in August. But they have declined every week so far in 2015, down by $​31 billion YTD, to $​2.​702 trillion. For calendar 2014, ICI'​s monthly series shows money fund assets were up (​barely) by $​7.​9 billion, or 0.​3%.

ICI'​s weekly says, "Total money market fund assets decreased by $​2.​54 billion to $​2.​70 trillion for the week ended Wednesday, January 28, the Investment Company Institute reported today. Among taxable money market funds, Treasury funds (​including agency and repo) decreased by $​6.​98 billion and prime funds increased by $​7.​27 billion. Tax-​exempt money market funds decreased by $​2.​82 billion." Month-​to-​date in January (​through 1/​28), money fund assets have declined by $​31 billion, or 1.​1%.

It explains, "Assets of retail money market funds decreased by $​5.​13 billion to $​902.​88 billion. Among retail funds, Treasury money market fund assets decreased by $​460 million to $​197.​75 billion, prime money market fund assets decreased by $​2.​72 billion to $​515.​89 billion, and tax-​exempt fund assets decreased by $​1.​95 billion to $​189.​23 billion. Assets of institutional money market funds increased by $​2.​60 billion to $​1.​80 trillion. Among institutional funds, Treasury money market fund assets decreased by $​6.​52 billion to $​787.​40 billion, prime money market fund assets increased by $​9.​99 billion to $​939.​53 billion, and tax-​exempt fund assets decreased by $​870 million to $​71.​98 billion."

The Trends report says, "The combined assets of the nation'​s mutual funds decreased by $​104.​94 billion, or 0.​7 percent, to $​15.​86 trillion in December, according to the Investment Company Institute'​s official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI. Bond funds had an outflow of $​19.​01 billion in December, compared with an inflow of $​14.​96 billion in November."

It adds, "Money market funds had an inflow of $​81.​43 billion in December, compared with an inflow of $​21.​65 billion in November. In December funds offered primarily to institutions had an inflow of $​67.​68 billion and funds offered primarily to individuals had an inflow of $​13.​75 billion." Money funds represent 17.​2% of all mutual fund assets (​up from 16.​3% last month) while bond funds represent 21.​8%.

ICI also released its latest "Month-​End Portfolio Holdings of Taxable Money Funds," which show sizable increases in Repos, Treasuries, and Agencies, and a drop in CP and CDs in December. (​See Crane Data'​s Jan. 13 News, "January Portfolio Holdings Show Spike in Fed Repo, Treasuries" on this topic too.) ICI'​s latest Portfolio Holdings summary shows that Repo holdings increased $​124.​6B, or 23.​5%, to $​654.​9B, after increasing $​17.​9 billion last month. Repos represent 26.​6% of taxable MMF holdings and jumped ahead of CDs as the largest segment. Holdings of CDs (​including Eurodollar) decreased by $​79.​6 billion, or 12.​8%, in December to $​544.​7 billion, after increasing $​13.​5B in November. CDs represent 22.​1% of assets and fell to the second largest composition segment.

Treasury Bills & Securities, which increased by $​50.​7B, or 13.​7%, remained the third largest segment. Treasury holdings totaled $​419.​2 billion (​17.​0% of assets). U.​S. Government Agency Securities jumped into fourth place, increasing $​36.​7B, or 10.​4%, in December to $​390.​3 billion (​15.​8% of assets). Commercial Paper dropped to the fourth largest segment, decreasing $​21.​3B, or 5.​9%, to $​338.​0 billion. They represent 13.​7% of assets. Notes (​including Corporate and Bank) increased by $​5.​8 billion, or 7.​9%, to $​79.​5 billion (​3.​2% of assets), and Other holdings (​primarily Time Deposits) decreased by $​45.​2 billion to $​38.​9 billion.

The Number of Accounts Outstanding in ICI'​s Composition tables for taxable money funds decreased by 112.​1 thousand to 23.​474 million, while the Number of Funds remained the same at 365. Over the past 12 months, the number of accounts fell by 644.​3 thousand and the number of funds declined by 17. The Average Maturity of Portfolios decreased by 2 days to 44 days in December. Over the past 12 months, WAMs of Taxable money funds have declined by 3 days. Note: Crane Data has updated its January MFI XLS to reflect the 12/​31/​14 composition data and maturity breakouts for our entire fund universe. (​Visit our Content Center to access our archives and the latest version of MFI XLS.)

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The Federal Reserve'​s Open Market Committee concluded its latest meeting yesterday and indicated no imminent change in its outlook for interest rates. The Fed continues to remain "​patient" in its shift towards normalizing monetary policy. In other news, the Federal Reserve Bank of New York announced more term reverse repo terms for February and March. The new FOMC Statement says, "​Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to decline further in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate. The Committee continues to monitor inflation developments closely."

It continues, "To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/​4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress -- both realized and expected -- toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. However, if incoming information indicates faster progress toward the Committee'​s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated."

Further, "​The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-​backed securities in agency mortgage-​backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee'​s holdings of longer-​term securities at sizable levels, should help maintain accommodative financial conditions. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-​run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-​consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run."

Also, late yesterday, the NY Fed issued another "Statement Regarding Term Reverse Repurchase Agreement Operational Exercises." It says, "The Federal Reserve continues to enhance operational readiness and increase its understanding of the impact of RRPs through technical exercises. In further support of its objectives, the FOMC instructed the Desk to examine how term RRP operations might work as an additional supplementary tool to help control the federal funds rate. In support of this goal, the FOMC instructed the Desk to conduct a series of term RRP operations in February and early March, and to conduct a series of term RRP operations that span the March 2015 quarter-​end."

The Statement continues, "The FOMC instructed the Desk to conduct a series of term RRP operations from mid-​February through early March. These operations will mature no later than March 12, will be open to all eligible RRP counterparties, and will use Treasury collateral. These term RRP operations will be subject to an overall size limit outstanding at any one time of up to $​50 billion. This limit is in addition to the limit on overnight reverse repurchase agreements, which remain subject to a separate overall size limit of $​300 billion per day. The first of these term RRP operations is anticipated to be approximately $​10 billion and to take place on or around February 12. The Desk will release further information about these operations on or around February 5."

Finally, the NY Fed adds, "The FOMC also instructed the Desk to conduct term RRP operations that cross the March 2015 quarter-​end. The operations will mature on several dates in early April. The operations will be open to all eligible RRP counterparties and will use Treasury collateral. The Desk intends to offer the operations via auction at various times in late March. These term RRP operations will be subject to an overall size limit of $​200 billion. This limit is in addition to the limit on overnight reverse repurchase agreements, which remain subject to a separate overall size limit of $​300 billion per day. The Desk will release further information about these term RRP operations on or around March 2."

In other news, consulting firm Treasury Strategies held its 9th Annual "​State of the Treasury Profession" webinar on Wednesday. The theme of the presentation was "Seize the Day," as the nearly 1,​000 corporate treasurers in attendance were encouraged to "​seize the benefits" that lay ahead, explained Tony Carfang, Partner, Treasury Strategies. One of the challenges on the horizon relate to money fund reform and the fluctuating NAV. "Most of you invest in money market funds as important source of liquidity and with the technology we have in place, coupled with some things that are currently being developed, it should actually be relatively easy to support a fluctuating NAV money market fund, something that we thought even 2 or 3 years ago would be very difficult." He said this was one example of how treasurers are now "​empowered to seize the day."

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Crane'​s 5th Annual Money Fund University, a two-​day crash course in money market mutual funds, attracted nearly 100 attendees to the Stamford Marriott in Stamford, Conn., late last week. Our Day 1 recap features coverage of the History of Money Funds, the Federal Reserve, Interest Rates and Money Fund Math, and Fund Ratings, as well as sessions explaining the various Instruments of the Money Markets (​including Repurchase Agreements, Commercial Paper, CDs, Tax-​Exempt/​VRDNs, CDs, Treasurys, and Time Deposits). Day 2, which we will report on in coming days (​and in our February MFI), focused exclusively on Money Fund Regulations. "A day and a half is really not enough time to learn about a space as big as the money fund sector, but we'​re going to give you a crash course and try," said Peter Crane, President, Crane Data, as well as host and MC for the event. He opened the conference leading a session called "History and Current State of Money Funds. (​Note: Crane Data'​s next conference will be our flagship Money Fund Symposium, June 24-​26 in Minneapolis. The next European Money Fund Symposium will be Sept. 17-​18 in Dublin and our next MF University will be Jan. 21-​22, 2016, in Boston.)

"​In 1994, when I started writing about money funds and when the Community Bankers Fund '​broke the buck,' the space was only about $​500 billion. Money market funds were not this behemoth that they were when the Reserve Fund broke the buck in 2008 and almost took down the world economy with it. Money funds peaked at $​3.​9 trillion in January 2009 after Reserve broke the buck; money was still pouring in because money funds lagged the money markets." Since that time, money fund assets declined precipitously over the next few years, dropping by about 15% per year in 2010 and 2011, he explained. But then the last 3 years in a row, money fund assets have clawed higher despite a near zero interest rate environment. "The fact that money fund assets have gone up fractionally the last 3 years in a row is just mind boggling," he said, testament to the safety and stability of the funds, which were made even safer by recent reforms.

On the other hand, there is the question of how recent reforms will impact money funds going forward, particularly Prime Institutional, which will be subject to a floating NAV in October 2016. "Institutional investors say they are going to leave, but as Churchill said about America, institutional investors will do the right thing, and stay in prime institutional money funds, after they'​ve exhausted every other possibility," quipped Crane. He believes that any outflows we do see from Prime Institutional MMFs will be "​dwarfed by inflows from bank deposits and perhaps from bond funds as well."

In the session that followed, two of the leading strategists in the space discussed "The Federal Reserve and US Money Markets." Brian Smedley, US Rates Strategist at BofA Merrill Lynch Global Research, shared his thoughts on when interest rates will rise. "Our expectation is that the Fed will start to shift up the Fed Funds target range starting in September of this year and from there we see hikes proceeding every other meeting, so half as fast as what they pursued last time." He expects it will go up to the 0.​25-​0.​50% range in September, then to 0.​50-​0.​75% in December 2015. By December 2016, rates will reach the 1.​50-​1.​75% range, he said.

"There'​s an old proverb that says, "​May you live in interesting times," and I think that'​s a fairly accurate description of financial market conditions, certainly in money markets at the moment," said Joseph Abate, Senior Vice President, Liquid Market Research at Barclays Capital. He focused on 4 topics; 1) the ongoing shortage of government safe assets in the financial sector and how that effects behavior in money markets, 2) how the repo market is changing largely because of dynamics related to the Fed and regulation, 3) the Federal Reserves arsenal of tools, namely reverse repo and term deposits, and 4) market liquidity, especially in prime assets. Going forward, he said, "​The next battle, if you will, is not going to show up on this front, it'​s going to come from somewhere else, and I think it'​s going to be liquidity."

In her overview of the "Instruments of the Money Markets," J.​P. Morgan Securities' Teresa Ho, Vice President, Short Duration Strategy, talked about challenges related to supply. "At its peak (​in 2007) total money market supply was around $​11.​5 trillion. If you exclude Treasurys, the peak was about $​9.​5 trillion" she said. "Fast forward to today, and that has fallen to $​5.​5 trillion (​excluding Treasurys) so we'​ve seen a drop of about $​4 trillion in the sector. As you might expect, a lot of it was driven by banks.

Case in point, the commercial paper market peaked at about $​2 trillion at the end of 2006; half of that was in ABCP, or asset-​backed commercial paper. This was a very popular way back in the day for banks to fund on a short-​term basis on behalf of their clients. This particular product has really fallen by the wayside. The economics for banks to participate in this market has really waned. So right now the ABCP market is at its all-​time low, at $​230 billion, and it is our expectation that this sector will continue to decline going forward because of other regulatory headwinds." Another sector that has declined is the repo sector. "This is a market that has also suffered from the liquidity crisis. It has shrunk almost by half since 2007 and will continue to shrink if you look at all the regulations out there.

On the other hand, investors still see money market funds as a good way to invest their cash on a short-​term basis, so demand is strong. "When you think about what has happened with supply over the last couple of years and factor that in to what'​s happened with demand -- you have a situation where there'​s too much cash chasing too few assets. There'​s a huge gap between supply and demand, and it'​s the reason why we see the competition for assets right now.... [​It'​s] so intense that'​s its driving rates very, very low in the front end market. There'​s a real concern that a lot of money will move out of bank deposits into money market funds because of regulations.... If indeed that is the case and cash moves from bank deposits to money market funds, then this supply/​demand imbalance becomes even more acute in the absence of additional supply."

There are some bright spots, however. One is Collateralized CP, which is a small but growing sector of the market at about $​30-$​35 billion. "Investors have been very attracted to this product." (Rob Crowe, Director, Institutional Clients Group, and Jean Luc Sinniger, Director, Money Markets, both of Citi Global Markets, took a deeper dive into CP in their session later in the day on "Instruments: Commercial Paper and ABCP.") Another glimmer of hope is in the Treasury Bill market.

Ho commented, "We have heard from the U.​S. Department of the Treasury that they intend to increase their operating cash balances. Right now they run an average of about $​60 billion; the expectation is that that they want to raise it to $​500 billion. I suspect if they do that, a lot of it would be funded in the bill [​market]. If that is the case, we'​ll see about $​400-$​450B in T-​Bill supply." She said in closing, "Regulations are going to alter and fundamentally change the landscape, but the markets will adapt and they will evolve and meet whatever needs are out there."

Finally, Day 1 ended with a session led by Adam Ackerman, Vice President and Portfolio Manager at J.​P. Morgan Asset Management on "Portfolio Management & Credit Analysis." Ackerman said, "​My presentation is about taking everything you'​ve seen today and bringing it all together to give you some insight into how portfolio managers think -- how we assess risk and model a portfolio for our fundamental goal, which is to provide liquidity." He said his primary goal is the preservation of capital. After that, his goals are to provide adequate liquidity and competitive yield, in that order. "Yield is important but it doesn'​t drive our decision making as portfolio managers, primarily."

He added, "We are in the business of providing liquidity; cash right now. We need to provide any type of liquidity that'​s demanded, whether it'​s billions or millions. We need to manage well enough so that we can manage any type of flow risk at any time." In terms of credit analysis, "​Generally, the way we think about it is, the higher the credit rating, the higher the liquidity. The better the credit quality, the more concentration I'​m comfortable with. Conversely, with lower credit quality, you want to lower your risk through lower concentrations." J.​P. Morgan employs a rigorous credit selection process that includes their own internal analysis, he explained. Finally, he said, the ultimate measure of success is how well you meet investors' demands of preservation of capital, liquidity, managing risk, and yield. Do that well, and the assets will come.... Stay tuned for coverage of Day 2 in coming days.

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Below, we excerpt from the January issue of our new Bond Fund Intelligence publication, which features the article, "Short Now Big at PIMCO: Talking w/​Schneider & Reisz.... This month, we sat down with Jerome Schneider, MD & Head of the Short-​Term and Funding Desk, and Paul Reisz, Executive V.​P. and Product Manager for Money Market, Enhanced Cash and Income Strategies, at PIMCO. While Total Return has made a lot of headlines over the past year, it'​s the short-​term bond funds and ETFs at PIMCO that could generate a lot of buzz in 2015. (​Crane Data recently launched Bond Fund Intelligence to track the bond fund marketplace with a focus on the ultra-​short segment -- see our Dec. 23 News "​Crane Data Launches Bond Fund Intelligence, Focus on Ultra-​Shorts". Contact us if you'​d like to see this first "​live" issue.)

BFI: How long have you been focused on the ultra-​short bond space at PIMCO? Schneider: PIMCO has been predominantly focused on fixed income assets since 1971 and has been a leader in short-​term and actively managed strategies. We launched our initial PIMCO Short-​Term Fund back in 1987 and focused on 3 things: providing an attractive yield, liquidity, and preserving capital. I joined the firm in 2008 and have been managing our front end and short-​term portfolios since that time. We have evolved out of the financial crisis, focusing on creating front end strategy solutions which adapt to changing liquidity needs and focus on capital preservation. We'​ve added several new products over the past 5-​6 years, providing solutions to a variety of clientele. We manage about $​250B in short-​term assets through funds, separate accounts, and more recently, ETFs.

For us, this is not a new pony to ride. This is something that we'​ve done for 30 years, and we'​ve continued to expand our stable of offerings, such as adding the Short Asset Investment Fund, [​which takes a] a small step out beyond money markets. We'​ve also been active in ETFs, launching MINT about 5 years ago, and more recently LDUR, our Low Duration ETF, which was launched in January of last year.

Reisz: I started at PIMCO in 2000 and my primary focus has been on our short duration strategies -- from money markets all the way out to our low duration strategy. I'​ve helped build out our suite through product launches, such as our Short Asset Investment Fund, which will have its 3-​year anniversary in May. This was designed to step outside of MMFs while seeking to limit NAV volatility. Five years ago we launched MINT and 28 years ago we launched the Short-​Term Fund. MINT has really met a need and is one of the largest actively managed fixed income ETFs.

These represent our ultra-​short offerings, with 0-​1 year duration ranges. Then we have our low duration strategies, which fall within a 1- to 3-​year duration band. The LDUR ETF was launched a year ago with the objective of outperforming money markets while striving to maintain liquidity and a stable market value. We'​ve also run the Low Duration Fund since 1987.

BFI: Tell us about the differences between funds. Schneider: What we'​ve come to realize over the years is that there'​s simply not a one size fits all solution. There'​s not a panacea that allows people to balance liquidity, credit risk, interest rate risk, all in one, and it'​s taken the market years, even decades, to realize that. Coming out of the crisis, we realized that not everybody wants to simply earn zero on their money, so we had to find a healthy balance between capital preservation, credit risk, and liquidity risk. What that points to is having a variety of offerings that cater to incremental steps of liquidity needs, balanced with increasing yield and risk that you might be undertaking. Our suite of short duration strategies provides simple incremental steps in terms of how to think about clients' needs and risk appetite.

BFI: What do you buy in the funds? Reisz: Each investor has a customized liquidity profile in terms of cash flow activity and risk tolerance. So in some cases, money markets are a completely appropriate strategy to utilize. When we step out beyond money markets in the Short-​Term strategy we have the flexibility to add value. Naturally, the core holdings will be money market securities for liquidity and principal stability. But once you step outside of 2a-​7 regulated space, there are a lot of interesting opportunities, since there are securities that you can'​t purchase in MMFs that you can purchase in the non 2a-​7 space.

Sector exposure is much more diversified and some high quality securities may even be more liquid than traditional money market securities, even though the maturity is longer. That is the playing field for Jerome and our team. We are looking for securities across multiple fixed income sectors that have attractive risk-​adjusted return profiles, and are also liquid. This creates well diversified portfolios that have competitive yields. (​Watch for more excerpts from our BFI Profile in coming days, or see the inaugural issue of our Bond Fund Intelligence for the full article.)

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Federated Investors released its latest quarterly earnings report and hosted its latest earnings call late last week. As usual, both contained a wealth of information about money market funds and the money fund business in general. The earnings release says, "Federated'​s money market assets were $​258.​8 billion at Dec. 31, 2014, down $​17.​2 billion or 6 percent from $​276.​0 billion at Dec. 31, 2013 and up $​13.​3 billion or 5 percent from $​245.​5 billion at Sept. 30, 2014. Money market mutual fund assets were $​225.​5 billion at Dec. 31, 2014, down $​14.​5 billion or 6 percent from $​240.​0 billion at Dec. 31, 2013 and up $​10.​3 billion or 5 percent from $​215.​2 billion at Sept. 30, 2014." (​Note: A transcript of the Federated earnings call is also available on the website Seeking Alpha.)

Federated'​s release continues, "​Revenue increased by $​3.​1 million or 1 percent due to higher average equity assets under management, partially offset by lower average money market assets. The increase in revenue was also due to a decrease in voluntary fee waivers related to certain money market assets primarily due to lower average money market assets. For information about voluntary fee waivers related to certain money market funds in order for those funds to maintain positive or zero net yields, please see the table at the end of this financial summary. During Q4 2014, Federated derived 69 percent of its revenue from equity and fixed-​income assets (​46 percent from equity assets and 23 percent from fixed-​income assets) and 31 percent from money market assets."

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

On the Q4 call, Federated President & CEO Chris Donahue comments, "Now looking at money markets, period end fund assets increased by about $​10 billion and average money market fund assets increased by about $​5 billion from the prior quarter. The growth was weighted to prime funds which added $​7 billion. Our market share at year-​end was about 8.​2%. Money market separate accounts increased reflecting tax seasonality. We continue to work on product modifications and additions related to new money market funds rules which were released in July. We expect to have products in place to meet the needs of all of our money fund clients. These will likely include prime and muni money market funds modified to meet the new requirements, government funds, separate accounts and offshore money funds."

He says, "We are also working on developing privately placed funds in an attempt to mirror existing Federated money market funds to serve the needs of groups of qualified, usually institutional, investors unable to use money funds modified by the new rules. The new rules as you recall are subject to a lengthy implementation period. The floating NAV requirement for institutional prime and muni funds takes effect in October of 2016.... Taking a look at our most recent asset totals as of January 21st, managed assets were approximately $​263 billion including $​259 billion in money markets, $​51 billion in equities, $​53 billion in fixed income. Money market mutual fund assets were $​223 billion."

Federated CFO Tom Donahue comments, "The impact of money fund minimum yield waivers was $​29.​5 million and it was down slightly from the prior quarter and about the same as Q4 2013. Based on current assets, fewer days and assuming overnight repo rates for treasury and mortgage-​backed securities, run at roughly 6 to 8 basis points over the quarter and T-​bills stay in the 2 to 8 basis point range. The impact of the waivers to pretax income in Q1 would be around $​28 million. Looking forward, we estimate that gaining 10 basis points in gross yields from beginning Q1 levels would likely reduce the impact of minimum yield waivers by about 40% and a 25 basis point increase would reduce the impact by about 65%. Looking ahead, we expect that we will recover about 75% of minimum yield waiver-​related pretax income when money fund yields increase to the point of eliminating these waivers. This estimate is based on our assessment of competitive market conditions including the expectation that we will incur higher distribution expenses as a percentage of money market revenues when rates and yields increase."

During the call'​s Q&​A, Tom Donahue adds, "The expense related to the money market business and all the various structures and what are we doing, we spent a decent amount of money working to maintain that business in the past few years and so a lot of the resources there are going to help us structure new products and attract, maintain and gain new business. So I don'​t see big expense increases there, is the short answer."

Chris Donahue answered another question, "It'​s really hard to foresee the leakage at this point. We don'​t see it, we don'​t hear it from clients and if you'​ve looked at the industry statistics, you'​ve seen that money market fund assets are basically up over $​2.​7 trillion. So, on that part of it, there remains a tremendous desire on the part of clients across the board for these types of products. In terms of where we'​re going, we not yet ready to announce to all of the individual shareholders and individual funds how it'​s going to look. We have a pretty good idea of how it'​s going to look."

He also tells us, "There will be a number of fund mergers. There will be the spawning of more classes, we will have products in each area, treasury, government, prime and muni that meet the requirements. [​We'​ll] also have 60 day funds, [​and] have retail funds divided from institutional. But we are very much right now in what I like to refer to as the waterboarding stage of this whole exercise and we'​ve, as Tom mentioned, changed the regulatory response expense into a restructuring of products expense and we think we will be able to score on all streets. And I look forward to, after the dust settles, being able to get back onto the track of increasing money market fund assets post the October 16 date."

Donahue responds later, "In terms of LCR, we are hearing from some of our larger clients ... as you read in the press, there is a rigorous effort to evaluate every cash management client in order to determine the capital cost and therefore the economic efficacy of keeping those clients by those large banks. And some clients are being asked to graduate from the relationship with the bank and this of course will inspire people to want to use money market funds. And I don'​t think there is going to be an alteration in that factor. It is very, very difficult for us to try and size that.... [​As I] said earlier in this call that after the regulations are all put into place that we can look forward to higher balances again, in my opinion, and this is one of the factors."

The Federated CEO also says, "Well, the consolidation ... continues. Basically before the '​08 crisis there were over 200 firms offering money funds. Today if you look at the list, there will be a list of 80, but the bottom 25 or 30 will have either very little money or money that they totally control the redemption right on. So, we look forward to more consolidation of the smaller players, but on the other hand if you look at the list, the top 30 or so players are not going to get out of this business. It'​s essential to where they are even though they may not have large components. So, yes there will be more consolidation as these regulations unfold but a lot of it has already happened."

Finally, he adds, "So in the new environment because we'​re going to have a bunch of fund mergers, some funds will disappear but we'​re also going to spawn more classes as I mentioned. And it'​s hard to say right now whether that would have any meaningful -- I don'​t think it would have any meaningful effect on expenditures. What I can say is that because of the elimination of an institutional prime money market fund as we knew it, there will be increase in costs in the marketplace and to us, because everything else that we'​re coming up with is not as good as that product. Of course that was the intention of the regulators."

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Last Friday, we ran the first part of our interview with J.​P. Morgan Asset Management'​s John Donohue, the newly-​appointed CEO of Investment Management Americas and Global Head of Liquidity, and Andrew Linton, Global Head of Liquidity Product Development. (​If you missed it, read it here.) In Part 2 of the interview, which originally appeared in our January issue of Money Fund Intelligence, the two talk about sweep accounts, the impact on liquidity, and other matters related to gates and fees. We reprint the second half of our article below. (​Note: Thanks to those who attended our 5th annual Money Fund University in Stamford Thursday and Friday! The conference binder is available to Crane Data subscribers at the bottom of our "​Content" center, and the Powerpoints will be available early next week.)

MFI: Do investors understand the rule? Donohue: I don'​t think many investors have focused on it at this point due to the fact that the regulations won'​t take effect until October 2016. What we are going to do in 2015 is work with clients through a very aggressive client outreach campaign to walk them through exactly what all of this means for them and for us.

MFI: Are sweep accounts a big concern? Linton: When you talk to retail intermediaries that have a sweep and ask them about processing a fee and a gate, some respond that they are considering building new sweep processes that can process a fee and a gate, some feel that it'​s too complicated and will simply use government funds. At the end of the day, it'​s incredibly complicated and many firms are still evaluating what they will do.

MFI: Will gates be an issue for municipal money funds? Donohue: The interesting thing about muni funds is they tend to have significantly more weekly liquid assets than credit funds. So muni funds have a higher hurdle to actually have a fee or a gate that'​s triggered by a weekly liquidity number that'​s below the 30% threshold. It'​s not uncommon to see muni funds with as much as 85% invested in weekly liquid assets, so gates and fees should be much less of a concern in muni funds.

MFI: How about the logistics of notifying clients? Donohue: There is no getting around it: the logistics will be difficult. And disclosure will be critical. Once one fund throws down a gate, I think it'​s safe to assume that people will believe that more money funds will follow suit. You are almost introducing contagion at that point. That'​s why disclosure is going to be really important because on a fund'​s website, liquidity levels will be posted. Hopefully clients will use that to make sure that the funds they'​re invested in have ample liquidity.

Our money market funds voluntarily started publicly disseminating their weekly liquidity asset levels and 4-​digit shadow NAVs prior to the adoption of the reforms. Again, if that disclosure had been required in 2008, things might have been different. If you looked at the JPMorgan money market funds, we had a ton of liquidity at that time. People would have been able to see that. For other funds, like Reserve -- where perhaps the indications were there that they were facing some issues -- with all the disclosure that'​s now required, clients may have been able to see that.

MFI: What'​s the outlook for liquidity? Donohue: It'​s going to be incredibly challenging because you'​re going to see more money coming in to the government space. On the same side of the coin you have less repo and front end supply in the market, so there is potentially not enough short-​term high-​quality issue to meet all of the demand. Also, you have Basel III kicking in. The supply issue is going to be one of the biggest challenges.

At some point, water will find its own level, and the spread between '​Govie' and credit should widen. Then, potentially, credit becomes attractive again and maybe people start to go back into credit funds. At that point investors would be smart to consider segmenting their cash based on amounts that must be liquid and stable. [​Some] would benefit from being invested in a government or retail fund, [​but some] cash could be more productive invested in a floating NAV MMF, or potentially even further out the curve.

Here'​s the big question: Will the tax and accounting relief for floating NAV money market funds be sufficient to get clients to accept a gate and a fee in a 2a-​7 registered institutional money market fund as opposed to going into a floating NAV fund that does not have the potential for a gate and a fee? I don'​t know the answer, but that'​s what we'​ll be trying to figure out with our clients over the next several months.

MFI: What'​s the potential impact of higher interest rates? Donohue: All of these issues become easier to manage when rates are higher, that'​s clear. We'​ll be facing some major issues, no doubt, but hopefully not in a zero rate or potentially negative rate environment.

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Although money market fund reforms don'​t kick in until October 2016, Goldman Sachs Asset Management announced this week that it intends to comply with the new rules for government money market funds now, nearly two years early. Goldman, the 3rd largest MMF manager in the world with $​246.​6B in global MMF assets (​and 8th largest in the US), has already made changes to four of its MMFs to comply with the reforms. Their press release explains, "Though compliance with the new government money market fund definition is not required until October 2016, GSAM will comply with the new definition and its requirements early in response to investor demand to help ease the transition to new money market fund rules."

"We hope that by confirming that our government money market funds will comply with the new definition of "​government money market fund" today, we will simplify one aspect of implementation during this transition period," said Jim McNamara, Global Head of Third Party Distribution. "Government money market funds will remain an important liquidity solution, and we want to make it clear that we are committed to offering government money market funds with a stable net asset value and without liquidity fees or redemption gates."

The release continues, "On December 18, 2014, the Goldman Sachs Funds' Board of Directors approved changes that clarify that the funds will comply with the new definition of "​government money market fund," which requires that a fund invest 99.​5% or more of its assets in cash, U.​S. government securities, and/​or repurchase agreements that are collateralized fully by cash or U.​S. government securities. In addition, the Board did not elect to implement "​liquidity fees" and/​or "​gates" at this time. "Government money market funds" meeting this definition are neither required to float their net asset values (​NAVs) nor required to impose a "​liquidity fee" and/​or "​gate" that temporarily restricts redemptions from the funds when liquidity levels fall to certain levels."

The changes will not impact any of the Treasury or government fund'​s investment profiles. "​We'​ve historically limited the investments of these funds only to U.​S. government securities, because investors generally seek out government money market funds for their explicit investment in government-​only strategies," said McNamara. "These updates are merely designed to give investors assurance about the funds' compliance with the new rules. We recognize that implementation of the new rule set will be a phased process for most investors, and could require a reevaluation of all available liquidity options with large-​scale policy, operational, and technological changes in order to implement." The four GSAM MMFs impacted are the Goldman Sachs Financial Square Government Fund; the Goldman Sachs Financial Square Federal Fund; the Goldman Sachs Financial Square Treasury Obligations Fund; and the Goldman Sachs Financial Square Treasury Instruments Fund.

On the topic of reforms, Invesco posted some videos on its website that succinctly explain the key provisions of the pending changes. On "New Definitions," Esther Chance, Head of Credit Liquidity/​Asia-​Pacific Portfolio Management at Invesco, says, "One of the things to come out of these rules is the creation of a new distinction between retail and institutional funds. Government funds will continue to transact at a stable NAV. The retail and institutional distinction will apply to prime and municipal money market funds. A retail money market fund would be allowed to price and transact at a share price of $​1 as it does today. Institutional money market funds will need to maintain a floating net asset value based on the current market value of the securities. The definition of a retail money market fund will be amended to "​a money market fund that has policies and procedures reasonably designed to limit all beneficial owners of the fund to natural persons.""

Chance continues, "It'​s important to clarify that in its release accompanying the final rules, the SEC states that money market funds will have flexibility in how they choose to comply with the natural persons test including developing policies and procedures that best suit a funds investor base. The SEC expects that many funds will rely on social security numbers to confirm beneficial ownership by a natural person. However, a money market fund or the appropriate intermediary could determine that the beneficial ownership of a non U.​S. natural person be obtained by government issued Identification; one example would be a passport. Some examples of a retail account could include participant directed defined contribution plans, individual retirement accounts, or college savings plans. Some examples of institutional accounts could include small businesses, defined benefit plans, or endowments. It'​s important to reiterate that the funds will have the flexibility in how they choose to comply with the natural person test."

On "New Liquidity Fees and Redemption Gates," Chance says, "​Under the current rules, money market funds are required to hold 30% in weekly liquidity. Under these new rules, if a money market fund'​s level of weekly liquid assets falls below 30% of its total assets, the money market fund'​s board would be allowed to impose these new tools of fees and gates. If weekly liquid assets fall below 30%, money market funds would be allowed to impose a liquidity fee of up to 2% on all redemptions. In contrast, if weekly liquid assets fall below 10%, money market funds would be required to impose a liquidity fee of 1% on all redemptions. In both cases, a money market fund'​s board of directors has the discretion to determine if such a fee is in the best interest of the fund."

She adds, "If weekly liquid assets fall below 30%, money market funds could temporarily suspend redemptions or gate a fund. To impose a gate, the fund'​s board of directors would find that imposing a gate is in a money market fund'​s best interest. A money market fund that imposes a gate would be required to lift that gate within 10 business days. The board could determine to lift the gate earlier. Money market funds would not be able to impose a gate for more than 10 business days in any 90 day period. It'​s important to remember that a fund'​s board of directors maintains discretion over what is in the best interest of the shareholders so that fees and gates are really additional tools that the board has to protect investors in times of stress. The SEC stated that it expects fees and gates only rarely and in extreme circumstances."

A man who played a key role in developing the MMF reforms, Norm Champ, the SEC'​s Director of the Division of Investment Management, will leave the agency later this month. "​The Commission has benefited greatly from Norm'​s expertise and sound judgment and we have been very fortunate to have had him work on behalf of U.​S. investors and our markets," said SEC Chair Mary Jo White. "​His efforts on important rulemakings and the organizational changes he has put in place will leave a lasting mark on the Commission."

Champ, who has been with the SEC for 5 years, said, "It has been a privilege to serve with the talented people of the SEC in both the Division of Investment Management and the Office of Compliance Inspections and Examinations as we worked together to fulfill the agency'​s mission. Together, we were able to restructure both organizations to increase transparency, increase cooperation across Divisions and offices, provide staff with more opportunities and improve the agency'​s use of data while at the same time accomplishing significant policy goals." Champ will be a Visiting Scholar for Spring Term 2015 at Harvard Law School, where he also is a lecturer, teaching a course on investment management law.

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The Investment Company Institute released its "Money Market Fund Holdings" summary report for December, 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 Dec. 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 21.​9% as of December 31, 2014, down from 25.​8% on Nov. 30. "​Daily liquid assets" were made up of: "​All securities maturing within 1 day," which totaled 17.​0% (​vs. 22.​2% last month), and "​Other treasury securities," which added 4.​9% (​down from 3.​6% last month). Prime funds' "​Weekly liquid assets" totaled 39.​9% (​vs. 37.​8% last month), which was made up of "​All securities maturing within 5 days" (​32.​3% vs. 32.​9% in November), Other treasury securities (​4.​9% vs. 3.​4% in November), and Other agency securities (​2.​8% vs. 1.​5% a month ago). (​See also our previous Money Fund Portfolio Holdings story, Crane Data'​s Jan. 13 News, "January MMF Portfolio Holdings Show Spike in Fed Repo, Treasuries.")

ICI'​s Chris Plantier also posted a "Viewpoints" commentary this month on the holdings entitled, "European Banks Borrow Less from MMFs; the Federal Reserve Borrows More." He comments, "As we discussed in April and July of last year, due to regulatory pressures European banks generally have become less willing to borrow from U.​S. money market funds (​MMFs), especially at the end of the quarter. This quarter-​end effect was particularly large at the end of December 2014.... [​D]​eclines in the share allocated to European counterparties are larger than the decline seen in December 2013. In addition, the share settled at much lower levels at the end of 2014, suggesting that regulatory pressures continue to rise on European banks."

ICI'​s holdings report also shows that Government Money Market Funds' Daily liquid assets totaled 51.​6% as of Dec. 31 vs. 60.​7% in November. All securities maturing within 1 day totaled 19.​3% vs. 27.​8% last month. Other treasury securities added 32.​2% (​vs. 32.​9% in November). Weekly liquid assets totaled 80.​7% (​vs. 78.​2%), which was comprised of All securities maturing within 5 days (​40.​2% vs. 37.​8%), Other treasury securities (​29.​7% vs. 31.​2%), and Other agency securities (​10.​8% vs. 9.​2%).

ICI'​s "​Prime and Government Money Market Funds' Holdings, by Region of Issuer" table shows Prime Money Market Funds with 51.​1% in the Americas (​vs. 41.​8% last month), 20.​0% in Asia Pacific (​vs. 20.​5%), 28.​6% in Europe (​vs. 37.​5%), and 0.​3% in Other and Supranational (​same as last month. Government Money Market Funds held 92.​6% in the Americas (​vs. 86.​3% last month), 0.​2% in Asia Pacific (​vs. 0.​6%), 7.​1% in Europe (​vs. 13.​0%), and 0.​1% in Supranational (​vs. 0.​0%).

The table, "​Prime and Government Money Market Funds' WAMs and WALs" shows Prime MMFs WAMs at 43 days as of Dec. 31 vs. 46 days in November. WALs were at 78 days, down from 80 last month. Government MMFs' WAMs was at 43 days, down from 46 days last month, while WALs was at 74 days from 76 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 December covers funds holding 94 percent of taxable money market fund assets." Note: ICI publishes aggregates but doesn'​t publish individual fund holdings.

In its latest "Prime Money Market Fund Holdings Update," JP Morgan Securities', Alex Roever, Teresa Ho, and John Iborg report, among other things, a $​119 billion decline in exposures to banks due to large pullbacks in time deposits and CP/​CD balances.. They comment, "Total time deposit balances contracted by $​95bn, while CP and CD balances dropped by a combined $​26bn. By jurisdiction, the reduction in time deposits was driven by French banks (-$​21bn), Norwegian banks (-$​15bn) and Swedish banks (-$​37bn). Furthermore, reductions in CP and CD balances were mostly scattered across several European banks. A prominent trend during 2014, many international banks and their securities dealing affiliates have tended to temporarily shed short-​term wholesale funding sources such as repo and time deposits from their balances sheets at quarter-​ends as they prepare to comply with and disclose their Basel III leverage ratio and LCR this year. This phenomenon certainly continued to play out during 4Q14."

Roever, et. al., explain, "As we have highlighted in previous holdings notes, the bank balance-​sheet management mentioned above has caused temporary crunches in money market liquidity, which in turn has prompted large surges in Fed RRP usage on quarter-​end dates. In fact, looking at money funds that voluntarily report their holdings on a daily basis illustrates how strong this relationship has been throughout the duration of 2014." They add, "[​T]​here has been a very strong negative correlation between MMF usage of the RRP and the amount of dealer repo and time deposits outstanding on quarter-​end dates."

On the reverse repo program, they continue, "Money market funds accounted for $​201bn or 89% of the $​226bn in usage at the term RRP facility, and took down $​159bn or 93% of the $​171bn in overnight RRP used on December 31st. Government MMFs were the largest users of the first two term RRP operations, representing 52% of awarded bids during the December 8th operation and 67% of awarded bids during the December 15th operation. Prime fund participation picked up over the last two term RRP offerings, amounting to 51% of usage. Furthermore, usage of the ON RRP on 12/​31 was mostly split evenly between prime and government funds."

Finally, on Treasurys, they tell us, "As of the end of the year, MMFs held $​35.​4bn in Treasury floaters, an increase of $​9.​8bn since November, and the largest monthly increase in holdings since the FRN was first auctioned last January. With the on-​the-​run issue averaging an attractive discount margin of 8.​5bp through December and the continuing lack of investible assets in the front end, this uptick in holdings is not much of a surprise. On balance, treasury funds continue to be the largest holders of floaters at $​21.​8bn, followed by prime MMFs with $​11.​8bn and government MMFs at $​1.​8bn. Money market funds now hold 22% of all Treasury FRNs outstanding."

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ICI Global, the international arm of the Investment Company Institute, released its 2014 Annual Report recently, which includes brief comments on the state of money market fund regulations in Europe, as well as U.​S. reforms. ICI Global MD Dan Waters says in the introduction, "​Helping regulators and member firms find common ground on issues important to funds is at the heart of ICI Global'​s work. Throughout the year, ICI Global met with policymakers to help them better understand the nature of funds and why some proposed regulations -- such as the potential designation of funds as global systemically important funds, or the European Union'​s proposed 3 percent capital buffer on certain money market funds -- would inadvertently harm funds and their investors." (​Note: The Federal Reserve Bank of New York also released an "Expanded Reverse Repo Counterparties List late Friday, which included the Additions of several banks, GSEs and money fund managers.)

On proposed European money fund reforms, the report comments, "While money market fund reforms have moved forward in the United States, the European Union'​s proposed money market fund rule is still pending. Much of the debate surrounding the rule has focused on the feasibility of imposing a 3 percent capital buffer on constant NAV (​CNAV) funds, with some policymakers suggesting alternatives to capital requirements. In meetings with EU policymakers, ICI Global explained why the proposed capital buffer is impractical and not economically viable for member funds. It also stressed that any additional regulation should be designed both to strengthen money market funds in the European Union and ensure a continued robust and competitive money market fund industry."

On the SEC'​s reforms in the U.​S., ICI Global offers a recap. "After six years of deliberations and extensive analysis, the US Securities and Exchange Commission (​SEC) released its final money market fund rule in July 2014. According to the rule, by October 2016, institutional prime and institutional municipal money market funds must maintain a floating net asset value (​NAV), so that sales and redemptions are based on the current market value of the underlying securities. These funds no longer will be allowed to use amortised cost (​for securities with maturities greater than 60 days) to maintain a stable NAV of $​1.​00 per share. However, government money market funds and retail money market funds -- which account for nearly 80 percent of US money market fund assets -- may continue to maintain a stable NAV using amortised cost valuation and/​or penny rounding."

They continue, "The rule also provides money market fund boards with new tools to stem heavy redemptions by giving them discretion to impose a liquidity fee or gate if a fund'​s weekly liquid assets fall below a specific threshold. In addition, the rule requires all nongovernment money market funds -- including floating NAV money market funds -- to impose a liquidity fee if the fund'​s weekly liquid assets fall below a designated level, unless the fund'​s board determines that imposing such a fee is not in the best interests of the fund."

Finally, ICI Global'​s report adds, "Many European policymakers are interested in understanding the changes and effects of the new US rule. To that end, ICI Global met with numerous EU policymakers, including members and staff of the Parliament and the European Council, to explain the SEC'​s analysis, the resulting rule, and what it means for funds and their investors."

In other news, Fitch Ratings published an interesting piece on its "Why Forum" blog entitled, "Investors Share Views on 5 Money Fund Alternatives." It features survey data from Fitch'​s European Cash Management Conference in November, where attendees were asked how their MMFs allocations would change if the VNAV was adopted in Europe. About 58% said it would stay the same, while roughly 42% said it would decrease. The survey also asked investors where they would invest the money if the allocation to MMFs decreased. Most, about 30%, said "Cash Alternatives."

They write, "Many providers are launching "​cash plus" funds (​or equivalent - nomenclature varies) with either more duration risk or more credit risk or more of both. As investors segment their cash more and take a longer-​term view on some parts of their cash allocation, the different profiles offered by these funds may appeal, albeit while incurring greater risk than in an MMF. Some investors may also consider repo-​backed products. These could include pooled funds investing in repos or notes backed by repo contracts or other collateral pools.... Some providers may launch derivative-​based funds that manage cash through the purchase and sale of, for example, interest rate derivatives. However, these funds may be too complex for many cash investors and will inevitably incur counterparty risk."

Roughly 22% said "Direct Investment in Money markets." Fitch explains, "Probably reserved for the largest and most sophisticated cash investors only, direct investment in money-​market instruments is now a less popular alternative than last year. Instead of investing in an MMF, investors would simply acquire money-​market instruments directly: certificates of deposit, commercial paper, repo agreements, etc."

Approximately 17% said "Unregulated Pooled investments." "Interestingly, this relatively new cash-​management tool is the only one that saw growth in our survey year over year. Pooled products could include funds comparable to existing CNAV MMFs available in the U.​S. or Europe, but fall outside the scope of money-​fund regulation.... [​T]​hese funds may be able to retain a CNAV structure. With VNAV firmly on the table in the U.​S. and proposed in Europe, some investors with an operational attachment to CNAV funds may opt to invest in such products anyway," writes the piece.

The same amount said "Bank Deposits." Fitch comments, "If investors can'​t use MMFs anymore some may consider sticking with bank deposits instead. However, doing so will be a challenge as Basel III has substantially reduced bank demand for wholesale deposits. In Europe, deposit rates are negative for short-​term deposits at higher credit quality banks, and the pool of eligible banks is shrinking as they are downgraded."

Finally, around 13% of Fitch respondents said "Segregated Accounts." They add, "These have been around for a long time, are typically reserved for the largest investors only, and were also less popular in our survey in 2014 than in 2013.... This set-​up provides flexibility, as the portfolio is built to investors' specifications in terms of timeframe, liquidity needs, and risk profile, while leveraging the management firm'​s operations and resources."

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In the latest issue of our flagship Money Fund Intelligence, we profile J.​P. Morgan Asset Management'​s John Donohue, the newly-​appointed CEO of Investment Management Americas and Global Head of Liquidity, and Andrew Linton, Global Head of Liquidity Product Development. Below, we reprint part of the Q&​A, in which they discuss the implementation of the SEC'​s recently adopted money fund reforms, particularly issues involving the "​gates and fees" provisions. (​Look for more of the interview in coming days, or see Crane Data'​s January Money Fund Intelligence.)

MFI: How big a concern are gates and fees? Are they a bigger issue than the floating NAV? Donohue: Clients are telling us that fees and gates are potentially more problematic than a floating NAV. That'​s simply because they are aware that if and when a gate actually happens it will be during a stressed market, which is precisely when they would most want access to their liquidity. Many investors use money market funds for liquidity, so to the extent that they think that a gate is potentially going to be utilized, there is a risk that they will look to move earlier than they otherwise may have to get money out of funds. So, at least initially, I think there is some risk of unintended consequences in the form of large outflows.

Linton: Clients are certainly wary of both the fee and gate, and the floating NAV, and a fee potentially creates some complicated issues for money market funds. Saying that you'​re going to impose a maximum 2% fee, from a processing standpoint, sounds simple. But if you have a transfer agent that has 10 different clients and each one of those clients comes in at a different time of the day and implements a fee that might be at different levels, and then starts changing it every day.... Well, an extreme number of permutations would have to be put in place. This could turn into an incredibly tangled web. In addition, new regulations require money fund boards to take on significant new responsibilities. I know they are thinking carefully about what those responsibilities entail. We have heard they will want more clarity about what exactly they are responsible for and where they might run into trouble.

MFI: How do these issues differ from the current rules? Linton: Ordinarily, U.​S. open-​end funds may not suspend the right of redemption, and may not postpone the payment of redemption proceeds for more than seven days following receipt of a redemption request. However, under the 2010 money market fund reforms, Rule 22e-​3 permits money market funds to suspend redemptions and postpone payment of redemption proceeds in an orderly liquidation of the fund if, subject to other requirements, the fund'​s board determines that the deviation between the fund'​s amortized cost per share and its current net asset value per share may result in material dilution or other unfair results to investors or existing shareholders. Basically, under Rule 22e-​3 you have to move to liquidate the fund. Under the new rule, you can suspend redemptions for up to 10 business days in a 90 day period. Also, you don'​t have to move to liquidation.

We should point out, while we just went through the reasons why maybe there are some hidden dangers in the use of a gate, at the end of the day, the gates themselves can be a shareholder friendly protection. If a gate does come down, if used appropriately, it may help to ensure that shareholders are treated fairly.

Donohue: If we had gates back in 2008 and Reserve had put one in place, would that have prevented the contagion that ensued? Would Reserve have been able to survive? We'​ll never know the answer to this question. But we do know that it probably couldn'​t have been any worse. Linton: If Reserve could have imposed a gate for 10 business days, then it might have been possible for them to go through an orderly liquidation of the fund instead of what we saw happen.

MFI: What would it take to trigger gates? Donohue: I think it'​s important to note, new disclosure requirements should encourage clients NOT to rush for the fund exits. But if weekly liquidity falls below 30%, a fund may impose a gate. Before the most recent reforms, when the gate goes down under Rule 22e-​3, that'​s an event of liquidation -- and that'​s the difference. Now, if, at any time, a money fund has invested less than 30% of its total assets in weekly liquid assets, then its board may implement a gate. I think the SEC wanted to give flexibility on the trigger in the weekly liquid assets. However, 30% is a lot of liquidity, and today there are times when money market funds go below that 30% threshold. But just because you go below 30% doesn'​t mean you are having a liquidity issue in your fund. You may have large redemptions; you may go down to 29% but have 4-​5% maturing over the next two weeks.

I think it’​s going to force people to actually hold more than 30% in weekly liquid assets. Responsible fund managers are likely going to manage these funds differently than they do today to try to ensure that they remain above the applicable threshold. I would almost equate it to a "​breaking the buck" scenario today. Fund managers will likely do everything they possibly can to make sure the fund doesn'​t "​break the buck." They are going to manage to that level of liquidity to seek to ensure that they never have to put down a gate or a fee.

At 30%, the board has the ability to opt into a fee or a gate. You are giving a lot of discretion to the board. Do I think that any reasonable board in "​business as usual" activity is going to throw down a gate if a fund drops below the 30% threshold? I don'​t. But that doesn'​t mean they can'​t. I think the number where it would make sense to approve the implementation of a gate would typically be well below 30%. What is that number where boards implement fees and gates? Every scenario is different. That is why I think that client outreach and education about liquidity in funds is going to become much more important. But again, fund managers will likely hold more liquidity than they do today to try to make sure they don'​t breach that 30% threshold and, of course, it'​s going to have an effect on the yield of the fund. The more liquidity you hold, the lower your yield will likely be.

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Crane Data published its latest Money Fund Intelligence Family & Global Rankings earlier this week, which rank the asset totals and market share of managers of money market mutual funds in the U.​S. and globally. The January edition, with data as of Dec. 31, 2014, shows asset increases for a majority of money fund complexes in the latest month, with the largest players leading the way. Gains have also been solid over the past three months. Assets jumped by $​86.​2 billon, or 3.​3%, in December; over the last 3 months, assets are up $​115.​4 billion, or 4.​6%. For 2014, total assets inched up $​25.​7 billion, or 1.​0%. Below, we review the latest market share changes and figures. These "Family" rankings are available to our Money Fund Wisdom subscribers. (Note: We also wanted to give readers a final reminder about next week'​s Crane'​s Money Fund University, which will take place Jan. 22-​23 in Stamford, Conn. Registrations are still being accepted for our "​basic training" event (see the agenda here), and we hope to see some of you in Stamford next week!)

Goldman Sachs, BlackRock, JP Morgan, Federated, and Fidelity, were the biggest gainers in December, rising by $​14.​7 billion, $​12.​9 billion, $​11.​3 billion, $​10.​9 billion, and $​8.​5 billion, respectively. BlackRock, JP Morgan, Goldman Sachs, Wells Fargo, and Federated led the increases over the 3 months through Dec. 31, 2014, rising by $​30.​5B, $​21.​4B, $​17.​1B, $​10.​1B, and $​9.​5B billion, respectively. The only complexes among the 25 largest seeing declines in December were: Invesco, RBC, T. Rowe Price, Reich & Tang, and BofA (​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 $​413.​9 billion, or 15.​7% of all assets (​up $​8.​5 billion in December, up $​9.​1B over 3 mos. and down $​14.​4B over 12 months), followed by JPMorgan'​s $​259.​5 billion, or 9.​8% (​up $​11.​3B, up $​21.​4B, and up $​7.​7B for the past 1-​month, 3-​months and 12-​months, respectively). BlackRock remained in third with $​221.​9 billion, or 8.​4% of assets (​up $​12.​9B, up $​30.​5B, and up $​13.​7B). Federated Investors was fourth with $​215.​9 billion, or 8.​2% of assets (​up $​10.​9B, up $​9.​5B, and down $​13.​1B), and Vanguard ranks fifth with $​173.​7 billion, or 6.​6% (​up $​1.​3B, up $​1.​4B, and down $​2.​0B).

The sixth through tenth largest U.​S. managers include: Dreyfus ($​169.​9B, or 6.​4%), Schwab ($​166.​3B, 6.​3%), Goldman Sachs ($​160.​4B, or 6.​1%), Wells Fargo ($​119.​7B, or 4.​5%), and Morgan Stanley ($​107.​3B, or 4.​1%). The eleventh through twentieth largest U.​S. money fund managers (​in order) include: SSgA ($​82.​0B, or 3.​1%), Northern ($​80.​5B, or 3.​1%), Invesco ($​59.​9B, or 2.​3%), BofA ($​50.​6B, or 1.​9%), Western Asset ($​46.​6B, or 1.​8%), First American ($​42.​4B, or 1.​6%), UBS ($​37.​7B, or 1.​4%), Deutsche ($​34.​5B, or 1.​3%), Franklin ($​21.​5B, or 0.​8%), and RBC ($​17.​1B, or 0.​6%). Crane Data currently tracks 72 managers, the same number as last month.

Over the past year, calendar year 2014, Goldman Sachs showed the largest asset increase (​up $​18.​7B, or 13.​2%; followed by BlackRock (​up $​13.​7B, or 6.​6%), Morgan Stanley (​up $​10.​3B, or 10.​6%), JP Morgan (​up $​7.​7B, or 3.​1%), and Northern (​up $​5.​5B, or 6.​8%) <​b:>`​_. Other asset gainers in 2014 include: Western (​up $​4.​6B, or 10.​9%), First American (​up $​4.​4B, or 11.​6%), American Funds (​up $​2.​8B, or 20.​7%), Franklin (​up $​2.​7B, or 14.​3%), and SSgA (​up $​2.​2B, or 2.​8%). The biggest decliners over 12 months include: Fidelity (​down $​14.​4B, or -​3.​4%), Federated (​down $​13.​1B, or -​5.​7%), UBS (​down $​6.​9B, or -​15.​5%), Invesco (​down $​6.​9B, or -​5.​5%), and Wells Fargo (​down $​3.​6B, or -​2.​9%). (​Note that money fund assets are very volatile month to month.)

When European and "​offshore" money fund assets -- those domiciled in places like Dublin, Luxembourg, and the Cayman Islands -- are included, the top 10 managers match the U.​S. list, except for Goldman moving up to No. 4, and Western Asset appearing on the list at No. 9. (​displacing Wells Fargo from the Top 10). Looking at the largest Global Money Fund Manager Rankings, the combined market share assets of our MFI XLS (​domestic U.​S.) and our MFI International ("​offshore"), the largest money market fund families are: Fidelity ($​420.​2 billion), JPMorgan ($​388.​8 billion), BlackRock ($​343.​7 billion), Goldman Sachs ($​244.​6 billion), and Federated ($​225.​4 billion). Dreyfus ($​196.​7B), Vanguard ($​173.​7B), Schwab ($​166.​3B), Western ($​137.​5B), and Morgan Stanley ($​125.​7B) round out the top 10. These totals include offshore US Dollar funds, as well as Euro and Pound Sterling (​GBP) funds converted into US dollar totals.

Also, our January 2015 Money Fund Intelligence and MFI XLS show that yields continue to inch up for the second straight month in December. Our Crane Money Fund Average, which includes all taxable funds covered by Crane Data (​currently 838), remained at 0.​02% for the 7-​Day Yield, but moved up a tick to 0.​02% for the 30-​Day Yield (​annualized, net) Average. (​The Gross 7-​Day Yield was unchanged at 0.​13%.) Our Crane 100 Money Fund Index shows an average 7-​Day Yield of 0.​03%, same as last month, but the 30-​Day Yield went up to 0.​03% from 0.​02% last month. (​The Gross 7- and 30-​Day Yields for the Crane 100 also inched up to 0.​17%, from 0.​16%.) For the 12 month return through 12/​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.​03% (​7-​day), while the Crane Govt Inst Index moved back down to 0.​01% (​from 0.​02%). 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.​20% (​up from 0.​19%), Govt 0.​10% (​up from 0.​09%), Treasury 0.​06%, and Tax Exempt 0.​11% in December.) The Crane 100 MF Index returned on average 0.​00% for 1-​month, 0.​00% for 3-​month, 0.​02% for YTD, 0.​02% for 1-​year, 0.​04% for 3-​years (​annualized), 0.​05% for 5-​year, and 1.​56% for 10-​years.

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Where will bank deposit assets flow given the regulatory challenges banks are facing? That is the question Wells Fargo Securities' short-​term market strategist Garret Sloan explores in a special commentary entitled, "It'​s Not You, It'​s Me: Finding Investment Alternatives for Bank Deposit Investors." Sloan asks, "​Why are banks so flush with deposits?" He explains, "In a somewhat perverse way, since the financial crisis of 2008 and the failure of a number of global banks, bank deposits have grown on an outright basis, and in terms of the proportional share of institutional cash investments. Deposit growth can be attributed to four primary drivers: Lack of business reinvestment has resulted in cash accumulation; Unlimited FDIC insurance encouraged companies to park cash; Attractive ECR relative to money market rates; and, Government support (​TARP) and regulatory reform has reduced perceived bank risk." (​Note: Bank deposits now have over $​7.​5 trillion in assets, compared to about $​2.​7 trillion in MMFs. Since the financial crisis in 2008, bank deposits have grown by over $​3 trillion, while MMF assets have declined by about $​1 trillion.)

What is changing? Sloan writes, "While the last five years have been a relative safe-​haven for deposit-​minded investors, a new regulatory framework, coupled with the likelihood of rising rates could cause the competitiveness of bank deposits to significantly diminish relative to other investment opportunities." These reforms including the `​Liquidity Coverage Ratio (​LCR), which requires U.​S. bank holding companies with more than $​250 billion in assets to hold enough High Quality Liquid Assets (​HQLA) to withstand severe deposit outflows over a 30-​day period, he explains.

"​At all times a bank'​s Liquidity Coverage Ratio must be greater than 100 percent. As a result, banks may be more likely to (​1) purchase assets that provide the best funding efficiency under the LCR and (​2) reduce yields on certain deposit products to compensate for the increased cost of institutional demand deposit offerings. Therefore, banks (​as investors) may become more competitive in buying high quality assets, but banks (​as deposit takers) may become less competitive when compared to similar money market investment products."

Sloan adds, "​The previous discussion is not meant to suggest that banks no longer have a need for deposits, but we clearly expect them to price and structure deposit products to minimize their HQLA impact. That suggests that the downward rate pressure on overnight fully fungible deposits is likely to grow even if the Federal Reserve is slow to raise short-​term interest rates."

He continues, "There will likely be significant changes in 2015 with respect to the pricing of institutional deposits. As banks start to tangibly detect the true cost of certain deposits under LCR, it is likely that they will begin having pricing conversations with clients more frequently. In a recent Wall Street Journal article the authors anecdotally mentioned five large money center banks that have already had discussions with "​clients, which range from large companies to hedge funds, insurers and smaller banks, that they will begin charging fees on accounts that have been free for big customers." (​See Crane Data'​s Dec. 9, 2014, News, "Big Banks Push Away Deposits, Says WSJ.")

What are the alternatives for short-​term investors? One is money market funds. The piece continues, "It has been suggested that the structural changes to money market funds will force assets back into bank deposits. However, we would argue that countervailing regulatory forces from LCR may be just as powerful, especially if a rising rate environment widens the yield differential between deposit products and money market funds from the current 0–​10 basis points to higher double digits. In that context, we expect that money market fund balances may not be as significantly impacted and may remain an attractive alternative in both floating-​rate and fixed-​rate forms. There are still a number of operational elements pertaining to money market funds to be sorted out, yet we see them as the closest cousin to bank deposit products and recommend them as a relatively strong alternative for short-​term operating cash balances."

Short-​term bond funds won'​t see the same type of flows as MMFs, Sloan says. "​We argue that money market funds and short-​term bond funds at the sector level have fundamentally different value propositions and will not be economic substitutes even when prime funds float their net asset values. Flows in short-​term bond funds do not generally correlate with money market funds, suggesting that investors do not see the two as economic substitutes either. As such, it is unlikely that investors currently investing in bank deposits would directly shift into a short-​term bond funds. In fact, we do not generally see short-​term bond funds as suitable for the liquidity requirements of operating cash balances at all. As such, we do not anticipate that traditional corporate cash investors will move a significant amount of cash into short-​term bond funds and that they will remain a very small component of overall cash strategies."

However, he continues, "We estimate that direct investments will experience the largest marginal inflows from bank deposit outflows. In this estimate, we assume that deposit yields will lag alternative investment yields based on market and regulatory forces. However, not every fixed income asset class will perform the same in the new investment environment and we highlight how various asset classes may fare. Four forces will likely impact short-​term yields going forward: (​1) overall fixed income supply, (​2) bank demand for government assets, (​3) deposit flows out of banks, and (​4) outflows from prime funds to government funds."

Sloan concludes, "Wells Fargo Economics anticipates that overall Treasury issuance will likely decline as labor markets improve and overall economic growth accelerates.... Meanwhile, the supply of agency-​related assets is expected to continue its downward trajectory for at least the next three years.... As global banks fully phase-​in the LCR over the coming years, we anticipate that overall demand for government-​related assets will continue to grow, pressuring yields lower than they otherwise would." Further, "​To the extent that depositors look to reallocate funds from deposits into direct investments, downward yield pressure on highly-​rated short-​term securities will increase in both government-​related and credit-​related asset classes. While we do not expect a wholesale exit out of prime funds and into government funds, we expect at least some movement in that direction. The shift from prime to government funds will strengthen demand for government-​related short-​term assets, while non-​government related assets yields should widen (​if only slightly), creating opportunity to outperform."

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Crane Data released its January Money Fund Portfolio Holdings yesterday, and our latest collection of taxable money market securities, with data as of Dec. 31, 2014, shows a jump in Repo, Treasuries, and Agencies, and drops in Other (​Time Deposits), Commercial Paper, and CDs. Money market securities held by Taxable U.​S. money funds overall (​those tracked by Crane Data) increased by $​68.​3 billion in December to $​2.​519 trillion, after rising $​11.​5 billion in November, $​4.​7 billion in October, $​42.​4 billion in September, and $​28.​2 billion in August. With a huge increase in Fed repo at year-​end, Repo became the largest portfolio segment among taxable money market funds, once again moving ahead of CDs. Treasuries ranked as the third largest segment, followed by Agencies, which moved ahead of CP. These were followed by Other (​Time Deposits), then VRDNs. Money funds' European-​affiliated holdings fell precipitously to 20.​0%, from 28.​1% the previous month, while the Americas increased its market share to 67.​9%. Below, we review our latest Money Fund Portfolio Holdings statistics.

Among all taxable money funds, Repurchase agreement (​repo) holdings increased by a whopping $​140.​3 billion (​26.​9%) to $​662.​4 billion, or 26.​3% of assets, after increasing $​10.​8 billion in November, decreasing $​85.​3 billion in October, and increasing $​84.​4 billion in September. Certificates of Deposit (​CDs) were down $​34.​8 billion (​6.​2%) in December to $​528.​4 billion, or 21.​0%, after increasing $​11.​3 billion in November, increasing $​5.​6 billion in October, and dropping $​20.​1 billion in September. Treasury holdings, the third largest segment, increased by $​56.​0 billion (​14.​5%) to $​441.​9 billion (​17.​5% of holdings), after decreasing $​3.​0 billion in November. Government Agency Debt moved up to the fourth largest segment, jumping $​19.​9 billion (​5.​7%) to $​367.​2 billion, or 14.​6% of assets, while Commercial Paper (​CP) fell to fifth, decreasing $​26.​2 billion (​6.​9%) to $​353.​9 billion, or 14.​0% of assets. Other holdings, which include primarily Time Deposits, decreased sharply, down $​86.​1 billion to $​140.​9 billion (​5.​6% of assets). VRDNs held by taxable funds decreased by $​0.​8 billion to $​24.​5 billion (​1.​0% of assets).

Among Prime money funds, CDs still represent over one-​third of holdings with 34.​7% (​down from 36.​9% a month ago), followed by Commercial Paper (​23.​2%). The CP totals are primarily Financial Company CP (​13.​5% of holdings) with Asset-​Backed CP making up 5.​9% and Other CP (​non-​financial) making up 3.​8%. Prime funds also hold 5.​6% in Agencies (​same as last month), 4.​8% in Treasury Debt (​up from 3.​6%), 3.​8% in Other Instruments, and 5.​2% in Other Notes. Prime money fund holdings tracked by Crane Data total $​1.​523 trillion (​down from $​1.​526 trillion last month), or 60.​5% of taxable money fund holdings' total of $​2.​519 trillion.

Government fund portfolio assets totaled $​482 billion in December, up from $​461 billion in November, while Treasury money fund assets totaled $​514 billion, up from $​466 billion at the end of November. Government money fund portfolios were made up of 57.​7% Agency Debt, 15.​7% Government Agency Repo, 3.​2% Treasury debt, and 22.​8% in Treasury Repo. Treasury money funds were comprised of 68.​9% Treasury debt, 30.​2% Treasury Repo, and 1.​0% in Government agency, repo and investment company shares.

European-​affiliated holdings plunged a massive $​184.​1 billion in December to $​504.​4 billion (​among all taxable funds and including repos); their share of holdings fell to 20.​9% from 28.​1% the previous month. Eurozone-​affiliated holdings also fell sharply, down $​82.​8 billion to $​276.​8 billion in December; they now account for 11.​0% of overall taxable money fund holdings. Asia & Pacific related holdings decreased by $​5.​8 billion to $​302.​8 billion (​12.​0% of the total). Americas related holdings skyrocketed $​258.​3 billion to $​1.​711 trillion, thanks to a year-​end spike in Fed Repo, and now represent 67.​9% of holdings.

The overall taxable fund Repo totals were made up of: Treasury Repurchase Agreements (​up $​176.​7 billion to $​441.​1 billion, or 17.​5% of assets), Government Agency Repurchase Agreements (​down $​21.​7 billion to $​131.​3 billion, or 5.​2% of total holdings), and Other Repurchase Agreements (​remained flat at $​90.​0 billion, or 3.​6% of holdings). The Commercial Paper totals were comprised of Financial Company Commercial Paper (​down $​21 billion to $​205.​1 billion, or 8.​1% of assets), Asset Backed Commercial Paper (​up $​3.​2 billion to $​90.​5 billion, or 3.​6%), and Other Commercial Paper (​down $​8.​3 billion to $​58.​3 billion, or 2.​3%).

The 20 largest Issuers to taxable money market funds as of Dec. 31, 2014, include: the US Treasury ($​442.​7 billion, or 17.​6%), Federal Reserve Bank of New York ($​352.​6B, 14.​0%), Federal Home Loan Bank ($​215.​7B, 8.​6%), JP Morgan ($​62.​9B, 2.​5%), Federal Home Loan Mortgage Co ($​60.​8B, 2.​4%), Wells Fargo ($​58.​0, 2.​3%), Bank of Tokyo-​Mitsubishi UFJ Ltd ($​55.​8B, 2.​2%), BNP Paribas ($​55.​4B, 2.​2%), RBC ($​54.​8B, 2.​2%), Bank of Nova Scotia ($​51.​7B, 2.​1%), Bank of America ($​47.​0B, 1.​9%), Federal National Mortgage Association ($​46.​6B, 1.​8%), Toronto-​Dominion ($​46.​2B, 1.​8%), Sumitomo Mitsui Banking Co ($​44.​3B, 1.​8%), Federal Farm Credit Bank ($​41.​0B, 1.​6%), Citi ($​40.​8B, 1.​6%), Bank of Montreal ($​38.​8B, 1.​5%), Credit Agricole ($​38.​4B, 1.​5%), Credit Suisse ($​38.​0B, 1.​5%), and Mizuho Corporate Bank Ltd ($​35.​2B, 1.​4%).

In the repo space, Federal Reserve Bank of New York'​s RPP program issuance (​held by MMFs) remained the largest program with $​352.​6B, or 53.​2% of the repo market, up from 27.​6% one month ago. Of the $​352.​6B, $​201.​1B was in the Fed’​s temporary Term Repo, while $​151.​4B was in Overnight Repo. The 10 largest Repo issuers (​dealers) (​with the amount of repo outstanding and market share among the money funds we track) include: Federal Reserve Bank of New York ($​352.​6B, 53.​2%), Bank of America ($​38.​6B, 5.​8%), BNP Paribas ($​28.​3B, 4.​3%), JP Morgan ($​27.​0B, 4.​1%), Wells Fargo ($​23.​9B, 3.​6%), Citi ($​18.​9B, 2.​9%), Credit Suisse ($​18.​7B, 2.​8%), RBC ($​18.​1B, 2.​7%), Credit Agricole ($​16.​7B, 2.​5%), and Bank of Nova Scotia ($​16.​2B, 2.​4%).

The 10 largest issuers of CDs, CP and Other securities (​including Time Deposits and Notes) combined include: Bank of Tokyo-​Mitsubishi UFJ Ltd ($​49.​7B, 5.​5%), Sumitomo Mitsui Banking Co ($​44.​3B, 4.​9%), Toronto-​Dominion Bank ($​40.​7B, 4.​5%), RBC ($​36.​7B, 4.​0%), Bank of Nova Scotia ($​35.​5B, 3.​9%), JP Morgan ($​35.​4B, 3.​9%), Wells Fargo ($​34.​1B, 3.​7%), Bank of Montreal ($​31.​7B, 3.​5%), Mizuho Corporate Bank Ltd ($​31.​6B, 3.​5%), and Svenska Handelsbanken ($​30.​7B, 3.​4%).

The 10 largest CD issuers include: Toronto-​Dominion Bank ($​40.​1B, 7.​7%), Bank of Tokyo-​Mitsubishi UFJ Ltd ($​37.​2B, 7.​1%), Sumitomo Mitsui Banking Co ($​37.​2B, 7.​1%), Bank of Montreal ($​29.​9B, 5.​7%), Bank of Nova Scotia ($​29.​5B, 5.​6%), Mizuho Corporate Bank Ltd ($​29.​1B, 5.​6%), Wells Fargo ($​25.​3B, 4.​8%), Rabobank ($​24.​4B, 4.​7%), RBC ($​18.​4B, 3.​5%), and Sumitomo Mitsui Trust Bank ($​17.​8B, 3.​4%).

The 10 largest CP issuers (​we include affiliated ABCP programs) include: JP Morgan ($​24.​3B, 8.​0%), Commonwealth Bank of Australia ($​17.​6B, 5.​8%), Westpac Banking Co ($​16.​8B, 5.​6%), RBC ($​14.​1B, 4.​7%), BNP Paribas ($​10.​6B, 3.​5%), Australia & New Zealand Banking Group ($​10.​4B, 3.​4%), Toyota ($​9.​3B, 3.​1%), DnB NOR Bank ASA ($​9.​1B, 3.​0%), Bank of Tokyo-​Mitsubishi UFJ Ltd ($​8.​2B, 2.​7%), and FMS Wertmanagement ($​7.​7B, 2.​6%).

The largest increases among Issuers include: Federal Reserve Bank of NY (​up $​208.​4B to $​352.​6B), US Treasury (​up $​56.​5B to $​442.​7B), Federal Home Loan Mortgage Co. (​up $​8.​7B to $​60.​8B), Federal Home Loan Bank (​up $​8.​3B to $​215.​7B), JP Morgan (​up $​4.​9B to $​62.​9B), Toronto-​Dominion Bank (​up $​3.​4B to $​46.​2B), Sumitomo Mitsui Trust Bank (​up $​2.​2B to $​19.​5B), Standard Chartered Bank (​up $​2.​2B to $​19.​6B), Federal Farm Credit Bank (​up $​2.​1B to $​41.​0B), and Svenska Handelsbanken (​up $​1.​3B to $​30.​7B).

The largest decreases among Issuers of money market securities (​including Repo) in December were shown by: Credit Agricole (​down $​21.​8B to $​38.​4B), DnB Norbank ASA (​down $​19.​2B to $​15.​5B), Barclays PLC (​down $​18.​8B to $​25.​4B), Swedbank AB (​down $​17.​1B to $​12.​5B), Skandinaviska Enskilda Banken AB (​down $​14.​9B to $​15.​1B), Societe Generale (​down $​12.​7B to $​21.​3BBNP Baribas (​down $​8.​3B to $​55.​4B), Natixis (​down $​6.​8B to $​34.​2B), ING Bank (​down $​3.​7B to $​22.​2B), and Bank of America (​down $​3.​6B to $​47.​0B).

The United States remained the largest segment of country-​affiliations; it represents 58.​7% of holdings, or $​1.​478 trillion (​up $​260B). Canada (​9.​1%, $​229.​7B) remained in second, while Japan (​7.​2%, $​181.​8B) jumped into third, moving ahead of France (​6.​6%, $​165.​8B). Australia (​3.​5%, $​88.​5B) moved into fifth, followed by the U.​K. (​3.​3%, $​83.​2B) in sixth place. Sweden (​3.​1%, $​78.​7B) was in seventh place, followed by the The Netherlands (​2.​5%, $​63.​0B), and Switzerland (​2.​0%, $​49.​7B). Germany (​1.​6%, $​40.​0B) held 10th place among country affiliations. (​Note: Crane Data attributes Treasury and Government repo to the dealer'​s parent country of origin, though money funds themselves "​look-​through" and consider these U.​S. government securities. All money market securities must be U.​S. dollar-​denominated.)

As of Dec. 31, 2014, Taxable money funds held 20.​8% of their assets in securities maturing Overnight, and another 18.​1% maturing in 2-​7 days (​38.​9% total in 1-​7 days). Another 20.​3% matures in 8-​30 days, 15.​3% matures in 31-​60 days, and 10.​2% matures in the 61-​90 day period. (​Note that almost ¾, or 74.​5% of securities, mature in 60 days or less, the dividing line for use of amortized cost accounting under the new pending SEC regulations.) The next bucket, 91-​180 days, holds 11.​1% of taxable securities, and just 4.​2% matures beyond 180 days.

Crane Data'​s Taxable MF Portfolio Holdings (​and Money Fund Portfolio Laboratory) were updated Monday, and our MFI International "​offshore" Portfolio Holdings and Tax Exempt MF Holdings will be released later this week. Visit our Content center to download files or visit our Portfolio Laboratory to access our "​transparency" module. Contact us if you'​d like to see a sample of our latest Portfolio Holdings Reports or our new Reports Issuer Module.

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As we mentioned Thursday when we released the January issue of our flagship Money Fund Intelligence newsletter, each year Crane Data recognizes the top-​performing money funds, ranked by total returns, for calendar year 2014, as well as the top-​ranked funds for the past 5‐​year and past 10-​year periods. We present the following funds with our annual Money Fund Intelligence Awards. These include the No. 1-​ranked funds based on 1-​year, 5-​year and 10-​year returns, through Dec. 31, 2014, in each of our major fund categories -- Prime Institutional, Government Institutional, Treasury Institutional, Prime Retail, Government Retail, Treasury Retail and Tax‐​Exempt. Below, we reprint the MFI article announcing the winners. (​We mentioned the 1-​year winners on the website Thursday -- see our Jan. 8 News "​Dec. MFI Features Awards, JPM'​s Donohue & Linton; Fed Shelves CSAs". We repeat them here, but we also review the 5-​year and 10-​year top-​performers below.)

The Top-​Performing Taxable fund overall in 2014 and top among Prime Institutional funds was BlackRock Cash Inst MMF (​BGIXX), which returned 0.​11%. (​We excluded BlackRock Cash'​s SL class due to its limited availability.) Among Prime Retail funds, Invesco Money Market Cash Reserve (​AIMXX) and Schwab Cash Reserve (​SWSXX) had the best return in 2014 (​0.​06%). BofA Govt Plus Reserve Capital (​GIGXX), Morgan Stanley Inst Liquid Govt Inst (​MVRXX), and Western Asset Inst Govt MM Inst (​INGXX) were the Top Government Institutional funds over a 1-​year period with returns of 0.​04%, while BofA Govt Plus Reserve Investor (​BOPXX) and Morgan Stanley Inst Liq Govt Cash Mgmt (​MSGXX) won the MFI Award for Government Retail Money Funds (​based on 1-​year return). Morgan Stanley Inst Liq Treasury Inst (​MISXX) and Western Asset Inst US Treasury Obligation MMF Inst (​LUIXX) were No. 1 in the Treasury Institutional class, and Morgan Stanley Inst Liq Treasury Cash Mgmt (​MREXX) ranked tops among Treasury Retail funds.

For the 5-​year period through Dec. 31, 2014, BlackRock Cash Inst MMF Inst (​BGIXX) and Fidelity Inst MM Portfolio (​FNSXX) took top honors for the best performing Prime Institutional money fund with returns of 0.​18%. Meeder Money Market Fund Retail (​FFMXX) once again ranked No. 1 among Prime Retail with an annualized return of 0.​11%. American Beacon US Govt Select (​AAOXX) ranked No. 1 among Govt Institutional funds, while Davis Government MMF (​RPGXX) ranked No. 1 among Govt Retail funds over the past 5 years. BlackRock Cash Treasury MMF Inst (​BRIXX) ranked No. 1 in 5-​year performance among Treasury Inst money funds, and Northern Trust Treasury Money Market (​NITXX) ranked No. 1 among Treasury Retail funds.

The highest‐​performers of the past 10 years included: Touchstone Inst MMF (​TINXX), which returned 1.​82% (​it was No. 1 overall and first among Prime Inst, though this fund will be liquidating -- see our Dec. 26 News "​Touchstone to Liquidate Money Funds, Victim of SEC'​s MMF Reforms"); Fidelity Select MM Portfolio (​FSLXX), which returned 1.​67% (​the highest among Prime Retail); American Beacon US Govt Select (​AAOXX) and Goldman Sachs FS Govt Inst (​FGTXX), which returned 1.​61%, (​No. 1 among Govt Inst funds); and Vanguard Federal Money Market Fund (​VMFXX), which ranked No. 1 among Govt Retail funds (​1.​57%). BlackRock Cash Treasury MMF Inst (​BRIXX) returned the most among Treasury Institutional funds over the past 10 years; and, Morgan Stanley Inst Liq Treasury Inv (​MTNXX) ranked No. 1 among Treasury Retail money funds.

We'​re also giving out awards for the best-​performing Tax‐​Exempt money funds. Fidelity AMT Tax Free Money Fund (​FIMXX) and Invesco Tax Exempt Cash Fund A (​ACSXX) ranked No. 1 for the 1-​year period ended Dec. 31, 2014, with returns of 0.​11%. Over the last 5 years, BMO Tax Free MMF I (​MFIXX) was the top performer with a return of 0.​21%. BMO Tax Free MMF I also was the top-​ranked fund for the 10-​year period ended Dec. 31, with a return of 1.​37%. See our latest Money Fund Intelligence XLS for more detailed rankings. Winners will receive a letter and certificate stating their No. 1 ranking , the number of funds in their category, and the criteria used.

In others news, management consulting firm Beacon Consulting Group released a white paper, entitled, "Getting Ready for Money Market Reform last week. BCG Principal Gerry Healy writes, "The Securities and Exchange Commission'​s (​SEC) money market reform imposes new operational requirements on institutional money market funds and provides retail money market fund boards with new tools should certain market events occur. Now is the time for asset managers and service providers to organize a readiness assessment program in anticipation of potential operating model changes, new procedures, technology modifications and new data flows that may be required in order to meet the operational requirements and regulatory filing deadlines,"

The paper explains, "Money market reform readiness activities generally consist of working with all affected functions to ensure that: Systems and processes are capable of handling the requirement for institutional funds to use a floating NAV out to four decimal places; Data and processes are established to comply with SEC filings (​new data on Form NMFP and new Form N-​CR) that may be required; and, Investor liquidity requirements (​e.​g. intraday dealing) are met."

On Accounting and NAV Dissemination, it says, "Fortunately, most fund accounting systems currently in use appear to be able to calculate the floating NAVs to the four decimal place requirement. Where firms will likely spend the most time during this phase is ensuring that the extracts and reports delivered to internal and external interested parties are retrofitted to accommodate the dissemination of the four decimal place NAV. All reports currently used to support money market funds, including hard copy reports, data extracts, management reporting, should be analyzed to ensure compliance. The reports will drive the development of business requirements that may be required to close any gaps related to NAV dissemination."

On the subject, Regulatory Filings - Data, the paper explains, "A trigger event that may require a filing occurs in one of two ways: via market activity or through board approved measures such as redemption gates or redemption fees. Once a trigger event is approved by the board or occurs within the portfolio due to market activity, a Form N-​CR filing requirement results. A "​sources and uses" data matrix for the N-​CR and NMFP filings is useful in developing requirements for any data or reporting gaps and tracks key inputs required to complete the new forms."

Finally, the paper says, "Complying with money market reform requirements will require a significant collaboration between asset managers and service providers. The asset manager'​s role in orchestrating this coordination is critical. An approach that includes a sound analysis of process changes and data requirements, followed by a comprehensive action plan to remediate any gaps can ensure a successful compliance process."

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We recently learned of a story involving a local government investment pool, or LGIP, the Illinois Metropolitan Investment Fund (​IMET) that may lose as much as $​50 million in what it thought was a safe investment, a repo backed by USDA loans. The Chicago Tribune, which has been following the story, first wrote, "Questions Surround IMET'​s Decision to Buy Repurchase Agreements." They explain, "The securities, known as repurchase agreements, or repos, have long been used by investors to park large amounts of cash rather than depositing the money in banks where only the first $​250,​000 is insured."

The Tribune piece continues, "​Repos are considered relatively safe investments because they are secured by collateral. Investment pools entrusted with public funds normally only enter into repurchase agreements that are secured by U.​S. Treasury bonds or other debt issued by U.​S. government agencies. They are considered the highest quality collateral and can be easily liquidated. IMET'​s collateral in the repo were private loans guaranteed by the U.​S. Agriculture Department."

It explains, "Government investment pools like IMET are common. They allow local governments to combine funds for investment, providing investment diversity and strategies that local governments may not be able to find on their own. The pools are vulnerable to investment losses like any security. In Illinois, there is the state-​managed pool run by the treasurer'​s office and a few pools like IMET created through interlocal cooperation agreements. IMET was established in 1996 [​and[] created the convenience fund in 2003, billing it as short-​term, fully collateralized investment vehicle. According to IMET documents, the fund is run like a money-​market mutual fund by trying to maintain a stable $​1 share price. The convenience fund'​s 12-​month return as of Sept. 30, 2013, was 0.​34 percent, compared with 0.​05 percent for Illinois Funds, IMET said its in 2013 annual report."

The Tribune, writes in its latest update, "Advisor to Municipal Investment Fund Accused of Negligence." They discuss a lawsuit against the investment advisor, Milwaukee-​based Pennant Management, for recommending the bad loans and touting them as "​essentially risk-​free." The article says, "​Pennant'​s clients have lost nearly $​180 million because the loans are allegedly fraudulent."

The article goes on to explain, "Starting in 2013, Pennant began acquiring loans from Orlando-​based First Farmers Financial, which said the loans were guaranteed by the USDA. In all, Pennant bought 26 loans from First Farmers totaling nearly $​180 million, according to court papers. According to the federal criminal complaint, First Farmers fabricated the USDA guarantees. Pennant also came to believe that the borrowers for the 26 loans do not exist, according to a suit filed by Pennant filed against First Farmers." The piece adds that First Farmers CEO Nikesh Patel was arrested in September and released on bond.

The Tribune article continues, "The Illinois Metropolitan Investment Fund, or IMET, is one of the biggest losers. It had $​50.​4 million invested, and the loss has rippled across the state. IMET runs an investment pool on behalf of almost 300 municipalities, public pension funds and other public entities in Illinois. The entire loss on the First Farmers repo involved public funds. Municipalities and public agencies invest operating funds with IMET and have had a portion of the investments frozen as IMET and Pennant seek to recover money."

IMET Chairman Jerry Ducay posted a letter to investors on its website in which he announces his intent to recover the loss. It says, "​As a valued investor with IMET, you understandably have many questions regarding your investment, IMET'​s recovery efforts and the status of the Convenience Fund, which is why we wanted to update you on the latest information with regard to our efforts to obtain what we hope will be a full recovery of the approximately $​50 million in fraudulent investments.... We want to assure you that this is an isolated incident and is contained as we have eliminated all other repurchase agreements from the Convenience Fund in an abundance of caution for IMET Participants."

Ducay continues, "​Further, we have reviewed all other investments and the collateral pledged for these other investments. IMET has and will continue to evaluate its practices and policies in order to continue to protect the Convenience Fund'​s participants. At present, IMET'​s Convenience Fund portfolio consists of bank deposits which are collateralized by FDIC Insurance, government securities at 110 percent or Federal Home Loan Bank letters of credit. We will solicit RFP responses for investment advisory services for future needs and review the responses with third party consultants as appropriate . We will continue to make every effort to ensure that the investments of the Convenience Fund are prudent and safe."

The letter continues, "​IMET has retained the law firm of Vedder Price P.​C. to assist in the recovery of assets from all potentially responsible parties. Recovery efforts are well underway, and IMET successfully filed a motion to intervene in the Pennant litigation against FFF in order to best protect the Convenience Fund Participants' interests in these seized assets. IMET also filed a lawsuit against FFF in federal district court. Over the course of our 18-​year history, IMET has provided outstanding investment options to our participants. This is the first time we have been the subject of criminal fraud, and we are taking all appropriate actions to guard against further such incidents. We are committed to continuing these updates, and appreciate your patience and understanding as we aggressively pursue legal redress in this matter."

IMET is not the first LGIP to run into problems over the years. In 1994, the Orange County (​Calif.) Investment Pool went bankrupt, which also triggered some support events from California Tax Exempt Money Funds that owned O.​C. debt. Also, in November 2007, the Florida State Board of Administration'​s Local Government Investment Pool had to implement a freeze on withdrawals after a run by investors -- a story we covered at the time, "State Board Halts Redemptions in Florida Local Govt Investment Pool."

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The January issue of Crane Data'​s Money Fund Intelligence was sent out to subscribers Friday morning. The latest edition of our flagship monthly newsletter features the articles: "Money Fund Highlights of '​14; Looking for Daylight in 2015," a review of the top MMF stories of the year, asset totals, highlights, and a look ahead to 2015; "JPMAM'​s Donohue & Linton Discuss Gates & Fees," an interview with J.​P. Morgan Asset Management'​s John Donohue and Andrew Linton, who discuss gates and fees; and, "Top MMFs of 2014; Our 6th Annual MFI Awards," where we name the top-​performing MMFs for the year. We also updated our Money Fund Wisdom database query system with Dec. 31, 2014, performance statistics, and sent out our MFI XLS spreadsheet this morning. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our December Money Fund Portfolio Holdings are scheduled to go out on Monday, Jan. 12. (​Note: ICI also just announced a workshop on the new Money Market Fund Reforms scheduled for Feb. 4 in Washington.)

The latest MFI'​s "Money Fund Highlights of '​14; Looking for Daylight in 2015" article comments, "Money market mutual funds endured not only sweeping regulatory reform in 2014, but another year of near zero interest rates -- their 6th in a row. And yet, MMFs not only survived, assets grew (​slightly) for the third straight year. Modest consolidation continued and fee waivers remained a fact of life, but looking ahead, there is reason for hope. Banks are also feeling the regulatory squeeze, which could lead to outflows from bank deposits, and at long last, it finally appears that interest rate hikes will, in fact, be a reality in 2015. Never have so many worked so hard for so little, is the way we sum up the past few years. But maybe, just maybe, that hard work will pay off a little bit more in 2015."

It continues, "News coverage last year was dominated by the SEC'​s long-​awaited and much-​debated Money Market Fund Reforms, which were adopted in July. In short, the big change was that the SEC adopted the floating NAV and fees and gates for prime institutional and municipal MMFs only, both taking effect in 2016. However, reforms were not the only big story of 2014." It goes on to list the top 10 stories of 2014 from cranedata.​com and explain how MMF assets surged in the latter half of 2014.

In our monthly MFI profile, we interview JP Morgan'​s John Donohue and Andrew Linton on the topic of gates and fees. We asked: How big a concern are gates and fees? Are they a bigger issue than the floating NAV? "Donohue: Clients are telling us that fees and gates are potentially more problematic than a floating NAV. That'​s simply because they are aware that if and when a gate actually happens it will be during a stressed market, which is precisely when they would most want access to their liquidity. Many investors use money market funds for liquidity, so to the extent that they think that a gate is potentially going to be utilized, there is a risk that they will look to move earlier than they otherwise may have to get money out of funds. So, at least initially, I think there is some risk of unintended consequences in the form of large outflows."

We asked: How do these issues differ from the current rules? "Linton: Ordinarily, U.​S. open-​end funds may not suspend the right of redemption, and may not postpone the payment of redemption proceeds for more than seven days following receipt of a redemption request. However, under the 2010 money market fund reforms, Rule 22e-​3 permits money market funds to suspend redemptions and postpone payment of redemption proceeds in an orderly liquidation of the fund if, subject to other requirements, the fund'​s board determines that the deviation between the fund'​s amortized cost per share and its current net asset value per share may result in material dilution or other unfair results to investors or existing shareholders. Basically, under Rule 22e-​3 you have to move to liquidate the fund. Under the new rule, you can suspend redemptions for up to 10 business days in a 90 day period. Also, you don'​t have to move to liquidation. We should point out, while we just went through the reasons why maybe there are some hidden dangers in the use of a gate, at the end of the day, the gates themselves can be a shareholder friendly protection."

The January MFI article on the MFI Awards says, "In this issue, we once again recognize some of the top‐​performing money funds, ranked by total returns, for calendar year 2014, as well as the top-​ranked funds for the past 5-​year and past 10-​year periods. We present the following funds with our annual Money Fund Intelligence Awards. These include the No. 1-​ranked funds based on 1-​year, 5-​year and 10-​year returns, through Dec. 31, 2014, in each of our major fund categories -- Prime Institutional, Government Institutional, Treasury Institutional, Prime Retail, Government Retail, Treasury Retail and Tax‐​Exempt."

It continues, "The top-​performing Taxable fund overall in 2014 and top among Prime Institutional funds was BlackRock Cash Inst MMF (​BGIXX), which returned 0.​11%. Among Prime Retail funds, Invesco Money Market Cash Reserve (​AIMXX) and Schwab Cash Reserves Fund <​b:>`​_(​SWSXX) had the best return in 2014 (​0.​06%). `​BofA Govt Plus Reserve Capital (​GIGXX), Morgan Stanley Inst Liquid Govt Inst (​MVRXX) and Western Asset Inst Govt MM Inst (​INGXX) won the Top Government Institutional fund award over a 1-​year period with a return of 0.​04%, while BofA Govt Plus Reserve Investor (​BOPXX) and Morgan Stanley Inst Liq Govt Cash Mgmt (​MSGXX) won the MFI Award for Government Retail Money Funds (​1-​year return). Morgan Stanley Inst Liq Treasury Inst (​MISXX) and Western Asset Inst US Treasury Obligation MMF Inst (​LUIXX) were No. 1 in the Treasury Institutional class, and Morgan Stanley Inst Liq Treasury Cash Mgmt (​MREXX) ranked tops among Treasury Retail funds." Watch for more on our MFI Awards in coming days, or see the January MFI.

Crane Data'​s December MFI XLS with Dec. 31, 2014, data shows total assets increasing for the fifth straight month, rising $​86.​2 billion in December to $​2.​644 trillion, after rising $​21.​0 billion in November, $​10.​2 billion in October, $​27.​5 billion in September, and $​34 billion in August. Our broad Crane Money Fund Average 7-​Day Yield and 30-​Day Yield remained at 0.​02%, while our Crane 100 Money Fund Index (​the 100 largest taxable funds) stayed at 0.​03% (​7-​day and 30-​day). On a Gross Yield Basis (​before expenses were taken out), funds averaged 0.​13% (​Crane MFA, unchanged) and 0.​17% (​Crane 100, up from 0.​16%) 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, up one bps from last month. The average WAM for the Crane MFA and the Crane 100 were 40 and 43 days, respectively. The Crane MFA WAM is down 4 days from last month while the Crane 100 WAM is down 3 days from the prior month. (​See our Crane Index or craneindexes.​xlsx history file for more on our averages.)

In other news, the Federal Reserve Board released the Minutes from its December 16-​17 FOMC meeting (​which we covered on Dec. 18 in our News, "Fed Takes Baby Steps Towards Hikes; Fed Funds Headed Higher in 2015). One of the more notable points relates to the Fed shelving previous talk of creating segregated cash accounts.

The minutes say, "​The manager also provided an update on staff work related to potential arrangements that would allow depository institutions to pledge funds held in a segregated account at the Federal Reserve as collateral in borrowing transactions with private creditors and which could potentially provide an additional supplementary tool during policy normalization. After further review, staff analysis suggested that such accounts involved a number of operational, regulatory, and policy issues. These issues raised questions about these accounts' possible effectiveness that would be difficult to resolve in a timely fashion. It was therefore decided that further work to implement such accounts would be shelved for now."

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One of the key takeaways from State Street Global Advisors' new white paper, "2015 Global Cash Outlook: The New World of Cash," is that the era of "​one fund fits all" is over. Low interest rates and sweeping money market reforms have transformed how investors should approach cash management, they say. The paper offers a "guide to the new world of cash," explaining the changes and why it'​s important to segment cash into different buckets. The 6-​page report begins, "Between regulatory overhauls and unprecedented market conditions, cash investing has changed more in the past five years than in the previous 40, and it is likely to continue shifting for the balance of this decade."

It explains, "​The financial crisis which peaked in 2008 has ushered in regulations that have upended the way money market funds and the issuers of short-​term securities operate. Occurring against a backdrop of record-​low yields -- itself an outgrowth of the crisis -- these developments have forced investors to reassess the role of cash investments and the structures used to hold them. Where once institutional cash was practically synonymous with the prime money market fund, it has now become much more complicated for institutions to capture the three primary cash goals -- safety of principal, liquidity and attractive yield -- using a single type of account."

SSgA explains, "But these challenges are also creating opportunities. For example, regulations that impose constraints on money market funds may drive investors to hold more government paper. This increased demand will keep Treasury rates fairly well bid, but it may also boost rates on non-​government securities, offering a potentially favorable reward for investors.... If there is a common theme to our 2015 cash outlook, it'​s this: Compared to the old world of cash, the new world of cash requires an articulated set of tools to meet one'​s objectives."

The paper discusses the impact of several upcoming changes to the market. The first is the SEC'​s floating NAV requirement for institutional prime money funds. "Prime money market funds may be used less by institutional investors needing absolute stability of capital. Markets may in turn see a commensurate increase in demand for vehicles that provide stability, such as government money funds and direct bank deposits."

It also looks at the impact of the Basel III banking regulations on MMFs. "​Among other changes, Basel III (​and subsequent Federal Reserve) LCR rules require banks to hold enough capital in high-​quality liquid securities to fund 100 percent of their projected outflows over the next 30 days.... These regulations make institutional deposits more costly for banks to hold. To offset the cost, some have begun charging fees to a range of institutional depositors on accounts that were previously free. Banks are also encouraging these depositors to seek alternative places to put their cash."

SSgA'​s piece continues, "The rules penalize banks for issuing debt that comes due in 30 days or less, which will lead to lower supply of short-​maturity bank debt at the same time the 2a-​7 regulations are requiring money market funds to hold a higher percentage of short-​term debt. Simultaneously, Basel III increases banks' own demand for high-​quality assets, decreases the incentive for banks to hold institutional deposits, and likely makes it harder for banks to find repo agreements to meet their short-​term funding needs -- all further adding to the demand pressures on the short-​end of the Treasury curve."

On the impact of the fees and gates requirement, they say, "The SEC gave money market fund providers two new tools to prevent runs on institutional prime and tax-​exempt money funds -- but not government funds -- during times of market stress: liquidity fees and redemption gates. In the event that weekly liquid assets fall below 30 percent of the fund'​s assets, money fund boards may now impose redemption fees of up to 2 percent or prohibit withdrawals altogether.... Investors may be unable to make "​on demand" withdrawals during times of crisis in the short-​term markets. As a result many may stop using prime and tax-​exempt funds to hold assets that require immediate liquidity, and will likely shift assets into government money funds, prompting lower yields on government debt."

SSgA adds, "These regulatory reforms all add up to the same conclusion: more demand for government securities, less supply of high-​quality substitutes at the short end of the curve, and lots of pressures weighing down Treasury yields. Meanwhile, if assets flow into government funds and out of institutional prime funds -- where floating NAV requirements begin in 2016 -- credit spreads on money market investments could widen substantially.... One effect of the new regulations is that money market funds could -- at last -- generate a meaningful spread above government bonds."

So how will these factors play out in 2015 and beyond? They write, "[​W]​ith Basel III'​s new LCR requirements, and related fees for institutional depositors, institutions now have an impetus to start moving their cash. Once Treasury rates inch up, that incentive will grow. Many will choose to shift into government securities because of regulations that increase demand for highly liquid, risk-​free assets. This likely will create a feedback loop that mutes the effect of Fed rate hikes and helps keep Treasury yields from rising more than they might have. Meanwhile, prime money market funds may temporarily become less attractive because of the complexity of a floating NAV. This should serve to widen the spread gap between government funds and other money market structures, including commercial paper, time deposits, and short-​term notes. And this spread widening should create opportunities for investors to pick up yield in non-​government-​only funds."

These factors all point to the need for a segmented cash strategy. "​Since its birth in 1971, the money market fund has served as a catch-​all solution for cash investors, providing an attractive balance of stability, liquidity and yield. Since one fund can no longer serve all of those goals effectively, it is time for investors to become more intentional in their cash management decisions. With new market technicals and new limitations on traditional cash vehicles, investors have to rethink how they are managing cash, and for what purpose.... By dividing, or "​bucketing," their cash into three purposes, clients can uncover insights into the most effective ways to invest their assets."

SSgA concludes, "Bucketing is an important step to managing risk and liquidity. Without it, cash management could operate from the flawed perspective that "​all cash is operating cash." The three fundamental objectives in cash management still hold: security of principal, liquidity and yield. But corporate treasurers may want to focus more on liquidity for operating cash buckets. Or, for strategic cash, they may be more concerned with attractive yields, and be willing to take on additional counterparty or maturity risk. After examining and assessing their own cash goals and purposes, institutional investors can better gauge their risk tolerance, and decide to what extent they are able to remain in prime funds once floating NAV is implemented. Where they want to maintain a precise focus on stability and liquidity, they may opt for vehicles now more suited to meeting those needs, such as bank deposits and government money funds. Elsewhere, they may choose to stay in a prime fund, or, depending on their circumstances, pivot to pursue even higher yield."

Finally, they add, "For all it has changed, the cash investing landscape will be even more transformed in 18–​24 months.... Those who understand the implications of the new world of cash will be in the best position to meet its challenges, capture its opportunities, and achieve the full range of their operational and long-​term strategic goals."

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Crane Data kicks off its slate of 2015 conferences with Money Fund University, which is right around the corner, January 22-​23, 2015, at the Stamford Marriott in Stamford, Conn. The 5th annual Crane'​s Money Fund University is designed for those new to the money market fund industry or those in need of a concentrated refresher on the basics. But the event also focuses on hot topics like money market reforms and other recent industry trends. The conference features a faculty of the money fund industry'​s top lawyers, strategists, and portfolio managers. If you haven'​t already registered, there'​s still time -- click here to register. (​Tickets for the 1 1/​2 day event are $​500, but our block of discounted hotel rooms is only available through Thursday, Jan. 8) Registration is also now open for our "​big show" -- Crane'​s Money Fund Symposium, which will be June 24-​26, 2015, in Minneapolis, Minn.

MFU offers attendees an affordable and comprehensive one and a half day, "​basic training" course on money market mutual funds, educating attendees on the history of money funds, the Fed, interest rates, ratings, rankings, money market instruments such as commercial paper, CDs and repo, plus portfolio construction and credit analysis. At our Stamford event, we will also take a deep dive into the SEC'​s new money market reforms, with several sessions on the topic.

The morning of Day One of the 2015 MFU agenda includes: History & Current State of Money Market Mutual Funds with Peter Crane, President & Publisher, Crane Data; The Federal Reserve & Money Markets with Brian Smedley, U.​S. rates, Bank of America Merrill Lynch and Joseph Abate, Director, Fixed Income Strategy at Barclays; Interest Rate Basics & Money Fund Math with Phil Giles, Adjunct Professor, Columbia University; and, Ratings, Monitoring & Performance with Greg Fayvilevich, Director, Fitch Ratings and Barry Weiss, Director, Standard & Poor'​s Ratings Services.

Day One'​s afternoon agenda includes: Instruments of the Money Markets Intro with Teresa Ho, Vice President, J.​P. Morgan Securities; Repurchase Agreements with Teresa Ho and Shaina Negron, Associate, J.​P. Morgan Securities; Treasuries & Govt Agencies with Sue Hill, Senior Portfolio Manager, Federated Investors; Commercial Paper & ABCP with Rob Crowe, Director, Citi Global Markets and Jean-​Luc Sinniger, Director, Money Markets, Citi Global Markets; CDs, TDs & Bank Debt with Garrett Sloan, Fixed Income Strategist, Wells Fargo Securities and Marian Trano, senior Vice President and Treasurer, Bank Hapoalim; Instruments of the Money Markets: Tax-​Exempt Securities, VRDNs, TOBs & Muni Bonds with Colleen Meehan, Senior Portfolio Manager, Dreyfus Corp., and Rebecca Glen, Senior Research Analyst, Dreyfus Corp.; and, Credit Analysis & Portfolio Management with Adam Ackermann, VP & Portfolio Manager, J.​P. Morgan Asset Management.

Day Two'​s agenda includes: Money Fund Regulations: 2a-​7 Basics & History with John Hunt, Partner, Nutter, McClennan & Fish LLP and Joan Swirsky, Of Counsel, Stradley Ronon; Regulations II: New MMF Reforms with Stephen Keen, Counsel, Reed Smith and Jack Murphy, Partner, Dechert LLP; Regulations III: More Reforms, Hot Topics with Stephen Keen and Jack Murphy; and Money Fund Data and Wisdom Demo with Peter Crane. The conference ends with its annual MFU "​Graduation" ceremony (​where diplomas are given to attendees).

New portfolio managers, analysts, investors, issuers, service providers, and anyone interested in expanding their knowledge of "​cash" investing should benefit from our comprehensive program. Even experienced professionals may enjoy a refresher course and the opportunity to interact with peers in an informal setting. Attendee registration for Crane'​s Money Fund University is just $​500, exhibit space is $​2,​000, and sponsorship opportunities are $​3K, $​4K, and $​5K. A block of rooms has been reserved at the Stamford Marriott. For more information on how to become a sponsor or exhibitor, click here.

We'​d like to thank our MFU sponsors -- Fitch Ratings, Dreyfus/​BNY Mellon CIS, J.​P. Morgan Asset Management, Standard & Poor'​s Ratings Services, Wells Fargo Advantage Funds, and Dechert LLP -- for their support, and we look forward to seeing you in Stamford in just over two weeks. E-​mail Pete Crane (​pete@​cranedata.​com) for the latest brochure or visit www.​moneyfunduniversity.​com for more details.

Crane Data also has posted the preliminary agenda for our flagship conference, Money Fund Symposium, which will be held June 24-​26, 2015, at the Minneapolis Hilton in Minneapolis, Minn. The website -- www.​moneyfundsymposium.​com -- is live and we'​re now accepting registrations for our 7th annual Symposium. Crane Data, with partner Kinsley Meetings, hosted the largest gathering of money fund professionals anywhere (​we had a record attendance of 495) last past summer in Boston, and we again expect a capacity crowd in Minnesota.

Crane'​s Money Fund Symposium offers money market portfolio managers, investors, issuers, and service providers a concentrated and affordable educational experience, as well as an excellent and informal networking venue. Registration for Crane'​s Money Fund Symposium 2015 will remain $​750 (​like it'​s been the past 6 years); exhibit space is $​3,​000; and sponsorship opportunities are $​4.​5K, $​6K, $​7.​5K, and $​10K.

Finally, watch for the preliminary agenda on our 3rd annual European Money Fund Symposium soon. Our next "​offshore" money fund event is scheduled for Sept. 17-​18, 2015, in Dublin, Ireland. Let us know if you'​d like more information on any of our upcoming conferences, and watch for more information in coming weeks.

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The Federal Reserve Bank of New York began publishing more information on its RRP program last week, reports Reuters in the piece, "​U.​S. Fed releases more data on reverse repos operations". They write, "Among the new details released were the breakdown of the awards of the reverse repos by type of counterparty, which include Wall Street dealers, money market mutual funds, and government-​sponsored enterprises such as Fannie Mae and Freddie Mac, the New York Federal Reserve said on its website. Under the Fed'​s fixed-​rate reverse repo (​RRP) program, the Fed pays bidders an interest rate for them to borrow its Treasuries holdings, resulting in less cash in the banking system." We review the NY Fed'​s new data set below, and we also review some of the milestone'​s in the Fed'​s RRP program in 2014.

The Reuters article explains, "​The New York Fed plans to publish the breakdown information at or near the end of each quarter with a one-​quarter lag. In the third quarter, money market funds remained the dominant users of RRPs with the heaviest day on Sept. 30 when they took $​294.​37 billion. GSEs were the next biggest class of RRP participants, followed by banks, according to the latest allotment. Daily RRPs to primary dealers or the top 22 Wall Street firms that do business directly with the Fed ranged from $​100 million to as high as $​26.​06 billion."

An analysis of the new New York Fed data shows that money market fund usage of the RRP facility spiked at the end of the third quarter when MMFs purchased 98% of Fed repo. MMFs average share of the facility year-​to-​date through the third quarter was 78%, versus 14% for GSEs, 6% for Primary Dealers and 2% for Banks. MMFs average share of the total at quarter-​ends jumped to 88%. While we don'​t know yet how large MMFs' share of Fed repo was on Dec. 31, 2014, the overall issuance was a surprisingly low (​for quarter-​end) $​171 billion, according to the NY Fed'​s "​Temporary Open Market Operations" statistics. (​The Fed'​s new Term Repo program clearly took out much of the demand here.)

It was clearly a busy year for the New York Fed'​s ON RRP program, and changes to the program were one of the biggest stories of 2014. We review some of our coverage below.... We wrote in our Jan. 30, 2014, News, "Fed Extends Reverse Repo Program a Year, Increases Limit to 5 Billion," announcing that the NY Fed extended its trial repo program with money funds and cash investors by a year to Jan. 30, 2015 and increased the allotments for investors to $​5 billion from $​3 billion. Our Feb. 26 Link of the Day, "NY Fed Lifts Repo Rate to 5 Bps, said, "​Beginning with the operation to be conducted on Wed., Feb. 26, the fixed rate offered in these operations will be increased from four basis points to five basis points."

In April, we featured, "March MF Holdings Show Fed Repo Skyrockets, Other Securities Plummet. We wrote, "That giant sucking sound you heard at month-​end in March was money market investments leaving everywhere else and moving to the Federal Reserve Bank of New York'​s reverse repo program." On April 2, we reported, "Fed Repo Sets Record at Quarter End," as "​participation in the Federal Reserve reverse repo program rose to a record high of $​242 billion yesterday (​3/​31/​14), surpassing the previous record of $​197 billion that was set on December 31."

That record only lasted a quarter as detailed in our July 3 News, "JPM Says Fed RRP Hits Record." J.​P. Morgan Securities wrote, "Yesterday (​June 30, 2014), the Fed'​s overnight reverse repo facility (​RRP) program allotted a record $​340B to 97 approved program counterparties. There is a history of quarter-​end surges in use of the RRP program, although this is by far the largest."

On Sept. 16, we wrote "NY Fed Revises RRP Terms to $​30 Billion per Counterparty and $​300 Billion Total." Our News explained, "Effective Monday, Sept. 22, 2014, each eligible counterparty will 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. If the sum of the bids received is greater than the overall size limit, awards will be allocated using a single-​price auction based on the "​stopout" rate at which the overall size limit is reached, with all bids below this rate awarded in full at the stopout rate and all bids at this rate awarded on a pro rata basis at the stopout rate."

On Oct. 3, we wrote "MMFs Hit Fed RRP Limit, Push Repo Rates Below 5 Bps; Small Victory," announcing, "​The RRP hit record demand of $​407 billion at the end of the third quarter, surpassing the previous record of $​339 billion at the end of the second quarter (​prior to the cap). As a result, the repo rate fell to zero."

Our Oct. 30 Link of the Day reported, "Fed to Test Other Rates on RRP, Offer Additional $​300 Billion in Term Repo." It said, "​For operations conducted October 30 to October 31, the offering rate is 5 basis points; for operations conducted November 3 to November 14, the offering rate is 3 basis points; for operations conducted November 17 to November 28, the offering rate is 7 basis points; for operations conducted December 1 to December 12, the offering rate is 10 basis points; for operations conducted December 15 and after, the offering rate is 5 basis points."

Finally, we reported Nov. 13, "New York Federal Reserve Looks to Expand RRP Repo Counterparties." The News piece said, "​Effective today, the New York Fed is accepting applications from firms interested in becoming a counterparty eligible to participate in RRP transactions with the New York Fed." Watch for more news on the RRP program in coming days, as we approach the Jan. 30 expiration date. While most expect the program to be extended, there likely will be additional changes in the coming weeks and year.

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Money fund assets ended 2014 with a bang, rising for the second week in a row and for the 12th week out of the last 14. Money funds also rose for the 5th straight month in a row in December, up over $​70 billion. They ended 2014 up fractionally, up by $​14 billion, or 0.​5%, the same marginal increase as 2013 (​and slightly higher than 2012’​s $​10 billion gain). This year'​s asset gains are all the more impressive given the continued zero rate environment and the SEC'​s sweeping Money Fund Reforms passed in July. We review the Investment Company Institute'​s latest weekly money fund statistics, as well as ICI'​s latest "Trends" report and monthly Portfolio Composition figures for November, below.

ICI'​s weekly "Money Market Mutual Fund Assets" report says, "​Total money market fund assets increased by $​19.​42 billion to $​2.​73 trillion for the eight-​day period ended Tuesday, December 30.... Among taxable money market funds, Treasury funds (​including agency and repo) increased by $​16.​14 billion and prime funds increased by $​2.​95 billion. Tax-​exempt money market funds increased by $​320 million."

It explains, "Assets of retail money market funds increased by $​3.​39 billion to $​911.​29 billion.... Assets of institutional money market funds increased by $​16.​03 billion to $​1.​82 trillion. Among institutional funds, Treasury money market fund assets increased by $​15.​46 billion to $​813.​91 billion, prime money market fund assets increased by $​1.​03 billion to $​936.​90 billion, and tax-​exempt fund assets decreased by $​470 million to $​70.​78 billion." (​ICI'​s "Long-​Term Mutual Fund Flows" for the week of Dec. 17, show big outflows for bond funds in the latest week and for the second week in a row.)

ICI also released its latest monthly "Trends in Mutual Fund Investing, November 2014" earlier this week, which shows that total money fund assets increased by $​21.​1 billion in November to $​2.​645 trillion. MMF assets increased by $​19.​2B in October, $​22.​7B in September, and $​34.​0 billion in August, but decreased by $​16.​1 billion in July. Year-​to-​date through Nov. 30, ICI'​s monthly series shows money fund assets were down by $​74.​6 billion, or 2.​8%. (​As we mentioned too, ICI'​s weekly asset series shows money fund assets increasing by over $​70 billion in December 2014 too.)

The Trends report says, "The combined assets of the nation'​s mutual funds increased by $​207.​37 billion, or 1.​3 percent, to $​15.​96 trillion in November, according to the Investment Company Institute'​s official survey of the mutual fund industry.... Bond funds had an inflow of $​14.​91 billion in November, compared with an outflow of $​6.​24 billion in October. Money market funds had an inflow of $​21.​10 billion in November, compared with an inflow of $​19.​18 billion in October. In November funds offered primarily to institutions had an inflow of $​28.​50 billion and funds offered primarily to individuals had an outflow of $​7.​39 billion." Money funds represent 16.​3% of all mutual fund assets while bond funds represent 21.​9%.

ICI also released its latest "Month-​End Portfolio Holdings of Taxable Money Funds," which show sizable increases in Repos and Agencies, and drops in Treasuries and CDs, in November. (​See Crane Data'​s Dec. 10 News, "Dec. Portfolio Holdings Show Spike in Agencies, CDs, Repo; Drop in TDs.") ICI'​s latest Portfolio Holdings summary shows that Holdings of CDs (​including Eurodollar) decreased by $​13.​5B, or 2.​1%, in November to $​624.​4B, after increasing $​78.​9 billion in October. CDs represent 26.​1% of assets and remain the largest composition segment. Repo holdings, the second largest segment, increased $​17.​9 billion, or 3.​5%, in November (​after decreasing $​73.​3B in October) to $​529.​9 billion. Repos represent 22.​1% of taxable MMF holdings.

Treasury Bills & Securities, which decreased by $​12.​2 billion, or 3.​2%, remained the third largest segment. Treasury holdings totaled $​368.​4 billion (​15.​4% of assets). Commercial Paper stayed as the fourth largest segment, increasing $​9.​9B, or 2.​6%, (​after increasing $​12.​1 billion in October) to $​359.​3 billion. They represent 15.​0% of assets. U.​S. Government Agency Securities remained in fifth place, increasing $​11.​0B, or 3.​2%, in November to $​353.​5 billion (​14.​8% of assets). Notes (​including Corporate and Bank) dropped by $​2.​3 billion, or 3.​0%, to $​73.​6 billion (​3.​1% of assets), and Other holdings (​including Cash Reserves) increased by $​10.​2 billion to $​84.​1 billion (​3.​5% of assets).

The Number of Accounts Outstanding in ICI'​s Holdings series for taxable money funds decreased by 20.​7 thousand to 23.​587 million, while the Number of Funds decreased by 1 to 365. Over the past 12 months, the number of accounts fell by 385.​1 thousand and the number of funds declined by 19. The Average Maturity of Portfolios decreased by 1 day to 46 days in November. Over the past 12 months, WAMs of Taxable money funds have declined by 3 days.

Note: Crane Data updated its December MFI XLS to reflect the 12/​31/​14 composition data and maturity breakouts for our entire fund universe early last week. 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 our December holdings and the latest version of this new file.)

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