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The October issue of our Bond Fund Intelligence newsletter features an interview with Rich Mejzak, Managing Director & Portfolio Manager at BlackRock, who manages the company'​s Short Obligations Fund and some other short duration strategies and separate accounts. Mejzak tells us that while many conservative ultrashort portfolios may have underperformed their more aggressive peers the last few years, they are poised to outperform in a rising rate environment. He says, "We believe we are approaching market conditions that will make this fund more attractive on a comparable basis." Here is a reprint of the interview, which was originally published Oct. 14. (​E-​mail us at info@​cranedata.​com to see the full most recent issue of BFI.)

BFI: How long has BlackRock been running short-​term bond funds? Mejzak: BlackRock has been involved in short term bond funds for a long period of time. However, our approach to short term bond funds focusing more on preservation of principal and liquidity came to fruition in late 2012 when we officially launched our Short Obligations Fund. We recognized that the short term bond space is very broad, and that the differences in prospectuses, guidelines and yields can vary greatly. Our goal is not to compete necessarily on a yield level, but more on stable NAV, preservation of principal, and liquidity.

We view the Short Obligations Fund more as the next step out from money funds. It is managed on the same desk that we manage our money market business and our separate accounts that have similar strategies. Although the underlying securities and some of the parameters of the fund themselves are very similar -- whether it be average duration, spread duration or even the tenor of the assets that we'​re buying -- the design of the investment strategy overall is to be the next step out from money funds, and not necessarily a high yielding, total return bond fund.

BFI: What is your background? Mejzak: I joined BlackRock in 2006, following the merger with Merrill Lynch [​funds]. At Merrill, I was in a similar role and have been focusing on everything '​non-​2a-​7' cash at BlackRock. Since joining, I have been co-​portfolio manager of Short Obligations Fund since its inception in 2012. In addition, I have been co-​manager of our ETF, ICSH. I also manage the team that services and invests on behalf of our separate account clients, whose highly customized cash investment needs require dedicated resources.

BFI: How has the growth been in the separate accounts business? Mejzak: We have a fairly large presence in the liquidity separate account space, as well as in the short duration/​enhanced cash separate account world and are seeing increasing levels of interest. That investor base is most concerned about using [​these] as a liquidity vehicle. Once you get out to 1-​year average duration, we think the audience is much broader, and is often seeking a variety of different outcomes. We believe there are two ways to approach it: 1) more NAV stability and preservation of principal; and, 2) more from a total return perspective. So we have a team in New York that concentrates on short duration, but with a higher degree of total return focus, and our team here in Philadelphia manages in a more conservative fashion, focusing on stability or principal.

One of the main distinctions is the assets that we'​re buying. We invest with the assumption that everything must be made or could be made liquid in one day'​s time. As such, even though the investment guidelines might be very broad, the assets we actually invest in are, most times, much more restrictive. As an example, guidelines will normally just allow triple-​A ABS with an expected maturity of inside of 3 years. However, we normally limit our ABS exposure to only what we believe to be the most highly liquid -- credit cards, prime auto loans, and, occasionally, equipment.

The advantage is that a separate account doesn'​t need to hold 10% overnight and 30% one-​week liquidity like a 2a-​7 MMF. Assuming in today'​s interest rate environment that yield will be close to zero, that'​s an immediate 5-​7 basis point pickup with identical guidelines. Then all you need to do is broaden the investment parameters just a little by adding some A-​2, P-​2s or expanding the average duration to 90 days and, in most cases, you'​re able to deliver 15 to 20 basis points more in incremental yield.

BFI: What are some other "​sweet spots"? Mejzak: Supply has been one of the key market drivers in the front end over the last couple of years. Clearly, as the supply of most money market asset classes has shrunk over that time period, one area that has actually grown is the Tier-​2 Commercial Paper sector. That is certainly one of the opportunities that we'​ve been looking to capitalize on in this type of strategy. These [​names] also allow for greater diversification away from financials, as many of those A-​2, P-​2 issuers are normally industrials.

Also, a byproduct of money fund reform has been that the credit curve has moved in. As money fund investors ready for [​reform] implementation in October 2016, we'​re discovering that most fund providers, including ourselves, are repurposing funds well ahead of that date. The bid for credit for money funds which used to go out to 13 months, has shortened significantly -- in most cases to 6 months, and sometimes to even as short as three. We believe that these products -- whether it is a separate account or short term bond fund -- in today'​s marketplace, can deliver meaningfully more yield with only taking much smaller increments of increased risk vs. a comparable money fund. Generally speaking, our goal is to provide excess return over money funds with limited additional risk.

BFI: Do investors use these in tandem with money funds? Mejzak: While some investors will use this as their liquidity vehicle, we believe that going forward the concept of bucketing cash will become even more critical. These products, we believe, solve the bucket of cash not necessarily for daily operating cash, but more the bucket of cash where there would be either weekly or monthly cash withdrawals. We think investors recognize that as prime institutional money market funds adopt floating NAVs as part of reform a new paradigm emerges. If they are going to consider a product that has a floating NAV, it is perhaps most advantageous to take the next step into one of these products that will offer them: 1) more yield, and, 2) no liquidity fees and gates.

BFI: What is your investment strategy? Mejzak: The short term bond fund universe is very broad, and our offering falls on the more conservative side of that. Over the last 2-​4 years, with interest rates extraordinarily low and credit spreads so tight, most of those more aggressive products have outperformed. Most '​riskier' asset classes have outperformed the safer ones. It is our expectation that going forward, as interest rates begin to rise and credit spreads become more volatile, at some point the products in the short term bond universe with riskier parameters will experience more volatility. The short obligations products invest in no high yield, no currency, no non-​dollar securities, and with a 185-​day WAM and a 1-​year WAL, we don'​t have the ability to own too many 3-​year securities.

BFI: Does the product fill a gap? Mejzak: There were several motivations for launching the product in 2012. One, in anticipation of zero rates for a long period of time, we thought there was a gap in product offerings and we needed something to offer more yield than money funds. Second, we recognized that money fund reform was imminent and would likely involve, to some degree, floating NAV. So we thought that in the longer term, this offering would be sustainable going forward as a complement to money funds. Lastly, we wanted to be able to establish a track record of providing a stable NAV. At this point we believe that we have achieved all of these. However, the strong performance of more aggressive funds in this space has challenged the attractiveness of this product. But we believe we are approaching market conditions that will make this fund more attractive on a comparable basis.

BFI: Have investors been bucketing their cash in preparation for reforms? Mejzak: Our experience has been that most investors are not being proactive in bucketing cash or moving money away from prime money funds. Most providers are repurposing funds well in front of that date. [​But] we believe this will be a first and second quarter 2016 event where the assets that are expected to be in motion will be in motion. While many potential clients have explored the idea of either separately managed accounts, Short Obligations, or similar products, we believe that the impetus for them to actually move will occur well ahead of October 2016.

BFI: What is your outlook for rates? Mejzak: We believe that higher rates will bring higher volatility, and with that there is the opportunity to deliver more yield. The positioning of this type of product will be most important to strike the balance between incurring enough risk, yet not too much risk, to endure the market volatility that we anticipate. That is why we have chosen to approach this product the way that we have, which has been very conservative since its inception. It has underperformed most of its peers on a yield basis since then, but I think that limiting curve exposure and limiting exposure to asset classes that we would expect to be most volatile is going to be critical in a period of rising rates. While we expect that trajectory of higher rates to be slow, we do think that the two to three year part of the curve could become vulnerable.

BFI: What are your expectations for the future of this ultrashort space? Mejzak: The space is so broad that there will be winners and there will be losers, depending upon positioning and what that investment environment brings. Providers are trying to provide many different solutions, but selecting the right strategy and, most importantly, executing the right way is going to be most important. Depending upon how a product is managed, there will be ones that have a huge degree of success and ones that will not have any success at all. We think it'​s important to commit to one strategy, the strategy that you think will be most successful going forward and most appropriate for the interest rate cycle. This is the product and the strategy that we believe will perform best in the environment that we anticipate.

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Two more Prime money market funds are converting to Government funds, and two more firms appear to be exiting the money market space, according to a series of recent S.​E.​C. filings. Specifically, Nationwide is converting its $​1.​0 billion Nationwide Money Market Fund, which has both Institutional and Retail shares, into a Government Fund. It'​s also converting the $​1.​8 billion Nationwide VIT MMF to Government. Also, Pioneer is converting the $​280 million Pioneer Cash Reserves from Prime to Government. Further, William Blair filed to liquidate its $​1.​4 billion Ready Reserves Fund, and Delaware filed to convert its only money fund, the $​169 million Delaware Cash Reserves to an Ultra Short Bond Fund, the Delaware Ultrashort Fund (​as we first reported in yesterday'​s "Link of the Day"). These smaller players' "​going Government" moves follow announcements by Fidelity, Deutsche, Franklin, American, and BlackRock (​BIF and FFI) to shift major portions of their fund lineups to the safety and simplicity of the still stable NAV segment. To date, approximately $​232 billion is slated to move from Prime funds to Government funds. (​We'​ve seen portions of portfolios shift to date, but the first full transitions occur next week with Franklin MMFs' official crossover date on Nov. 1 and next month with Fidelity Government Cash Reserves' official start date Dec. 1.)

The filing for the Nationwide Money Market Fund says, "Effective October 14, 2016, the Nationwide Money Market Fund will operate as a "​Government Money Market Fund," as defined in Rule 2a-​7(​a)(​16) under the Investment Company Act of 1940, as amended." The NVIT Money Market Fund filing includes the same language. Nationwide is the 46th largest money fund manager, according to our Money Fund Intelligence XLS as of Sept. 30, 2015. (​Note: We do not track the NVIT MMF.)

Pioneer, the 59th largest money fund manager in our database, is converting the $​260 million Pioneer Cash Reserves fund to a Government fund. Its filing says, "The Board of Trustees of Pioneer Cash Reserves Fund has approved changes to the fund'​s investment objectives and strategies that will allow the fund to operate as a government money market fund under amendments to Rule 2a-​7 under the Investment Company Act of 1940. The fund'​s operation as a government money market fund will result in shareholders having continued access to a stable net asset value (​NAV) money market fund that is not subject to liquidity fees or redemption "​gates" (​temporary suspensions of redemptions). Under amended Rule 2a-​7, a government money market fund is a money market fund that invests 99.​5% or more of its total assets in government securities, cash, and/​or repurchase agreements that are fully collateralized by government securities or cash."

It continues, "Effective as of the close of business on or about November 13, 2015: The fund'​s name will be changed to Pioneer U.​S. Government Money Market Fund. The fund'​s investment objectives and principal investment strategies as set forth in the "​Fund summary" and "​More on the fund'​s investment objectives and strategies" sections of the prospectus are revised as follows: Investment Objectives. Preservation of capital, liquidity, and current income.... The fund will invest at least 99.​5% of its total assets in government securities, cash, and/​or repurchase agreements that are fully collateralized by government securities or cash."

We also learned that William Blair, the 41st largest money fund manager, is liquidating its $​1.​4 billion Ready Reserves fund. Its Prospectus Supplement filing says, "Upon the recommendation of the Adviser, the Board of Trustees determined that it was in the best interests of the William Blair Ready Reserves Fund to redeem all the shares of the Fund outstanding on or about November 18, 2015 (​the "​Liquidation Date"), and then to terminate the Fund. Any shares of the Fund that have not been redeemed or exchanged prior to the Liquidation Date will be redeemed automatically at their net asset value per share (​normally, $​1.​00) on the Liquidation Date."

In addition, as we reported in yesterday'​s LOTD, Delaware Investments filed a Prospectus Supplement to convert its $​169 million Delaware Cash Reserves, a Prime Retail fund, to an Ultra Short Bond Fund, the Delaware Ultrashort Fund. The filing for the 65th largest MMF complexes' only money fund says, "The Fund'​s Board of Trustees has approved the conversion of the Fund from a money market fund with a stable net asset value of $​1.​00 per share into an ultrashort-​term bond fund that will have a fluctuating net asset value. Following the conversion of the Fund into an ultrashort-​term bond fund, the Fund will no longer operate as a money market fund and it will be renamed Delaware Investments Ultrashort Fund. In addition, check writing privileges will be discontinued in connection with the conversion of the Fund."

It adds, "We anticipate that the conversion will be effected by early January 2016. After the conversion, the Fund'​s new investment objective will be to seek total return to the extent consistent with relatively low volatility of principal. Although the current and new investment objectives of the Fund are different, the Fund will continue to invest its assets in short-​term investment grade securities. Once converted, the Fund will maintain an average effective duration of less than 18 months, as compared with the Fund'​s current average maturity of 60 days or less."

These moves signal a continuing trend of consolidation in the money market fund industry. Currently we track 68 money fund managers in our XLS database, down from 74 on July 31, 2014, just after money fund reforms were adopted. Since then we have seen Reich & Tang, Touchstone, Williams Capital, Forward Funds, Alpine, Virtus, and Eaton Vance exit the space. When you add William Blair and Delaware, we'​re down to 66 money fund managers. (​For more on money fund complex changes, read our story from July, "Managers Rolling with Reform Changes; Recap of Announcements So Far" and see the November issue of Money Fund Intelligence when it ships next Friday.)

There have also been a heap of money fund liquidations. In August, we wrote a story called, "Another Muni Money Fund Liquidates: A Recap of Recent Expirations that tracked recent liquidations and mergers. Looking at our MFI XLS as of Sept. 30, 2015, we tracked 1,​191 money market funds -- 822 taxable and 369 tax-​exempt. One year ago on Sept. 30, 2014, we tracked 1,​257 MMFs -- 851 taxable and 396 tax-​exempt. Regarding Prime to Govie conversions, so far we count $​232 billion worth of Prime funds moving to Government funds, which includes the conversions of approximately 29 different portfolios by 11 different managers.

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Fidelity Fixed Income President Nancy Prior spoke last week on "Money Market Funds: The New Reality" in a session at the Association for Financial Professionals annual meeting in Denver. Prior discussed Fidelity'​s second phase of changes to its money market fund lineup and a number of issues related to pending money fund reform-​related changes, including the shift towards government funds, ultra-​short bond funds and other alternatives. (​See the recent "Fidelity Money Market Mutual Fund Changes" update, and our Oct. 15 News, "Fidelity Details Retail vs. Inst MMF Changes; Only One Floating Fund.") Fidelity also just released an update entitled, "Fidelity Money Market Fund Designations Q&​A."

At AFP, Prior stated, "MMFs survived a very long and difficult regulatory process, and will continue to exist in a form we all recognize. That survival was not a given through a series of ups and downs of a regulatory process that lasted more than five years. One result of the regulation, however, is that the current value proposition of prime MMFs -- stability, liquidity, and a competitive market yield -- has been diminished. In fact, investors will no longer be able to maximize all three with any single MMF product. There will be tradeoffs between the different types of funds, and investors will have to choose which features are most important to them."

She said, "​For many of you here, prime MMFs have traditionally been a great cash investment option. They met your needs by providing all three elements -- stability, liquidity, and a competitive yield. But going forward, prime funds may or may not meet your specific needs. You may choose to stay in a prime fund, or choose an alternative type of MMF, or even select a combination of funds for your cash management.... I want to reiterate our commitment to the institutional MMF business. Fidelity is the market leader in MMFs, and we are dedicated to meeting the needs of all our money fund customers, and continuing to offer our institutional clients a broad range of options."

Prior continued, "​From my own conversations with many, many clients over the past year, I know you were hopeful a "​silver bullet" would arise: a solution that complied with the new rules while offering everything prime MMFs have historically offered. Well, I'​m afraid to say there is no silver bullet.... With over 11 million MMF customers, Fidelity felt a responsibility to act quickly and lead the industry in proactively educating our shareholders, and to move promptly and decisively to realign our product lineup. We solicited feedback via surveys, investor forums, and direct client outreach to figure out what our MMF product lineup should look like in order to meet the specific needs of each of our customer segments. In response, we have adjusted our product lineup in many ways. Throughout the process, we were driven by the idea of keeping things as simple as possible for our customers."

Further, she said, "​Based on what we heard, we have done the following: First, we chose to convert three prime funds to government funds -- including the Cash Reserves Fund which, with $​116 billion in assets, was used predominantly as a brokerage core account. We heard strong sentiment from institutional and retail investors that liquidity fees and redemption gates, though a very remote possibility, were unacceptable in these funds, so these conversions, which are now approved and soon to be completed, will keep customers from being subject to either of those redemption restriction features. Second, we are in the process of merging six funds to rationalize and simplify our product lineup. And third, just last week, we announced the final element of our product response plan, designating funds as retail or institutional."

Prior stated, "So the decisions, on our end, have been made. And now, we will begin the process of working with all of you to help you understand where you are and what you need to do. With last week'​s announcement, all of our clients know how each Fidelity MMF is categorized a year in advance of the compliance deadline. Most importantly -- and again, I want to really emphasize this -- we will continue to offer a broad suite of MMFs: institutional and retail, prime and municipal funds, along with government and Treasury funds.... The decisions you make going forward will be informed by how you value the different features of money funds -- NAV stability, daily liquidity and yield. Once again, you can no longer maximize all three in any single fund."

She commented, "It is clear at this point that a lot of assets will be gravitating toward government funds.... What stands out immediately is how large the government supply bar is when compared to the size of government MMF assets. You can see that the total supply of MMF-​eligible government securities currently stands at approximately $​6.​6T."

Prior added, "Over the next year, several factors will keep the money moving within the market, including: 1. Fund manager decisions. So far, fund management firms have announced about $​200 billion of prime funds that will convert to government, and this figure may continue to rise. 2. Individual investor decisions. Currently, there is a total of $​1.​6 trillion in prime MMFs, and $​1 trillion in institutional prime funds; it is possible that a significant portion of this money eventually will be re-​allocated as institutional investors evaluate the advantages and disadvantages of prime and government funds. 3. Defined Contribution plan sponsor decisions. The defined contribution market currently holds $​75 to $​100 billion in MMF assets. Based on conversations and insights we have gained from Fidelity'​s DC clients, we believe many of these assets also may move from prime to government funds; and finally, 4. Corporate cash decisions, those that all of you will be making over the next year."

She added, "So a lot of money is, and will be, moving toward government funds. However, as I said, the government securities market is enormous, at close to $​7T. So each $​100B in incremental demand represents just 1.​5% of the available supply. Even if we see a total of $​400 billion to $​500 billion of assets convert to government securities before next October -- that represents only about 6% to 7% of the total available supply. Standing where we stand now, we believe that the converted MMF prime assets within the industry will have no trouble finding investments in the government market, though potentially at a lower yield. Despite the significant migration to government funds, we believe that prime funds -- which, historically, have enjoyed a yield advantage over government funds -- remain an attractive solution for corporate treasurers. But, importantly, the redemption gates are only applicable under extreme market conditions that result in a prime fund'​s weekly liquidity falling below the designated 30% threshold."

Prior concluded, "With the revamped product lineups of Fidelity and other asset managers coming into focus, now is the time for corporate decision-​making. Your three primary options are government MMFs, prime MMFs, and ultra-​short bond funds. In addition to those options, some investors may consider customized solutions, including separately managed accounts and other non-​registered alternatives. Of course, bank deposits are a further option, but they may or may not be readily available. In the end, your decisions will depend upon your priorities regarding time horizon, liquidity, yield, and tolerance for price volatility. With last week'​s announcement, Fidelity has completed the updating of our product lineup and is ready to work with you.... The near- and long-​term future will not be without continued challenges, but I believe that MMFs, as a vehicle, have the potential to emerge as strong as ever. Our true north as an industry remains our mutual commitment to ensuring the safety, stability and viability of the money market product for all of our customers."

Finally, during the Q&​A portion, Prior was asked about same day settlement for floating NAV funds after October 2016 and the amount of times per day floating NAVs might price. "The answer right now is it'​s too soon to say," she said. Prior said the key is trying to balance the desire to have as many settlements in the day, as late in the day, as possible, with the reality of being able to get in pricing. "There have been industry calls that have ranged from one settlement period a day, all the way up to three or four settlements per day, ranging in times from 9 am to 11 am to 2 pm and 3 pm," Prior explained. "​We just don'​t know the answer yet," but she added that they have been consulting with pricing vendors to arrive at the right solution. She added, "Because the last thing we want to do is push this to the limit, so that we'​re not able to meet the commitments that we set out for our customers."

At the end of January, Fidelity announced phase one of its money fund lineup changes (​see "Fidelity Announces Major Changes to MMFs; Staying Stable, Going Govt"), which involved merging 6 money funds into funds with similar strategies, and converting 3 Prime Retail funds into Government funds, including the largest money fund, the $​111 billion Fidelity Cash Reserves. Then Fidelity recently announced that it will convert its $​65.​5 billion Fidelity Institutional Money Market Portfolio to Prime Retail and its $​2.​2 billion FIMM Tax Exempt Portfolio to Retail. The largest MMF manager will retain just one Prime Institutional fund, the $​47.​8 billion FIMM Prime Money Market Portfolio.

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The October issue of our flagship Money Fund Intelligence newsletter features an interview with the cash management team at Morgan Stanley Investment Management -- Managing Director Fred McMullen, Managing Director & Senior Portfolio Manager Jonas Kolk, and Executive Director of Product Management Scott Wachs. Morgan Stanley, which has been managing money funds since 1975, is the 7th largest global institutional MMF manager with over $​120 billion in assets. McMullen, Kolk, and Wachs talk about Morgan Stanley'​s industry leading growth over the past 5 years and about new product development. Here is a reprint of that interview.

MFI: What is your biggest priority right now? McMullen: There are several priorities -- one is working with our clients to help them strategize around the impending rate and regulatory changes. Two is our focus on new product development. We'​re fortunate that we have a large retail fund money fund lineup as well as a large institutional fund lineup. Some in the marketplace have to create new retail funds to deal with the bifurcation the SEC created between institutional and retail investors. We don'​t have to worry about that, so we'​re more freed up to focus on new product development.

We'​ve already announced some changes to our product lineup in response to the regulations, and we'​ve shared our views on several aspects of the regulations and the competitive landscape. A few months ago, we provided clients our perspectives on the announcements that several of our competitors had made to date. We'​ll soon post a more comprehensive update on our progress to date and on some of our key product development issues. Three, we are very focused on growing our European liquidity business.

MFI: What kind of growth have you seen? McMullen: Most of the growth has been on the institutional side. If you look at our global institutional flows from the beginning of 2010 through the end of July of this year, we'​re up almost $​72 billion. The next largest competitor is [​up] $​34 billion and there are only 5 or 6 other fund families that have positive flows in the global institutional category over that time period. Some of the fund families have pretty significant outflows, so we'​ve been very fortunate to grow the franchise in what'​s been a tough market.

Morgan Stanley'​s commitment to and focus on liquidity management has been the major driver. We thought that with the strength of the Morgan Stanley franchise and the disciplined approach we had to managing the funds, if we just put the right distribution model in place, we would be able to be successful over what we thought were going to be some challenging years. We have focused on adding people to the Team who have extensive direct relevant experience. For example, we brought Scott [​Wachs] in ... to head up the product effort. He'​s got 25-​plus years in the liquidity space and he'​s done a tremendous amount of work for us on the existing product lineup and product development.

MFI: What is the biggest challenge in managing cash today? Kolk: Clearly, the biggest challenge today is the interest rate environment and balancing risk and return. In spite of what the Fed didn'​t do on Sept. 17, we'​re still at an inflection point. At some point, it'​s likely that rates will rise. So that brings into the thought process an evaluation of whether or not we'​re being properly compensated to extend out the curve. We clearly feel that we haven'​t been, so generally we have been short duration, shorter than the peer groups. So balancing risk and return in this rate environment is what makes our job especially challenging at this point in time. On top of that is the uncertainty surrounding the timing and the impact of 2a-​7 reform in terms of potential AUM movement. We'​ve already seen $​200 billion or so in prime funds that are intending to shift to government funds.

MFI: What are you buying? Or not? Kolk: Again, we don'​t think that we'​re being compensated to extend duration with the uncertainty of the Fed'​s liftoff decision. In terms of credit, we'​re conservative with respect to the areas and locations that we'​ll invest. We have a clear eye on headline risk -- a perfect example of that is China. We do not invest in Chinese banks, as an example, and I think that strategy has been a smart one, certainly with the volatility that we saw coming out of that part of the world in August.

In terms of [​the Fed'​s] Reverse Repo Program, from the standpoint of how we manage our portfolios and how short and liquid we are in most of our strategies, it'​s a great investment tool to have, as we look for short dated investment options. We'​ve had a consistent, disciplined investment strategy -- defensive fund positioning, high liquidity -- against the backdrop of a rising rate environment and uncertainty in terms of regulatory reform and AUM movement. That'​s a strategy that has resonated well with clients, and we expect that as uncertainty persists going forward it will become even more important.

MFI: What are you hearing from clients? Wachs: There is a confluence of events that are going on right now. It'​s not just money market fund reform, but it'​s also banking reform and Basel III. How does that play into the treatment that banks will have for deposits? What does that mean for the availability of deposits for clients going forward? Clients are becoming increasingly concerned about that. We already alluded to the interest rate policy and the low interest rate environment -- How long does that continue? We work with a lot of multinational clients and certainly the negative interest rate environment in Europe is a concern for these clients.

MFI: Can you tell us about new products or other new reform-​related initiatives? Wachs: There are still a lot of things we'​re working on relative to money market fund reform. I think back to last summer when the reforms were announced; we quickly kicked into gear. We put into place a very large money market reform project SWAT team with about a dozen work streams. Since then we'​ve been working rigorously through those work streams to prepare ourselves and our clients for the implementation dates. The big one is next October, where the rubber really meets the road.

There [​will be] new products that we'​ll be announcing shortly. There are also some changes to the characteristics of existing products. For example, our institutional lineup has two Prime funds today -- Prime Portfolio and Money Market Portfolio. We are working to determine and will announce how those funds will trade going forward with respect to how many NAV strikes they will have. I'​m not aware of any manager that has publicly committed to an NAV strike schedule going forward. We have heard from our clients as to how they would like a prime money fund to look. We'​ll be aligning our two prime funds in a way that makes sense for our clients. Also, we were one of the first to be out there with most of the information required by the new disclosure rules -- whether its market NAV or weekly assets. We'​ve been displaying it on our website for years now. The new regulations require 6 months' worth of history, [​so] we will have that information.

MFI: Where do you expect assets to flow, post-​reform? McMullen: You'​ve got to be engaged with clients continuously. But now that the industry is going through a big transition, you need to be in front of clients more than ever. While we are starting to see some regulatory related AUM movements, the client symposiums we are holding tell us that clients are hesitant to make any changes until they see a trend emerge. But you could have a scenario where a significant amount of money moves from prime funds to government and treasury funds. When the regulations first came out, clients were looking for that direct substitute for prime funds that would offer the same utility. Clients are recognizing that there isn'​t a direct substitute, so an increasing number of conversations are focused on, "​What alternatives do I have?" or "​How do I bi-​furcate my cash going forward?"

Wachs: Certainly there is no perfect substitute for prime funds once the new regulatory regime is implemented. But more importantly, there isn'​t a clear consensus on what the best option is -- different clients in different segments in different industries with different cash flow requirements are going to want different solutions. We try to engage in conversations with clients about all the possible solutions. We want to provide a compelling set of options for the money that'​s going to be in motion. The best way we can do that is to have continual dialogue with our clients as their thinking evolves.

MFI: Tell us about your outlook? McMullen: A lot is obviously contingent on how clients respond to the regulatory changes and the rate environment. It'​s not very clear exactly when and where prime fund assets will move. So I think the outlook for next year is fairly uncertain. But we'​re well positioned regardless. We can'​t control flows. But we do have a lot of control over our new business development, and we'​ve got a really robust pipeline. There are a lot of opportunities -- whether it'​s funds or separate accounts or some of the new products that we have in front of us. If you look at the last couple of years, the industry'​s been flat to down, and we'​ve been up. Our goal is to continue to take market share no matter what the environment.

Wachs: We are at a sweet spot in terms of our size -- we like to call ourselves right-​sized. That means we have the scale to meet our clients need without sacrificing the easy and direct access we provide to our portfolio managers, credit analysts, and product experts. We can talk to them about how we'​re managing their money, about their concerns in the market. That access, along with the defensive way we manage our portfolio, is the core of our value proposition.

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Federated Investors released its Q3 earnings Thursday night, which showed a $​7 billion increase in money market fund assets for the quarter. The press release says, "​Money market assets were $​246.​9 billion at Sept. 30, 2015, up $​1.​4 billion or 1 percent from $​245.​5 billion at Sept. 30, 2014 and up $​4.​9 billion or 2 percent from $​242.​0 billion at June 30, 2015. Money market mutual fund assets were $​216.​3 billion at Sept. 30, 2015, up $​1.​1 billion or 1 percent from $​215.​2 billion at Sept. 30, 2014 and up $​7.​5 billion or 4 percent from $​208.​8 billion at June 30, 2015.... Growth in money market assets was offset by lower equity and fixed-​income assets in Q3 2015 compared to Q2 2015." Federated saw a revenue increase in the quarter, due primarily due to a decrease in money fund fee waivers. In an earnings conference call Friday morning, Federated CEO Chris Donahue talked more about reducing fee waivers as well as new products and the impacts of money fund reform.

The release says, "Revenue increased by $​6.​2 million or 3 percent primarily due to an increase in revenue from higher average money market assets and an additional day in Q3 2015.... Operating expenses increased by $​1.​2 million or 1 percent primarily due to an increase in distribution expenses resulting from higher average money market assets and an additional day in Q3 2015." Money fund fee waivers in the quarter were $​20.​3 million, down from $​22.​3 million in Q2 and $​30.​2 million in Q3 of 2014. Year-​to-​date, fee waivers are $​69.​5 million, down $​20 million from the first 9 months of 2014. The release adds, "​Operating expenses increased by $​1.​2 million or 1 percent primarily due to an increase in distribution expenses resulting from higher average money market assets and an additional day in Q3 2015." Federated gets about open-​third of its revenues from money market funds.

In the earnings call, CEO Chris Donahue says the bulk of the money fund asset increase came from transitioning over $​3.​7 billion in assets from Reich & Tang, which Federated bought earlier this year. Also, he says, "In our cash separate account business, we added the West Virginia Local Government Investment Pool, which funded at about $​1.​1 billion during the third quarter."

On new products, he explains, "We continue the substantial effort necessary to adjust our product offerings well in advance of the October 2016 requirement for floating NAVs for institutional prime and muni funds. We are working to have products in place to address the cash management needs of all our money market clients. We expect to offer prime and muni money market funds that meet the new requirements, as well as government money funds, separate accounts, and offshore money funds. We continue to work on a privately placed fund for qualified institutional investors who are either unable or unwilling to use money funds, as modified by the new rules. In addition to Reich & Tang, we announced an agreement with Huntington to transition $​1.​1 billion in money market assets in the fourth quarter. Interest levels and discussions around money market consolidation remains elevated."

Chief Financial Officer Tom Donahue says the decreases in fee waivers were "​due mainly to higher fund gross yields. Based on current asset and yields, the impact of these waivers to pre-​tax income in Q4 is expected to be about the same as it was in Q3. Looking forward, we estimate that gaining 10 basis points in gross yields from beginning Q3 levels would likely reduce the impact of yield waivers by about 45%. A 25 basis point increase will reduce the impact by about 65%. We expect to capture about two-​thirds of the pretax income related to the remaining money fund yield waivers." He pointed out that this does not mean Federated will recapture fees from the past, it refers to going forward.

When asked about the concept of using fee waivers as a competitive advantage to gain market share, Chris Donahue explains, "​We have seen it ... people have an inclination to want to use pricing to try and capture share. This is not our idea at all. We'​re not going to be using these as weapons or strategies in order to gain share by reducing price, or not allowing the price to go back where it would have gone if they ever decide to raise rates."

Donahue says, "​They'​re [​clients are] leaning every which way. Some of them have not yet ... figured out what to do. Others have decided that they definitely want a stable NAV at any cost and at any situation. A lot of money fund clients are looking for cash management service, which implies dollar in, dollar out, and that would tend to push them into government funds. We are seeing viability for other types of products -- private funds, perhaps even 60 day [​maximum maturity] funds -- because after the first consideration of stable NAV, the yield does become an important second consideration."

He explains, "We have seen with clients who sweep that they either don'​t want to mess around with the floating NAV or they don'​t want to change their systems in order to do a sweep.... They'​re going to be heading primarily toward retail products where they can, as opposed to institutional... When we are looking at developing the private fund and the pricing thereof, we are looking at the standard type pricing that we have now. This is not to say that we can'​t and won'​t be in a position to respond if others decide to go another way, but that'​s currently how we'​re looking at it."

One analyst asked about the timing of money fund asset moves leading up to October 2016. Chris Donahue said that is a difficult question to answer. Some assets have already moved and some will move around year-​end because that'​s when some of the banks who are shedding deposit assets will look to remove that money from balance sheet, he responded. "But I think it has to almost wait until the full maturity of the October 2016 deadline for implementation of the new rules, because that'​s when everybody really knows what everything'​s going to look like."

He adds, "​Now, every one of us who is in this business is going to try and get things organized well ahead of that. But that'​s the point at which I think you begin to see meaningful positive flows coming back into the money fund business. Right now, obviously, we'​re spending a lot of time, as our others, restructuring products, talking to clients, and they'​re trying to figure out exactly where to go.... This is part of what informs our effort to create the products, but it'​s really tough to say exactly when you begin to see that money move."

Debbie Cunningham, CIO of Global Money Markets, adds, "As rates increase, historically, money market funds have lagged the direct marketplace. We'​ve already started to see yields increase on money market products despite the fact that the Fed hasn'​t made a move yet. But when those moves actually start in earnest, even if it'​s at a slow pace, the expectation is that money market funds are going to keep pace much more closely correlated than has historically been the case. That'​s when you are going to see deposit rates lag. They are going to lag for two different reason -- one, banks don'​t want those deposits anymore, and two, it'​s an administered rate. So they can figure out a way that makes it easier for them to shed them in a rising rate environment, especially when they'​re not keeping pace with that rise. We do think that the rising rate environment will begin that movement process."

Finally, on the state of the business in general, Donahue concludes, "​It is more challenging in the sense that every time you turn around there'​s another gang of regulation. We'​ve been through the redo on money market funds, which to the people working on it is truly waterboarding, as we were told by one of the Commissioners it would be. We'​re now dealing with liquidity rules, a fiduciary rule, and the SEC has said they'​re going to come out with a derivatives rule before year end.... [​Regulation] '​oligopolizes' the business. You can see it clearly in the money fund business. It makes it more and more difficult for other players to get in.... So I can at once say that it is far more challenging and say that we'​re very happy with where we are and with our growth prospects. At the same time, I would contend vigorously that this investment management business is a great business."

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The Investment Company Institute, the mutual fund industry'​s trade association, released its latest "Worldwide Mutual Fund Assets and Flows" data collection, which shows that global money market mutual fund assets increased in the Second Quarter of 2015. The latest report says total worldwide money fund assets rose $​31 billion to $​4.​580 trillion. (When Australia'​s approximately $​322.​1 billion is included, total Worldwide money fund assets stand at $​4.​903 trillion.) Ireland solidified its spot as the second largest MMF market with a huge jump, while China and Luxembourg also gained assets in Q2. Globally, MMF assets increased by $​107.​5 billion, or 2.​2%, over the past year (​through 6/​30/​15). In other international money fund news, the Institutional Money Market Funds Association hired a new Secretary General, Jane Lowe. (Note: We'​ve shifted the dates slightly for next year'​s European Money Fund Symposium, which will now be held Sept. 20-​21, 2016, in London.)

ICI'​s latest quarterly release says, "Worldwide regulated open-​end fund assets increased 2.​2 percent to $​38.​27 trillion at the end of the second quarter of 2015, excluding funds of funds. Worldwide net cash flow to all funds was $​588 billion in the second quarter, compared to $​562 billion of net inflows in the first quarter of 2015. The Investment Company Institute compiles worldwide open-​end fund statistics on behalf of the International Investment Funds Association, the organization of national fund associations. The collection for the second quarter of 2015 contains statistics from 46 countries."

It continues, "​Bond fund assets increased 1.​0 percent to $​8.​21 trillion in the second quarter. Balanced/​mixed fund assets rose 7.​4 percent to $​5.​41 trillion in the second quarter accounting for 45 percent of the quarterly increase in global mutual fund assets. Money market fund assets rose 0.​7 percent globally."

ICI'​s quarterly adds, "Money market funds worldwide experienced an outflow of $​22 billion in the second quarter of 2015 after registering an outflow of $​11 billion in the first quarter of 2015. The global outflow from money market funds in the second quarter was driven by outflows of $​30 billion in the Americas and $​36 billion in Europe that were partially offset by inflows of $​44 billion in the Asia-​Pacific region.... Money market fund assets represented 12 percent of the worldwide total."

According to Crane Data'​s analysis of ICI'​s "​Worldwide" fund data, the U.​S. maintained its position as the largest money fund market in Q2'​15 with $​2.​616 trillion (​or 53.​4% of all global MMF assets). U.​S. MMF assets decreased by $​26.​6 billion in Q2'​15, but were up by $​55.​4B in the 12 months through June 30, 2015. Ireland remained the second largest money market fund country, ending Q2 with $​450.​0 billion (​9.​2% of worldwide assets), up $​66.​8B for the quarter, or 17.​4%, and up $​57.​2B, or 14.​6%, over the last 12 months. China continues to gain market share, maintaining third place among countries overall. China saw assets grow $​39.​7 billion (​up 11.​4%) in Q2 to $​388.​9 billion (​7.​9% of worldwide assets). Over the last 12 months through June 30, 2015, Chinese MMF assets up are $​132.​1 billion, or 51.​5%.

France remained in fourth place with $​335.​2 billion (​6.​8% of worldwide assets), up $​6.​5 billion in Q2, but down $​84.​1 billion, or 20.​0%, over 1 year. Australia was in 5th place worldwide with $​322.​1 billion (​6.​6%). (​Note that ICI'​s data didn'​t include money fund figures for Australia again this quarter. We continue to estimate these at $​322 billion, the same amount as it had in Q4 2014 when ICI stopped reporting them. Australia'​s MMF assets were shifted into the "​Other" category several quarters ago but there'​s been no explanation from Australia'​s fund association on why.)

Luxembourg remained in 6th place with $​316.​9B, or 6.​5% of the total (​up $​18.​7 billion in Q2 and up $​9.​4B for 1 year). Korea, the 7th ranked country, jumped $​3.​3 billion to $​95.​6 billion (​1.​9% of total) in Q2 and is $​22.​2 billion (​30.​3%) for the year. Mexico held on to 8th place, climbing $​849 million to $​59.​8 billion (​1.​2% of total assets) in Q2 and $​3.​6 billion (​6.​4%) over the previous 12 months. ICI'​s latest Worldwide statistics also show Brazil ($​44.​0B, up $​2.​4B and down $​13.​7B on the quarter and year, respectively) in 9th place. India, with $​32.​5 billion in assets, rounds out the top 10. India was a big gainer in 2Q, rising $​6.​5B, or 25%. For the one year period through June 30, 2015, India'​s MMF assets were down $​3.​4B.

Taiwan ($​26.​5B, up $​1.​3B for the quarter and down $​712M for the year), Sweden ($​21.​2B, up $​2.​7B and down $​126M), South Africa ($​20.​6B, up $​893M and down $​4.​8B), Switzerland ($​20.​0B, up $​932M and up $​2.​3B), and Canada ($​19.​5B, up $​288M and down $​4.​8B) ranked 11th through 15th, respectively. Japan, Finland, Chile, United Kingdom, and Germany round out the 20 largest countries that have money market mutual funds.

Note that Ireland and Luxembourg'​s totals are primarily "​offshore" money funds marketed to global multinationals, while most of the other countries in the survey have primarily domestic money fund offerings. (​Crane Data believes that some of these countries, like France and Italy, do not have true "​money market funds" due to their lack of strict guidelines and "​accumulating" NAVs instead of stable NAVs.) Contact us if you'​d like our latest "Largest Money Market Funds Markets Worldwide" spreadsheet, based on ICI'​s data, or if you'​d like to see our MFI International product.

Crane Data'​s Money Fund Intelligence International, which tracks the "​offshore" or international money fund market (​mainly domiciled in Dublin and Luxembourg), shows assets down $​71.​6 billion year-​to-​date through Sept. 30, 2015, to $​683.​1 billion. USD-​denominated money funds are down $​13.​5 billion YTD to $​383.​7B. GBP-​denominated MMFs are down L6.​0 billion to L146.​4B, while Euro-​denominated money funds are down E13.​2 billion to E77.​5 billion.

As referenced in the lead, IMMFA appointed a new Secretary General, Jane Lowe, effective Nov. 9, 2015. She replaces Susan Hindle-​Barone, who stepped down in September after 3 years in that role, and was previously with the Investment Association (​formerly known as the Investment Management Association) The press release says, "​Lowe will lead and manage the day-​to-​day business of IMMFA. Her focus will be to represent the Association, members and the industry, to promote the understanding of money market funds, as well as their usefulness to investors and the money markets as a whole. Jane joins at an important time for the European Money Market Fund industry as the dialogue around the potential of European Money Market Reform continues. Engaging and working with European legislators and regulators will therefore also be a facet of the role."

IMMFA Chairman Reyer Kooy comments, "​Jane brings with her a valuable and highly relevant skill-​set to the Association, combining financial services and regulatory experience along with a strong understanding of industry association governance. Her lobbying expertise in both EU and UK contexts at the highest levels of government will enhance IMMFA advocacy initiatives."

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Following on the heels of our June Money Fund Symposium in Minneapolis and our September European Money Fund Symposium in Dublin, Crane Data is preparing for its sixth annual Money Fund University "​basic training" conference, which will be held at the Hyatt Regency Boston in Boston, Mass., January 21-​22, 2016. 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, money fund alternatives, offshore markets, and other recent industry trends. The affordable ($​500) educational conference (​see the preliminary agenda here) features a faculty of the money fund industry'​s top lawyers, strategists, and portfolio managers. Note: Crane Data would like to thank all of those visited our booth or attended our session ("Floating NAV Money Funds and Cash Alternatives," which featured Peter Crane, Vicki Fiegehen of Qualcomm and Lance Doherty of Pacific Life) at the Association for Financial Professionals annual conference in Denver earlier this week. (​See below for some outside comments on the conference.)

Money Fund University offers attendees a 2-​day 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 Boston event, we will also take a look at how the SEC'​s new money market reforms, which go into effect in October 2016, are changing the money fund landscape.

The morning of Day One of the 2016 MFU agenda includes: History & Current State of Money Market Mutual Funds with Peter Crane, President & Publisher, Crane Data; The Federal Reserve & Money Markets with Joseph Abate, Director, Fixed Income Strategy, Barclays and Mark Cabana, MD, Bank of America Merrill Lynch; Interest Rate Basics & Money Fund Math with Cabana and Crane; 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; Tax-​Exempt Securities & VRDNs with Colleen Meehan, Senior Portfolio Manager, Dreyfus Corp. and John Vetter, Municipal Structured Analyst, Fidelity Investments; 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; and, Credit Analysis & Portfolio Management with Jeff St. Peters, Senior Portfolio Manager, SSgA.

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; Outstanding Issues with MMF Reforms with Stephen Keen, Senior Counsel, Perkins Coie and Jack Murphy, Partner, Dechert LLP; Offshore MMFs, SMAs, and Ultra-​Short Bonds with Peter Crane and Jonathan Carlson, MD, BofA Global Capital Management; 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 Hyatt Regency Boston, located at One Avenue de Lafayette in the downtown Financial District. The conference negotiated rate of $​179 plus tax is available through December 22.

We'​d like to thank our MFU sponsors -- Fitch Ratings, Dreyfus/​BNY Mellon CIS, J.​P. Morgan Asset Management, Invesco, Standard & Poor'​s Ratings Services, Dechert LLP, and Wells Fargo Funds -- for their support, and we look forward to seeing you in Boston in January. E-​mail Pete Crane (​pete@​cranedata.​com) for the latest brochure or visit www.​moneyfunduniversity.​com to register or for more details. Crane Data is also preparing to publish the preliminary agenda for its next big show, Money Fund Symposium, which will be held June 22-​24, 2016, at the Philadelphia Marriott in Philadelphia, Pa..

Regarding the AFP Annual Conference going on this week in Denver, Wells Fargo Securities money market strategist Garret Sloan provided his perspective in his "Daily Short Stuff" commentary for October 21. Sloan writes, "​For all of the indecision amongst corporate cash managers on the subject of money market fund reform, it is not due to lack of interest. Yesterday at the AFP Conference in Denver, Pete Crane spoke on floating NAV money market funds and cash alternatives. I say that only because the room was filled beyond capacity. I know that because we were turned away at the door. Suffice it to say, the subject of cash alternatives and managing in a floating NAV environment is certainly on the minds of corporate cash managers. What is also evident, perhaps less so after Pete Crane'​s presentation, is the remaining uncertainty amongst cash managers ... and also many fund companies. There are still many fund complexes seeking more feedback from investors on what products they would hypothetically accept and which they likely would not."

Sloan continues, "The conversation around "​private funds" seems to be gaining more interest from both investors and fund companies. There are problems, to be sure. The diversification of investors seems to be the most pressing issue. Moreover, transparency is also likely to be a major concern. But there is little doubt in my mind that these can be overcome and more fund families will look to introduce private funds that can buy credit products, are not subject to gates and fees and do not have to float their NAVs."

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The Investment Company Institute released its latest "Money Market Fund Holdings" summary (​with data as of Sept. 30, 2015) earlier this week, which tracks the aggregate daily and weekly liquid assets, regional exposure, and maturities (​WAM and WAL) for Prime and Government money market funds. We also review JP Morgan Securities' "Prime Money Market Fund Holdings Update" for September. In other news, The Independent Adviser for Vanguard Investors published a statement that says Vanguard won'​t seek to recapture any money fund fees it has waived over the past several years. While we haven'​t heard of any firms announcing that they will recapture waived fees, some do include language in their prospectuses that give them the option to do so, as we wrote about in our Sept. 17, 2014, News, "Wiener on Vanguard Fee Waivers, Recapture."

ICI'​s "Prime and Government Money Market Funds' Daily and Weekly Liquid Assets" table shows Prime Money Market Funds' Daily liquid assets at 24.​2% as of September 30, down from 26.​8% on August 31. Daily liquid assets were made up of: "All securities maturing within 1 day," which totaled 20.​9% (​vs. 23.​2% last month) and "Other treasury securities," which added 3.​3% (​down from 3.​6% last month). Prime funds' Weekly liquid assets totaled 40.​8% (​vs. 39.​4% last month), which was made up of "​All securities maturing within 5 days" (​34.​7% vs. 33.​8% in August), Other treasury securities (​3.​3% vs. 3.​6% in August), and Other agency securities (​2.​9% vs. 2.​0% a month ago). (​See also Crane Data'​s Oct. 14 News, "Holdings Show Huge Jump in Fed Repo; Agencies Surge on Cash Res Shift.")

The ICI holdings report says Government Money Market Funds' Daily liquid assets totaled 59.​1% as of September 30 vs. 61.​7% in August. All securities maturing within 1 day totaled 26.​5% vs. 25.​5% last month. Other treasury securities added 32.​7% (​vs. 36.​2% in August). Weekly liquid assets totaled 82.​1% (​vs. 82.​7%), which was comprised of All securities maturing within 5 days (​40.​7% vs. 38.​6%), Other treasury securities (​32.​6% vs. 34.​1%), and Other agency securities (​8.​7% vs. 10.​0%).

ICI'​s "​Prime and Government Money Market Funds' Holdings, by Region of Issuer" table shows Prime Money Market Funds with 54.​4% in the Americas (​vs. 42.​5% last month), 18.​1% in Asia Pacific (​vs. 18.​6%), 27.​1% in Europe (​vs. 38.​6%), and 0.​4% in Other and Supranational (​vs. 0.​5% last month). Government Money Market Funds held 93.​0% in the Americas (​vs. 85.​4% last month), 0.​6% in Asia Pacific (​vs. 0.​7%), 6.​4% in Europe (​vs. 13.​9%), and 0.​1% in Supranational (​vs. 0.​1%).

The table, "​Prime and Government Money Market Funds' WAMs and WALs" shows Prime MMFs WAMs at a low of 32 days as of September 30, down from 33 days last month. WALs were at 67 days, down from 68 days last month. Government MMFs' WAMs was at 38 days, same as last month, while WALs was at 83 days, down from 78 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 June covers funds holding 94 percent of taxable money market fund assets." Note: ICI publishes aggregates but doesn'​t publish individual fund holdings.

Also, JP Morgan Securities' Short Duration Strategy team released its "Prime MMF Holdings Update for September" last week. JPM strategists Alex Roever, Teresa Ho, and John Iborg write, "Prime and government fund assets finished September mostly flat. During September, prime MMF assets fell by -​0.​42% or $​6bn while government fund assets rose by +​0.​13% or $​1bn. Prime fund AuMs currently stand at $​1,​435bn while government balances register $​971bn. YTD, flows have exhibited seasonality in line with recent history, and we have yet to see any significant reform-​related investor outflows. Funds began to extend maturities after the Fed'​s inaction during September'​s FOMC meeting. Prime funds collectively increased their WAMs by 3 days from all-​time lows in the weeks following the FOMC meeting."

JPM'​s update continues, "The final G-​SIB reporting date on 9/​30 appeared to have exacerbated typical large dealer pullbacks within the short-​term wholesale funding markets at quarter-​end. With the 8 G-​SIBs further incentivized to temporarily reduce their footprints in the money markets, prime MMF holdings of bank debt contracted to the lowest levels that we have on record. As usual, time deposits drove the reductions, falling by $​111bn.... As dealers pulled back on their outstanding short-​term wholesale funding, usage of the Fed RRP surged. The overnight RRP drew $​200bn in demand on 9/​30, while both term RRP operations were oversubscribed and totaled $​250bn in usage. The combination of the overnight and term facilities put total usage at $​450bn on 9/​30, an all-​time high in demand for the RRP. In total, MMFs accounted for $​399bn or 89% of RRP usage at quarter-​end. Prime MMFs took down $​100bn in term RRP and $​113bn in overnight RRP. Government funds used $​128bn in term RRP and $​58bn in overnight RRP."

It continues, "Away from the swings in bank and RRP exposures, most other sector allocations went relatively unchanged. Holdings of UST securities decreased by $​15bn, with massive cuts to bill supply over the course of the month. Indeed, bill supply has fallen by close to $​200bn over the past two months amidst seasonal tax receipt-​related reductions by Treasury. Conversely, holdings of agencies increased by $​64bn, likely serving as a substitute to short-​term Treasuries for their high credit quality and liquidity."

In other news, The Independent Adviser for Vanguard Investors piece, "Vanguard Gift to Money Fund Shareholders: $​112 million and Counting," says, "Big news for Vanguard money market fund shareholders: Vanguard has now explicitly said that its money market funds (​meaning shareholders) will not have to pay back the more than $​112 million in fees that it has waived over the past five-​plus years." Editor Daniel Wiener writes, "​In the just-​released annual report for its three taxable money funds, Vanguard has added language that says, "... the fund is not obligated to repay this [​fee waiver] back to Vanguard."

He explains, "The language clarifies that Vanguard won'​t try to claw back millions in fees, something that other mutual fund complexes may be forced to emulate. Vanguard is also rapidly taking off the temporary fee reductions that have been in place on Prime Money Market and Federal Money Market, though they'​re still waiving more than $​1 million at Treasury Money Market."

The article continues, "The waived fees on Federal Money Market dropped from $​298,​000 in the first half of its fiscal year, from September 2014 through February of this year, to just $​75,​000 in the second half, which ended in August. For Prime Money Market the fee reduction went from $​8.​1 million in the first six months of the fiscal year to just $​589,​000. At the same time, the funds' yields have been rising (​from 0.​01% in June to a current 0.​08% SEC yield for Prime Money Market and to 0.​06% from 0.​01% in August for Federal Money Market) as manager David Glocke has been buying higher-​yielding paper in Australia and Canada. Treasury Money Market still needs those waived fees to keep its yield at 0.​01% though even its waivers are slimming down. In the first six months of the current fiscal year the fund waived $​2.​9 million in fees. Over the second six months that was reduced to $​1.​6 million."

It concludes, "The big question now is how fund complexes like Charles Schwab & Co. will respond given their much larger fee waivers. Will Schwab money fund investors be forced to pay back waived fees? Vanguard has now shot a big one across the bow of its competitors."

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Online money market trading portal Institutional Cash Distributors issued a press release at the AFP Annual Meeting in Denver this week announcing a new partnership that will expand their offering of investment products. The release entitled, "ICD Announces Strategic Alliance with Tradeweb to Provide Corporate Treasury with an Expansive Selection of Investment Products," says, "ICD, the leading institutional trading and investment risk management company, announced a strategic alliance with Tradeweb Markets, a world leader in electronic fixed income and derivatives trading. The new alliance will enable corporate treasury clients to access the Tradeweb system through the ICD Portal to trade time deposits, commercial paper, repurchase agreements, certificates of deposits, U.​S. agency discount notes, U.​S. treasuries and U.​S. agency securities." We also report on today'​s Wall Street Journal piece, "Money Funds Clamor for Short-​Term Treasurys," which reviews recent changes in Fidelity Cash Reserves' portfolio, below.

The ICD release continues, "Corporate institutions have entered a new era of investment and credit risk management. Treasury practitioners have to navigate Basel III and MMF regulations in a protracted near-​zero interest rate environment. As a result, the supply and demand dynamics of traditional investments are driving institutional treasury departments to build more sophisticated portfolios. The ICD/​Tradeweb alliance enables corporate treasury departments to invest and trade a comprehensive selection of twelve institutional investment vehicles. Mutual clients of ICD and Tradeweb will be able to ingest trade information from Tradeweb and combine it with other ICD Portal investments to provide consolidated reporting and on-​demand exposure analytics."

Tory Hazard, ICD President & COO, says, "We are excited to provide our clients with access to Tradeweb'​s deep pools of liquidity. This enables our treasury investors to optimize their portfolio while running exposure analytics across all of their investments." Lee Olesky, CEO of Tradeweb adds, "​Our pre-​trade data and trade execution are truly complementary for corporate treasury. Integrating our deep pools of liquidity with ICD'​s offering represents a significant evolution in electronic trading and operational efficiency for corporate treasury."

In other news, The Wall Street Journal writes, "Money Funds Clamor for Short-​Term Treasurys," which is subtitled, "Fidelity'​s $​115 billion Cash Reserves fund plans to convert its entire portfolio to U.​S. government debt by Dec. 1." The article says, "​Behind the epic hunger for government debt is a rule change that has Fidelity Investments and other money-​fund managers hustling to snap up short-​term Treasurys and related debt. Fidelity'​s $​115 billion Cash Reserves fund, the world'​s largest money fund, said it plans to convert its entire portfolio to U.​S. government debt by Dec. 1, becoming one of the first to get ahead of rules slated to take effect next October that are designed to safeguard the money-​fund industry. The moves by the money funds, analysts say, are among several factors currently juicing demand for short-​term government debt, driving some Treasury-​bill yields to zero."

The piece quotes Peter Crane, president of money-​fund tracker Crane Data, "You could hear a giant sucking sound of money moving into government securities" as several funds convert to all-​government holdings to avoid the new restrictions." It adds, "`​Money-​market fund managers overseeing $​200 billion in assets have already announced plans to convert, and as much as $​1 trillion of money-​market fund assets could be caught up in the conversions, said Mr. Crane."

The Journal piece also says, "Fidelity is selling bank certificates of deposit, among other debt, and has been buying Treasury bills and government-​agency debt in recent months, according to Crane Data. Agency debt was 41% of the Cash Reserves fund'​s portfolio at Sept. 30, up from 19% in July. The transition of the Cash Reserves fund "​is progressing smoothly," said Nancy Prior, president of Fidelity'​s fixed income unit. She said "​there continues to be sufficient supply of these instruments for the fund to purchase."

Finally, it adds, "Money-​market funds, including Fidelity Cash Reserves, have piled into the Fed repo facility at a record pace. U.​S. money-​market funds' lent a record $​399.​2 billion of cash into the Fed repo program as of Sept. 30, in part to get Treasurys. That was up from the previous record of $​352.​6 billion as of Dec. 1, 2014, according to Crane Data." (​See also the Journal'​s "Big Banks to America'​s Firms: We Don'​t Want Your Cash.")

​

Money market strategists examine the debt ceiling battle brewing in Congress and the potential impact on Treasury Bills and money funds in their recent commentaries. Barclays' Joseph Abate writes in his "US Weekly Money Market Update," "​The Treasury has ratcheted up the pressure on Congress to lift the debt limit quickly. Despite growing Treasury concern, there has as yet been no noticeable back-​up in bill yields. Is the bill market too complacent?" We review commentary from Abate as well as from Citi'​s Andrew Hollenhorst and JP Morgan'​s Alex Roever. Also, we cover a new report on Private Funds, including Liquidity Funds, from the SEC'​s Division of Investment Management. The report, "Private Funds Statistics, Fourth Calendar Quarter 2014," examines statistics and trends, as reported by private fund advisers on Form ADV and Form PF. (Note: We look forward to seeing those of you attending this week'​s AFP conference in Denver! Visit Crane Data at Booth #​300 and see Pete Crane speak on "Floating NAV MMFs and Cash Alternatives" Monday at 10:​30am.)

Abate writes, "​The Treasury willingly sacrificed its "​financing" (​bill) instruments this summer to keep its "​funding" (​coupon) auctions as regular and predictable (​with respect to size and timing) as possible. But to accomplish this with its dwindling borrowing capacity under the extraordinary measure has required very sharp reductions in bill supply. Since August, the supply of bills has shrunk by nearly 15% (​or $​200bn). This has created a scramble among investors looking to roll their existing holdings into 1m, 3m, and 6m bills that have been cut to $​8bn, $​20bn and $​20bn (​October 15) from $​40bn, $​24bn, and $​24bn, respectively in early August. Short-​dated coupons with November 15 maturities briefly cheapened this week with their yields rising to between 10 and 13bp. This suggests that the supply scarcity in the bill market might be subtracting about 10bp from the debt ceiling 4w bill."

He explains, "Separately, the Treasury'​s deadline of November 3, is the day before it is set to announce the mid-​quarter refunding. If Congress has not increased the debt ceiling by then, the Treasury might have to postpone or make its auction of 3, 10, and 30y securities conditional on an increase in borrowing authority.... We are confident the debt limit will be increased as it has been since it was first introduced in 1917. We are hopeful that the increase (​or, more accurately, the suspension) will extend beyond the 2016 election and well into 2017. But, as noted above, the politics are still fluid and it is possible that the Treasury is granted a temporary debt ceiling suspension -- say, until December 11, when the current continuing resolution authorizing spending for FY 2017 expires."

Abate adds, "Assuming the ceiling is raised at the last minute (​consistent with the 2011 and 2013 episodes), and for the full two years, the Treasury might need to issue as much as $​250bn in bills between November 3 and year-​end just to reach its year-​end target cash buffer of $​275bn. We expect this to significantly cheapen bill yields and it could push 3m bill yields toward 10bp -- even with the Fed on hold into 2016. But it would also simultaneously create a fair bit of dealer indigestion that, in turn, could amplify the cheapening in bill yields and put upward pressure on GCF repo rates. For the Treasury to raise as much as $​250bn in bills in such a short time, it will need to rapidly ramp up the auction sizes -- pushing 1m bill offerings to $​40bn, and the 3m and 6m bill auctions to $​30bn each."

In his "Short-​End Notes" last week, Citi Research Strategist Hollenhorst explains, "​Demand for T-​bills continues to outstrip supply with the last four 1m T-​bill auctions clearing at 0bp. This week'​s 3m T-​bill auction cleared at 0bp for the first time in recent history as downward pressure on bill yields moves further out the curve.... Following last week'​s guidance from Treasury, most private sector forecasts (​including our own) for the "​hard" debt ceiling, when Treasury will no longer be able to meet its obligations, have moved to mid-​November."

He adds, "The uncertainty around Republican leadership and negotiating tactics increases the risk of a nail-​biter resolution to the debt ceiling. Consequently, the risk of cheapening of Treasury securities with maturities or coupon payments in November has risen."

In its latest "Prime Money Market Fund Holdings" report, JP Morgan Securities' Roever writes, "Generally, money market funds are not heavily exposed to potential debt ceiling risks in the bill market. During the last debt ceiling debacle in 2013, 1m bills sharply sold off in mid-​October as investors feared a technical default by the US Treasury. After Congress reached an agreement to lift the ceiling, bills quickly rallied back to normal levels. This time around, a similar episode could play out should Treasury exhaust its available funds, which we project to happen no later than 11/​12. Should this occur, we do not believe that MMFs are in too much risk. In total, Treasury security holdings represent less than 3% of total prime fund assets. While government funds allocate about a third of their assets to bills, floaters, and short coupons."

Crane Data'​s latest Money Fund Portfolio Holdings data shows that money funds hold $​414.​5 billion in U.​S. Treasuries as of Sept. 30, or 16.​2% of total holdings in taxable funds. Looking at the maturity distribution on 9/​30, 23.​0% of Treasuries were in overnights, 3.​0% in 2-​7 days, 17.​9% in 8-​30 days, 14.​5% in 31-​60 days, 23.​3% in 91-​180 days, and 7.​5% in over 181 days. (​See also, The Wall Street Journal'​s "​Debt Ceiling Standoff Hits Bond Market".)

In other news, the SEC released a report, "Private Funds Statistics, Fourth Calendar Quarter 2014," which (​among other things) examines data Liquidity Funds, which are similar to 2a-​7 money market funds. The SEC'​s press release quotes Chair Mary Jo White, "We believe that investors evaluating investments in private funds will benefit from access to this additional information about the private funds and their advisers. These statistics also should facilitate constructive feedback and additional analysis that could be used by the Commission and others."

The release adds, "​Advisers must report on Form ADV general information about private funds that they manage, such as basic organizational and operational information, fund size and ownership. Form PF is filed by SEC-​registered investment advisers with at least $​150 million in private funds assets under management to report information about the private funds that they manage. The staff intends to update the private fund statistics report periodically."

The report shows that there are a total of 69 Liquidity funds and 35 Advisers offering Liquidity funds. Further, there was $​272 billion in Liquidity funds and another $​349 billion in Parallel Managed Accounts at the end of 2014. It also states that 51.​1% of Liquidity Funds are fully compliant with Rule 2a-​7 and 60% are compliant from a Credit Quality standpoint.

In July, we reported on the US Treasury'​s Office of Financial Research paper, "Private Fund Data Shed Light on Liquidity Funds," and covered it in our story, "OFR Sheds Light on Liquidity Funds, STIFs, Managed Accts in Form PF." The OFR'​s paper stated, "​This brief analyzes for the first time a new confidential dataset collected by the Securities and Exchange Commission (​SEC), the Form PF filings of liquidity funds. Like money market funds and banks' short-​term investment funds, liquidity funds generally invest in short-​term assets and have portfolios structured to meet investors' near-​term liquidity needs." `​The OFR paper had data as of March 31, 2015, and showed `​Liquidity Funds with $​288 billion in assets and an additional $​359 billion in parallel managed accounts.

​

State Street Global Advisors released a new white paper called, "Meeting the Challenges: Six Strategies for the New World of Cash," wherein they introduce 6 new funds -- 3 money market funds and 3 ultra short-​term bond funds/​enhanced cash funds –- and discuss how they meet the challenges of the changing landscape of cash investing. We first reported on the new offerings back in July in the story, "State Street Files New 60 Day MMF, Current Yield, Ultra Short Bond," based on the initial SEC filings. This new white paper elaborates on the launches and comments on SSgA'​s larger strategy as it readies for the implementation of money fund reform. The 3 new money funds are: State Street 60 Day Money Market, State Street Institutional Liquid Assets, and State Street Cash Reserves. The 3 new "​non 2a-​7" or bond funds include: State Street Ultra Short Term Bond, State Street Current Yield, and State Street Conservative Income. We also recap some of the other recent ultra short term bond fund launches below.

The SSgA paper says, "The environment for cash investors changed dramatically after the Global Financial Crisis (​GFC), when the federal government stepped in with new regulations to keep future liquidity dislocations at bay.... New 2a-​7 rules were enacted to increase the liquidity of money market funds and improve the credit quality of underlying securities in those funds.... As before, any funds operating outside the 2a-​7 requirements may not be considered "​money market funds."

It continues, "It'​s hard to overstate the repercussions these various changes will have on the cash markets. The new banking rules will, among other things, heighten demand for short-​term government debt and reduce issuance of short-​term corporate debt. For their part, managers of prime money market funds have already lowered their risk tolerance and moved into shorter-​maturity, higher-​quality bonds, both government and corporate. The potential for supply-​demand imbalances and lessened liquidity in certain areas of the market is obvious."

State Street writes, "As regulations come into effect in 2016, the floating NAV rule in particular is likely to lead institutional investors to shift assets out of prime and tax-​exempt funds. Much of those assets are likely to flow into government money funds. Those flows, along with new banking regulations, will cause a leap in demand for short-​term government securities, weighing down yields on these investments and funds that hold them."

They add, "But fortunately, today'​s challenges also present opportunities, particularly for those able to move beyond the traditional stable NAV marker for a portion of their cash needs. To provide a solution to the investment limitations now vexing some cash investors, the State Street Global Advisors cash team scribbled up its whiteboard with fund ideas. We'​re now bringing these six new funds to market, each designed to answer a different combination of challenges created by the post-​GFC amendments, while maintaining a sharp focus on its investment strategy." (​For more on SSgA'​s post–​reform plans, see also our News story, "SSgA Says State Street ILR Will Float, Defends Gates, Fees or see SSgA'​s letter to shareholders.)

The white paper goes into some detail about each of the new funds. We start with the 3 money funds -- all of which fall within the parameters of 2a-​7. First is the 60-​Day Money Market Fund. "While this fund is a prime fund under Rule 2a-​7 with a variable NAV, it will take advantage of an SEC position allowing assets maturing in 60 days or fewer to be priced at amortized cost, so long as the amortized cost value is approximately the same as the fair value of the security without the use of amortized cost. Holding securities maturing in 60 or fewer days will ensure this fund maintains high levels of liquidity. Meanwhile, the use of amortized cost accounting should provide a potentially steadier NAV than floating NAV funds valuing their portfolios using market pricing. This is a credit fund able to purchase commercial paper, certificates of deposit and time deposits. As prime funds potentially become less attractive, due to the complexity of a floating NAV, yield spreads between government securities and CP, CDs and time deposits could increase. That dynamic could present an opportunity for this fund to pick up yield while maintaining a high level of liquidity."

Second is the Cash Reserves Fund. "​This fund will invest in commercial paper and other securities consistent with prime funds. These securities are likely to offer considerably higher yield than government issues, helping generate more yield than government-​only funds. The fund will serve retail investors. As such, it will seek to maintain a stable $​1.​00 NAV while investing in prime securities. Retail prime funds are allowed to seek to maintain a constant NAV in the new regulatory environment because regulators observed that during the financial crisis retail investors did not redeem out of prime funds to the extent institutional investors did. Like institutional prime funds, this fund will nevertheless be required to adhere to new 2a-​7 rules requiring the use of gates and liquidity fees."

Third is the Institutional Liquid Assets Fund. "​While this fund does follow 2a-​7 rules on liquidity and credit quality of underlying securities, it is not subject to additional restrictions from the major rating agencies. Funds not rated could have yield advantages while not posing significant additional risk. For example, this fund would allow the purchase of A2/​P2-​rated securities while the ratings agencies allow no A2/​P2 rated securities. This fund may be ideal for investors who use ratings agencies as one input in their evaluation of money market funds but not as the determining factor. The fund will still purchase securities that meet top-​tier ratings criteria, but will not have additional constraints that impede proper relative value evaluation."

Next, we look at the new funds that fall outside of 2a-​7 in either the ultra-​term bond fund or what'​s often called the "​enhanced cash" space. One is the Current Yield Fund. "​This fund purchases investment grade commercial paper with maturities no longer than 90 days. Rating requirements for this fund are less strict than those dictated by 2a-​7 rules, allowing the fund to choose from an entire universe of investment grade securities. This fund can purchase A2/​P2 securities, as well as A/​3, P/​3 and F/​3 securities that mature in less than 30 days. A Moody'​s report found default rates of only 0.​03 percent for A1/​P1 commercial paper over a 40-​year period, and only 0.​04 percent for A2/​P2 securities. Even when a CP issuer experiences a credit event, the risk of default in the short term is very low. This fund seeks to enable investors to benefit from securities issued by quality firms lower on the credit curve, while mitigating default risk by limiting the maturity range."

Another new offering is the Conservative Income Fund. "With this strategy, the fund can extend WAM and WAL limits beyond what is dictated by Rule 2a-​7. The fund therefore is designed to provide additional current yield, while maintaining sharp focus on preservation of principal and liquidity to meet shareholder activity. This fund'​s WAM can stretch to 90 days; its WAL can go out to 250 days; and the per-​asset maturity limit can be up to 760 days. By investing in longer-​maturity securities, the fund may present an attractive yield for investors looking to invest "​rainy day cash" that can be put aside for nine to 12 months. The fund has the flexibility to invest up to 20 percent of AUM in A2/​P2 securities, limited to A2/​P2 securities maturing in less than one year. This way, the fund can benefit from quality, higher-​yielding names further down the credit curve. The fund has the flexibility to purchase up to 10 percent of AUM in illiquid assets. This allows the fund to enter a greater proportion of repo agreements, one of the higher-​yielding fully-​collateralized investments for cash investors."

The last addition is the Ultra Short term Bond Fund. "​This bond fund carries a duration of one year, allowing the fund to purchase fixed rate assets further out the yield curve to potentially generate a higher current yield. Additionally, the fund will include floating rate assets to hedge against a future upward move in interest rates. Fund managers will purchase a wide range of investment grade credits to capitalize on relative value analysis that reveals names that typically provide higher yield without a significant increase in default risk. The stipulations include an average credit quality of single A for the overall fund, and no more than 30 percent of AUM in BBB and BBB+ rated names. The fund has the ability to purchase ABS investments (​such as credit cards and automobile trusts) up to three years WAL for a broader choice of high quality assets. All ABS securities purchased will be rated AAA. The fund also has a greater AUM allowance for illiquid securities (​up to 20 percent), offering a greater opportunity for term repo agreements. Investors in this fund seek to reduce interest rate risk while not giving up too-​much yield. The ultra-​short-​term bond strategy is for investors willing to venture well outside of traditional cash guidelines and have at least a 12- to 24-​month time horizon."

State Street joins a growing list of companies that have come out with or filed to launch "​ultra, ultra-​short" term bond funds (​or "Conservative Ultra Short" as our new Bond Fund Intelligence, which tracks this space, terms them) since the SEC reforms were announced. Most recently, Morgan Stanley filed to launch Morgan Stanley Institutional Ultra Short Income Fund. Deutsche Wealth & Asset Management plans to introduce two new bond funds, Deutsche Limited Maturity Quality Income and Deutsche Ultra Short Investment Grade. In April, Western Asset Management announced that it was coming out with the Western Ultra Short Obligations Fund and Western Asset Short Term Yield Fund. In February, Vanguard came out with the Vanguard Ultra Short Term Bond Fund, and last July, Invesco launched its Invesco Conservative Income Fund. BlackRock, Fidelity, Putnam and a number of others also have offerings immediately adjacent to the money fund space. (​See our latest Bond Fund Intelligence for more.)

​

Fidelity Investments provided another update on its fund lineup changes related to money fund reforms, sorting funds into retail or institutional and announcing plans for its Prime Institutional money market fund lineup on Wednesday. These latter changes include converting the $​65.​5 billion Fidelity Institutional Money Market Portfolio, the 4th largest money fund portfolio overall, to Prime Retail. Fidelity will retain one Prime Institutional fund, the $​47.​8 billion FIMM Prime Money Market Portfolio, the 7th largest in our universe. Fidelity will also convert its $​2.​2 billion FIMM Tax Exempt Portfolio to Retail. Nancy Prior, President of Fidelity'​s Fixed Income Division said in an interview, "I want to emphasize and reiterate that Fidelity is committed to the money market business. Money market funds continue to be an integral part of our business, so we are going to offer a wide variety of investment options that includes Retail and Institutional funds, Prime and Muni funds, as well as Government and US Treasury funds."

Prior also told us that the conversion of the $​111 billion Fidelity Cash Reserves fund from Prime Retail to Government will be complete around December 1. (​See yesterday'​s News for more on Fidelity Cash Reserve'​s shift to Government Agencies from CDs.) Fidelity announced back in January that it was going to merge 6 money funds into funds with similar strategies, and convert 3 prime Retail funds into Government funds, including Cash Reserves. (​See our story, "Fidelity Announces Major Changes to MMFs; Staying Stable, Going Govt.") Fidelity also provided a recap of its earlier changes in a shareholder update.

The latest update, released Wednesday afternoon, says, "After a thorough evaluation of our funds and their shareholders, we have now determined which Fidelity prime and municipal money market mutual funds will be designated as retail funds and which will be designated as institutional funds." As previously mentioned, only the $​47.​8 billion FIMM Prime Money Market Portfolio will remain Prime Institutional, subject to floating NAV and gates and fees when the new rules are implemented in October 2016. Two funds have been designated as Prime Retail: Fidelity Money Market and FIMM Money Market Portfolio. The $​65.​5 billion FIMM Money Market Portfolio is currently categorized as Prime Inst., while Fidelity Money Market is and will stay Prime Retail.

Further, Fidelity will have no Tax Exempt Institutional funds as the $​2.​2 billion FIMM Tax Exempt Portfolio will be classified as Retail. The other Tax Exempt Retail funds include: Fidelity Tax-​Exempt Fund, Fidelity Arizona Municipal Money Market, Fidelity California AMT Tax-​Free Money Market, Fidelity California Municipal Money Market, Fidelity Connecticut Municipal Money Market, Fidelity Massachusetts AMT Tax-​Free Money Market, Fidelity Massachusetts Municipal Money Market, Fidelity Michigan Municipal Money Market, Fidelity New Jersey AMT Tax-​Free Money Market, Fidelity New Jersey Municipal Money Market, Fidelity New York AMT Tax-​Free Money Market Fidelity New York Municipal Money Market, Fidelity Ohio Municipal Money Market, and Fidelity Pennsylvania Municipal Money Market.

The release continues, "In November 2015, we will begin to notify current fund shareholders of their status as retail or institutional investors, based on the new SEC rules, and provide information about the Fidelity money market fund investment choices that will be available to them. Separate, advance notice of account status and investment options will be provided to advisors and other intermediaries whose clients are current fund shareholders. Additionally, on or about January 1, 2016, the retail funds will close for purchases by new accounts that are not beneficially owned by natural persons."

In an interview, Prior explained how Fidelity approached classifying funds as Retail or Institutional. "​Over the last several months we have looked at all of our Prime funds and all of our Muni funds and we focused in on the shareholder base of each of those funds, how the shareholders use those funds. We looked at the assets and we looked at the accounts and based on that analysis, determined which funds will be designated retail and which funds will be designated institutional. We are going to have 2 funds in the Prime space that will be designated retail -- which will have the stable NAV and be subject to the potential for gates and fees -- and we will have one Institutional prime fund, subject to the floating NAV and the potential for gates and fees. In our Muni lineup, we are going to designate all of our existing funds as retail funds. We will have 3 national Muni funds and 13 state Muni funds."

She added, "​We looked at the underlining account set ups in all of our retail funds and when we did that due diligence it became pretty clear that a significant amount of the assets weighed one way or another -- toward the natural persons or institutional. But we also wanted to make sure that we had a full product lineup for our institutional shareholders and with respect to that, we'​ll have a Treasury-​only fund, a Treasury fund, a Government fund, and a Prime fund, so we will be offering our institutional investors a full product lineup."

Prior continued, "​We'​re going to begin the process in November of reaching out to each of the shareholders in our retail prime and retail muni funds to begin to share with them what their account designation is and review the eligibility requirements of the funds. We will use the remainder of 2015, into the first half of 2016, to complete the designation processes and the process of aligning shareholders with their appropriate funds based on eligibility." She added, "​There certainly will be some shareholders that will no longer be eligible to be in the fund based on the SEC definition, but the preponderance of the assets in the funds aligned with the designations that we came up with."

Finally, Prior said that around December 1, 2015, Fidelity is expecting to complete the fund mergers, name changes and conversions (​including Cash Reserves' shift to Government). On January 1, 2016, Fidelity expects to close retail prime and municipal funds to new institutional investors, and in Q3 2016 Fidelity will implement potential liquidity fees and redemption gates on prime and municipal funds and a floating NAV on institutional fund. (October 14, 2016 is the final SEC compliance deadline for fees/​gates and floating NAV.) Fidelity has not yet determined the frequency and the time of the day that it will be having settlements on the floating NAV fund.

​

Crane Data released its October Money Fund Portfolio Holdings Friday, and our latest collection of taxable money market securities, with data as of Sept. 30, 2015, shows a huge gain in holdings of Fed repo, which spiked to record levels. There was also a sizable gain in Agencies (​Fidelity Cash Reserves' continuing shift to Govts accounted for half of the increase), a large drop in Other (​Time Deposits), and smaller decreases in CDs and Commercial Paper. Money market securities held by Taxable U.​S. money funds overall (​those tracked by Crane Data) decreased by $​30.​2 billion in September to $​2.​554 trillion. MMF holdings increased by $​35.​0 billion in August, $​55.​0 billion in July, and $​58.​3 billion in June. Repos remained the largest portfolio segment, well ahead of CDs. Agencies moved into third place, jumping ahead of both Treasuries and Commercial Paper . Other (​mainly Time Deposits) securities was sixth, followed by VRDNs. Money funds' European-​affiliated securities represented just 18.​5% of holdings, down significantly from the previous month'​s 28.​1%. Below, we review our latest Money Fund Portfolio Holdings statistics.

Among all taxable money funds, Repurchase agreements (​repo) increased $​172.​6 billion (​31.​1%) to $​728.​4 billion, or 28.​5% of assets, after decreasing $​2.​5 billion in August and dropping $​109.​7 billion in July. Certificates of Deposit (​CDs) were down $​55.​3 billion (​10.​3%) to $​482.​0 billion, or 18.​9%, after increasing $​1.​1 billion in August and jumping i$​33.​9 billion in July. Government Agency Debt increased $​34.​5 (​9.​0%) to $​418.​2 billion, or 16.​4% of assets, after increasing $​29.​8 billion last month. Almost half of the gains, $​16.​7 billion, were due to the ongoing conversion of Fidelity Cash Reserves, the largest money fund with $​111.​5 billion, from Prime to Government. (​Fidelity Cash Reserves now holds 41% in Agencies, up from 26% last month and 19% the month ended July 31.)

Treasury holdings decreased $​19.​6 billion (​4.​5%) to $​414.​5 billion, or 16.​2%, while Commercial Paper (​CP) dropped $​27.​7 billion (​6.​8%) to $​379.​0 billion, or 14.​8% of assets. Other holdings, primarily Time Deposits, fell $​133.​8 billion (​53.​7%) to $​115.​2 billion, or 4.​5% of assets. VRDNs held by taxable funds decreased by $​1.​0 billion (​5.​4%) to $​16.​8 billion (​0.​7% of assets).

Among Prime money funds, CDs represent just under one-​third of holdings at 30.​4% (​down from 33.​4% a month ago), followed by Commercial Paper at 23.​9% (​down from 25.​3%). The CP totals are primarily Financial Company CP (​13.​1% of total holdings), with Asset-​Backed CP making up 5.​8% and Other CP (​non-​financial) making up 5.​0%. Prime funds also hold 10.​7% in Agencies (​up from 8.​0%), 3.​7% in Treasury Debt (​down from 4.​1%), 13.​9% in Treasury Repo (​up from 3.​2%), 1.​5% in Other Instruments, 1.​3% in Other Instruments (​Time Deposits), and 4.​3% in Other Notes. Prime money fund holdings tracked by Crane Data total $​1.​588 trillion (​down from $​1.​607 trillion last month), or 62.​2% of taxable money fund holdings' total of $​2.​554 trillion.

Government fund portfolio assets totaled $​471 billion, up from $​468 billion in August, while Treasury money fund assets totaled $​495 billion, down from $​509 billion in August. Government money fund portfolios were made up of 52.​7% Agency Debt, 20.​1% Government Agency Repo, 3.​6% Treasury debt, and 23.​2% in Treasury Repo. Treasury money funds were comprised of 68.​5% Treasury debt, 30.​1% in Treasury Repo, and 1.​4% in Government agency, repo and investment company shares. Government and Treasury funds combined total $​977 billion, or 37.​8% of all taxable money fund assets.

European-​affiliated holdings plummeted $​253.​8 billion in September to $​472.​7 billion among all taxable funds (​and including repos); their share of holdings decreased to 18.​5% from 28.​1% the previous month. Eurozone-​affiliated holdings decreased $​138.​7 billion to $​267.​9 billion in September; they now account for 18.​5% of overall taxable money fund holdings. Asia & Pacific related holdings decreased by $​11.​3 billion to $​282.​2 billion (​10.​5% of the total). Americas related holdings increased $​236.​0 billion to $​1.​793 trillion, and now represent 70.​2% of holdings.

The overall taxable fund Repo totals were made up of: Treasury Repurchase Agreements, which was up a whopping $​202.​2 billion, or 73%, to $​479.​2 billion, or 18.​8% of assets, Government Agency Repurchase Agreements (​down $​28.​7 billion to $​170.​6 billion, or 6.​7% of total holdings), and Other Repurchase Agreements ($​78.​7 billion, or 3.​1% of holdings, down $​900 million from last month). The Commercial Paper totals were comprised of Financial Company Commercial Paper (​down $​21.​6 billion to $​207.​5 billion, or 8.​1% of assets), Asset Backed Commercial Paper (​unchanged to $​92.​2 billion, or 3.​6%), and Other Commercial Paper (​down $​6.​1 billion to $​79.​3 billion, or 3.​1%).

The 20 largest Issuers to taxable money market funds as of Sept. 30, 2015, include: the US Treasury ($​414.​5 billion, or 16.​2%), Federal Reserve Bank of New York ($​399.​2B, 15.​6%), Federal Home Loan Bank ($​273.​3B, 10.​7%), Wells Fargo ($​68.​6B, 2.​7%), JP Morgan ($​60.​1B, 2.​4%), Bank of Tokyo-​Mitsubishi UFJ Ltd ($​57.​2B, 2.​2%), BNP Paribas ($​56.​5B, 2.​2%), RBC ($​56.​5B, 2.​2%), Federal Home Loan Mortgage Co. ($​55.​4B, 2.​2%), Bank of Nova Scotia ($​54.​0B, 2.​1%), Bank of America ($​50.​2B, 2.​0%), Toronto-​Dominion Bank ($​46.​3B, 1.​8%), Sumitomo Mitsui Banking Co ($​45.​8B, 1.​8%), Federal Farm Credit Bank ($​44.​3B, 1.​7%), Federated National Mortgage Association ($​42.​6B, 1.​7%), Bank of Montreal ($​39.​8B, 1.​6%), Credit Agricole ($​34.​1B, 1.​3%), Credit Suisse ($​33.​9B, 1.​3%), HSBC ($​31.​2B, 1.​2%), and Mizuho Corporate Bank Ltd. ($​31.​1B, 1.​2%).

In the repo space, the Federal Reserve Bank of New York'​s RPP program issuance (​held by MMFs) skyrocketed and easily remained the largest repo program with $​399.​2B, or 54.​8% of money fund repo, up from $​128.​7B a month ago. The 10 largest Fed Repo positions among MMFs on 9/​30 include: Fidelity Inst MM ($​19.​2B), Fidelity Inst MMkt Prime ($​17.​6B), Morgan Stanley Inst Liq Gvt ($​16.​8B), JP Morgan Prime ($​15.​0B), BlackRock Lq TempFund ($​14.​4B), Fidelity Cash Reserves ($​13.​4B), JP Morgan US Govt ($​13.​2B), Fidelity Cash Central ($​11.​3B), Federated Trs Oblg ($​11.​2B), and Wells Fargo Adv Gvt MMkt ($​10.​3B).

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 ($​399.​2B, 54.​8%), Wells Fargo ($​38.​6B, 5.​3%), Bank of America ($​37.​7B, 5.​2%), BNP Paribas ($​31.​1B, 4.​4%), JP Morgan ($​28.​6B, 3.​9%), Citi ($​21.​1B, 2.​9%), Bank of Nova Scotia ($​18.​4B, 2.​5%), RBC ($​17.​5B, 2.​4%), Credit Suisse ($​17.​0B, 2.​3%), and Goldman Sachs ($​12.​9B, 1.​8%).

The 10 largest issuers of "​credit" -- CDs, CP and Other securities (​including Time Deposits and Notes) combined -- include: Sumitomo Mitsui Banking Co ($​45.​8B, 5.​4%), Bank of Tokyo-​Mitsubishi UFJ Ltd ($​45.​0B, 5.​3%), RBC ($​38.​9B, 4.​6%), Bank of Nova Scotia ($​35.​6B, 4.​2%), Toronto Dominion Bank ($​34.​3B, 4.​0%), Bank of Montreal ($​32.​1B, 3.​8%), JP Morgan ($​31.​5B, 3.​7%), Wells Fargo ($​30.​0B, 3.​5%), Mizuho Corporate Bank Ltd. ($​25.​9B, 3.​0%), and Svenska Handelsbanken AB ($​25.​7B, 3.​0%).

The 10 largest CD issuers include: Sumitomo Mitsui Banking Co ($​37.​5B, 7.​8%), Bank of Tokyo-​Mitsubishi UFJ Ltd ($​33.​6B, 7.​0%), Toronto-​Dominion Bank ($​31.​1B, 6.​5%), Bank of Montreal ($​29.​1B, 6.​1%), Bank of Nova Scotia ($​25.​7B, 5.​4%), Mizuho Corporate Bank Ltd ($​23.​4B, 4.​9%), Wells Fargo ($​23.​3B, 4.​9%), RBC ($​20.​7B, 4.​3%), Sumitomo Mitsui Trust Bank ($​18.​7B, 3.​9%), and Canadian Imperial Bank of Commerce ($​18.​3B, 3.​8%).

The 10 largest CP issuers (​we include affiliated ABCP programs) include: JP Morgan ($​24.​2B, 7.​8%), Commonwealth Bank of Australia ($​18.​1B, 5.​8%), Westpac Banking Co ($​16.​1B, 5.​1%), RBC ($​14.​4B, 4.​6%), BNP Paribas ($​13.​8B, 4.​4%), Bank of Tokyo-​Mitsubishi UFJ Ltd ($​11.​1B, 3.​6%), HSBC ($​10.​9B, 3.​5%), Toyota ($​10.​2B, 3.​3%), National Australia Bank Ltd ($​9.​6B, 3.​1%), and Australia & New Zealand Banking Group Ltd ($​9.​3B, 3.​0%).

The largest increases among Issuers include: Federal Reserve Bank of New York (​up $​270.​5B to $​399.​2B), Federal Home Loan Bank (​up $​20.​3B to $​273.​2B), Federal Home Loan Mortgage Co. (​up $​9.​4B to $​55.​4B), Federal National Mortgage Assoc (​up $​4.​8B to $​42.​6B), Bank of Montreal (​up $​3.​3B to $​39.​8B), Sumitomo Mitsui Banking Co. (​up $​1.​4B to $​45.​8B), Federal Farm Credit Bank (​up $​1.​1B to $​44.​3B), Bank of Tokyo-​Mitsubishi UFJ Ltd. (​up $​1.​1B to $​57.​2B), Commonwealth Bank of Australia (​up $​900M to $​19.​6B), and Toyota (​up $​900M to $​12.​3B).

The largest decreases among Issuers of money market securities (​including Repo) in August were shown by: Credit Agricole (​down $​40.​2B to $​34.​1B), DZ Bank AG (​down $​26.​2B to $​8.​6B), Natixis (​down $​25.​6B to $​26.​5B), Societe Generale (​down $​23.​8B to $​18.​3B), US Treasury (​down $​20.​9B to $​414.​5B), Barclays PLC (​down $​19.​7B to $​10.​8B), Skandinaviska EB (​down $​17.​7B to $​17.​1B), Credit Mutuel (​down $​17.​2B to $​6.​8B), BNP Paribas (​down $​15.​1B to $​56.​5B) and Swedbank AB (​down $​12.​4B to $​17.​6B).

The United States remained the largest segment of country-​affiliations; it represents 60.​7% of holdings, or $​1.​550 trillion (​up $​241.​0B). Canada (​9.​4%, $​250.​0B) moved into second, followed by Japan (​7.​2%, $​184.​7B). Both jumped ahead of France (​6.​0%, $​152.​3B), which fell to fourth. Sweden (​3.​0%, $​76.​8B) moved to fifth, ahead of Australia (​2.​9%, $​73.​5B), while the U.​K. (​2.​8%, $​72.​5B) fell to sixth. The Netherlands (​2.​5%, $​63.​7B), Switzerland (​1.​9%, $​48.​5B), Germany (​1.​8%, $​46.​7B), and Norway (​0.​7%, $​18.​0B) round out the top 10 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 Sept. 30, 2015, Taxable money funds held 27.​4% (​down from 27.​7%) of their assets in securities maturing Overnight, and another 16.​5% maturing in 2-​7 days (​up from 10.​3%). So 43.​9% in total matures in 1-​7 days. Another 23.​2% matures in 8-​30 days, while 10.​8% matures in 31-​60 days. Note that more than three-​quarters, or 77.​9% 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, 61-​90 days, holds 9.​3% of taxable securities, while 10.​8% matures in 91-​180 days, and just 1.​9% matures beyond 180 days.

Crane Data'​s Taxable MF Portfolio Holdings (​and Money Fund Portfolio Laboratory) were updated Friday, 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.

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Charles Schwab Investment Management sent out a letter to clients and shareholders Friday morning announcing changes to its money market fund lineup. The big change is that Schwab, which has mostly retail assets to begin with, will convert its Institutional shares to retail so that it'​s offering are entirely retail; it will also convert one of its small Prime funds, Money Market Portfolio, to Government. Schwab is the 7th largest money fund manager in the US with $​160.​1 billion in assets. The three funds that are changing -- Schwab Value Advantage Money Fund, Institutional Shares; Schwab Value Advantage Money Fund, Institutional Prime Shares; and Schwab Municipal Money Fund, Institutional Shares -- represent about $​3.​2 billion. (​See also the press release, "Charles Schwab Investment Management Changes Money Market Fund Line-​up," and see our previous News, "​​Schwab Shifting MMF Sweeps to Bank.")

The letter says, "Last year, the U.​S. Securities and Exchange Commission (​SEC) implemented a series of changes to the regulations that govern money market funds (​MMFs). The purpose of these changes is two-​fold -- to increase fund liquidity and protect investors. Money market funds represent the largest pool of client assets managed by Charles Schwab Investment Management, and we remain committed to offering and managing money market funds."

It continues, "Because our money market funds primarily serve the needs of retail investors, most of our clients will not be meaningfully impacted by the new regulations. We will continue to offer a robust product suite that includes prime, municipal, and government money market funds. Transparency and clarity are important to us and our shareholders, and we'​d like to provide you with some background on what is changing for this category of product and how."

Schwab tells us, "​The changes affect money market funds in three ways: New categories and eligibility requirements for retail money market funds. The SEC has created a new definition of "​retail money market funds" with restrictions on the type of client who can invest in them. New requirements for fund valuation. Retail money market funds will continue to be permitted to transact at a constant net asset value (​NAV) of $​1.​00 per share, but institutional money market funds must convert to a variable NAV. New methods to manage fund redemptions. Money market funds will now be able to deploy new tools to stem heavy redemptions during times of market stress and tight liquidity, giving them the ability to impose liquidity fees and/​or suspend redemptions (​also known as redemption gates)."

Further, they say, "While our investing discipline remains unchanged, we are announcing a number of changes to our product suite in order to satisfy these new requirements. Going forward, Schwab will categorize its money market funds as follows: All Schwab Prime and Municipal Money Market Funds plan to qualify as "​retail money market funds" by October 14, 2016, will continue to seek to maintain a constant NAV of $​1.​00 per share and will only be available to "​natural persons" which includes individuals, certain trusts, and certain retirement accounts), and participant-​directed defined contribution plan accounts. These funds will be subject to potential liquidity fees and redemption gates in periods of exceptional market volatility."

The letter adds, "Effective October 9, 2015, three Schwab Money Market Fund share classes are renamed. The Schwab Value Advantage Money Fund - Institutional Shares will be renamed Schwab Value Advantage Money Fund - Premier Shares. Schwab Value Advantage Money Fund - Institutional Prime Shares will be renamed Schwab Value Advantage Money Fund - Ultra Shares. Schwab Municipal Money Fund - Institutional Shares will be renamed Schwab Municipal Money Fund - Premier Shares."

It continues, "All Schwab Government Money Funds intend to qualify as "​government money market funds" as of April 14, 2016 according to the SEC'​s new definition of such funds, and will continue to seek to maintain a constant NAV of $​1.​00 per share. The Schwab Money Market Portfolio also intends to convert to a "​government money market fund" as of April 14, 2016, and will continue to seek to maintain a constant NAV of $​1.​00 per share. None of these funds will be adopting a policy to implement liquidity fees or redemption gates at this time."

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Treasury Strategies hosted its Quarterly Corporate Cash Briefing yesterday, where the discussion among panelists Roger Merritt, Managing Director, Fitch Ratings; Debbie Cunningham, CIO, Global Money Markets, Federated Investors; and Peter Matza, Engagement Director, Association of Corporate Treasurers, focused on liquidity -- or lack thereof -- in the marketplace, as well as the impact of Fed policy. The webinar was moderated by Tony Carfang, Partner, Treasury Strategies, and also featured Kevin Ruiz, Principal, Treasury Strategies. We also cover the release of the Minutes from the September meeting of the Federal Reserve'​s Federal Open Market Committee, where, despite much speculation to the contrary, the Fed did not raise interest rates. (Note: Charles Schwab just announced changes to its money funds this morning. Watch for a full update shortly.)

The Quarterly Cash Briefing <​i:​https://​www.​youtube.​com/​watch?​v=​o-​DG3jKEitk&​feature=​youtu.​be&​list=​PLgADTI06-​0lU2VZhDCFGVN1co5NsWNmkV>​_ panelists talked about liquidity shifts in the market. Merritt explained, "`​We'​ve seen tremendous structural changes in the markets since the financial crisis ... in no small part driven by regulations. One of the concerns that we have and that the market is focused on is whether these structural changes have resulted in markets that are fundamentally less liquid. That obviously has implications for anybody who'​s trying to manage cash or who is regularly trying to access to capital markets."

He continued, "We did a survey last year of select asset managers and one of the questions we asked was, '​Are the markets less liquid?' The answer was almost uniformly yes. So I think one of the concerns is, '​Where is the liquidity coming from today?' It seems that increasingly it'​s coming from the asset management industry itself. The assets held in bond funds have grown five-​fold since 2009, so the concern there is -- Do these managers have the intrinsic liquidity to manage a period of outflows? We'​ve done research that shows that flows are strongly correlated to returns, and we'​ve also seen that there'​s a high correlation between the size of a bond issue and its liquidity. Are we going to see greater volatility going forward than we have in the past? It remains to be seen. But I think in certain segments of the credit market the answer may be '​Yes.'"

Cunningham commented on the changes she'​s seeing. "​The bond markets have historically been less liquid than the equity markets -- it'​s historically a buy and hold asset class compared to equities. Having said that, I think today'​s market from a bond perspective, versus historically, probably isn'​t all that much less liquid -- it'​s just whose making the liquidity. Broker dealers, who have historically held inventory and made markets are not as willing to do so today because of concerns they have about what their own balance sheet might looks like. So I think the market makers are less prone to be active in the marketplace. Certainly, it'​s an aspect of the market that we will continue to monitor."

On Fed policy, Merritt said, "It would be hard to argue that that there aren'​t distortions in the marketplace because of the Feds long 0% interest rate policy. We are in uncharted territory. We'​ve had zero interest rate policy in place for nearly seven years -- that'​s really quite unprecedented. It'​s hard to know how the markets will ultimately re-​price once we start to see the Fed raise rates to more normal levels."

In other news, the Federal Reserve released the Minutes from its Sept. 16-​17 FOMC Meeting, detailing its decision not to raise interest rates. The minutes said, "Inflation continued to run below the Committee'​s longer-​run objective, partly reflecting declines in energy prices and in prices of non-​energy imports.... Participants weighed a number of risks associated with the timing of policy firming. Some participants were concerned that the downside risks to inflation could be realized if the target range for the federal funds rate was increased before it was clear that economic growth would remain at an above-​trend pace and downward pressures on inflation had abated."

It continues, "Some other participants, however, expressed concerns about delaying the start of normalizing the target range for the federal funds rate much longer. For example, a significant delay risked an undesired buildup of inflationary pressures or economic and financial imbalances that would be costly to unwind and that eventually could have adverse consequences for economic growth. In addition, a prompt decision to firm policy could provide a signal of confidence in the strength of the U.​S. economy that might spur rather than restrain economic activity. These participants preferred to begin policy firming soon, with most of them expecting that beginning the process before long would allow the target range for the federal funds rate to be increased gradually."

The Wall Street Journal covered the minutes in its story, "Fed'​s Rate Delay Spurred by Worry Over Low Inflation, Minutes Show." The story says, "Some Fed officials have described the September decision as a close call. The minutes don'​t suggest there was intense disagreement with the decision to hold off on raising rates."

In her regular "Month in Cash" column, Federated'​s Debbie Cunningham, wrote a post called, "The Fed Has No Cred." She says, "When the Federal Reserve decided to leave rates near zero in its September policymaking meeting, it was more than disappointing. It struck a serious blow for its credibility. While the Fed can'​t and shouldn'​t make promises, it has been giving strong indications in its economic projections and in most speeches that the economy is finally conducive to a hike. Our view of Chair Janet Yellen and company is now a case of "​watch what they do, not what they say." The markets have lost some faith, too."

She adds, "So where does it put us and most money market managers? Pretty much right where we were ahead of the September meeting. We will continue to position ourselves for the Federal Open Market Committee (​FOMC) to announce a move this month or in December, but we won'​t be surprised if there isn'​t one this year." (Correction: Please note that yesterday'​s News and our latest Money Fund Intelligence and MFI XLS contained an incorrect asset number for Vanguard Prime MMF Inst. We had reported a large drop in assets, but this fund was actually flat in Sept. Note that we'​ve since revised the story and the online versions of MFI and MFI XLS.)

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Crane Data'​s latest Money Fund Intelligence Family & Global Rankings, which rank the market share of managers of money market mutual funds in the U.​S. and globally, will be sent out to shareholders on Thursday. The October edition, with data as of Sept. 30, 2015, shows asset decreases for the majority of US money fund complexes in the latest month, but increases over the past 3 months. Assets decreased by $​22.​9 billion overall, or 0.​9%, in September; over the last 3 months, assets are up $​34.​3 billion, or 1.​4%. For the past 12 months through September 30, total assets are up $​36.​8 billion, or 1.​5%. Below, we review the latest market share changes and figures. (Note: Crane Data'​s October Money Fund Intelligence was released yesterday, and our latest Money Fund Portfolio Holdings will be released Friday.)

The biggest gainers in September were BlackRock, SSgA, Wells Fargo, Western, and Federated, rising by $​4.​7 billion, $​4.​7B, $​2.​7B, $​2.​4B, and $​973M, respectively. BlackRock, Fidelity, Morgan Stanley, SSgA, and Schwab had the largest increases over the 3 months through Sept. 30, 2015, rising by $​11.​2 billion, $​10.​6B, $​10.​4B, $​7.​6B, and $​6.​5B, respectively. (​Our domestic U.​S. "Family" rankings are available in our MFI XLS product, our global rankings are available in our MFI International product, and the combined "​Family & Global Rankings" are available to our Money Fund Wisdom subscribers.)

Our latest domestic U.​S. money fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $​413.​7 billion, or 16.​1% of all assets (​down $​3.​4 billion in September, up $​10.​6B over 3 mos., and up $​9.​0B over 12 months). Fidelity was followed by JPMorgan with $​254.​6 billion, or 9.​9% market share (​down $​2.​7B, up $​4.​8B, and up $​16.​6B for the past 1-​month, 3-​mos. and 12-​mos., respectively). BlackRock remained the third largest MMF manager with $​217.​0 billion, or 8.​5% of assets (​up $​4.​7B, up $​11.​2B, and up $​25.​6B). Federated Investors was fourth with $​206.​2 billion, or 8.​0% of assets (​up $​973M, up $​5.​5B, and down $​245M). Vanguard remained in fifth place with $​175.​8 billion, or 6.​8%, (​up $​1.​2B, up $​1.​2B, and up $​3.​6B). (Note: We initially reported a drop in Vanguard'​s Prime MMF Inst class in Sept., but this was incorrect.)

The sixth through tenth largest U.​S. managers include: Dreyfus ($​164.​0B, or 6.​4%), Schwab ($​160.​1B, 6.​2%), Goldman Sachs ($​137.​2B, or 5.​3%), Morgan Stanley ($​127.​2B, or 5.​0%), and Wells Fargo ($​111.​0B, or 4.​3%). The eleventh through twentieth largest U.​S. money fund managers (​in order) include: SSgA ($​84.​3B, or 3.​3%), which moved ahead of Northern ($​79.​7B, or 3.​1%), Invesco ($​51.​6B, or 2.​0%), BofA ($​48.​3B, or 1.​9%), Western Asset ($​45.​9B, or 1.​8%), First American ($​42.​1B, or 1.​6%), UBS ($​36.​7B, or 1.​4%), Deutsche ($​31.​0B, or 1.​2%), Franklin ($​24.​7B, or 1.​0%), and American Funds ($​15.​7B, or 0.​6%). Crane Data currently tracks 68 U.​S. MMF managers, same as last month.

Over the past year through Sept. 30, 2015, BlackRock showed the largest asset increase (​up $​25.​6B, or 13.​4%), followed by Morgan Stanley (​up $​18.​1B, or 16.​6%), JP Morgan (​up $​16.​6B, or 7.​0%), Fidelity (​up $​9.​0B, or 2.​2%), and Northern (​up $​4.​9B, or 6.​6%). Other asset gainers for the year include: First American (​up $​4.​1B, or 10.​9%), Vanguard (​up $​3.​6B, 2.​1%), Western (​up $​1.​8B, 4.​1%), Oppenheimer ($​1.​5B, 17.​0%), HSBC ($​1.​4B, 11.​2%), and Wells Fargo (​up $​1.​4B, or 1.​3%). The biggest decliners over 12 months include: Invesco (​down $​8.​9B, or 14.​7%), Goldman Sachs (​down $​6.​1B, or 4.​2%), Deutsche (​down $​3.​8B, or 10.​8%), Schwab (​down $​2.​9B, or 1.​8%), and BofA (​down $​2.​7B, or 5.​2%). (​Note that money fund assets are 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 (​dropping Vanguard to 7), and SSgA appearing on the list at No. 10, displacing Wells Fargo from the domestic Top 10 and dropping Western to 11th in the Global rankings. 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 ($​420.​6 billion), JPMorgan ($​382.​5 billion), BlackRock ($​317.​7 billion), Goldman Sachs ($​218.​1 billion), and Federated ($​214.​6 billion).

Dreyfus/​BNY Mellon ($​198.​3B), Vanguard ($​175.​8B), Schwab ($​160.​1B), Morgan Stanley ($​145.​9B), and SSgA ($​123.​7B) round out the top 10. As previously mentioned, SSgA replaced Western AM in the top 10. These totals include offshore US Dollar money funds, as well as Euro and Pound Sterling (​GBP) funds converted into US dollar totals.

Finally, our October 2015 Money Fund Intelligence and MFI XLS show that net yields remained largely unchanged in September but gross yields inched higher. Our Crane Money Fund Average, which includes all taxable funds covered by Crane Data (​currently 822), remained at 0.​02% for both the 7-​Day Yield and the 30-​Day Yield (​annualized, net) Average. The Gross 7-​Day Yield and 30-​Day Yield were 0.​17% (​up one basis point from last month). Our Crane 100 Money Fund Index shows an average 7-​Day Yield of 0.​04%, same as last month, and a 30-​Day Yield of 0.​04%. Also, our Crane 100 shows a Gross 7-​Day and 30-​Day Yield of 0.​21% (​up 1 basis point from last month). For the 12 month return through 9/​30/​15, our Crane MF Average returned 0.​02% and our Crane 100 returned 0.​03%. It'​s worth noting that the number of funds plummeted by 18 in September to 822, a drop of 2.​1%.

Our Prime Institutional MF Index (​7-​day) yielded 0.​06% (​unchanged), while the Crane Govt Inst Index was at 0.​02% (​unchanged). The Crane Treasury Inst, Treasury Retail, Crane Govt Retail Index, and Prime Retail Indexes all yielded 0.​01%. The Crane Tax Exempt MF Index also yielded 0.​01%. The Gross 7-​Day Yields for these indexes were: Prime Inst 0.​25% (​up from 0.​24% last month), Govt Inst 0.​13% (​up from 0.​12%), Treasury Inst 0.​09% (​up 1 basis point), and Tax Exempt 0.​09% (​down from 0.​11%) in August. The Crane 100 MF Index returned on average 0.​00% for 1-​month, 0.​01% for 3-​month, 0.​02% for YTD, 0.​03% for 1-​year, 0.​03% for 3-​years (​annualized), 0.​04% for 5-​year, and 1.​36% for 10-​years. (Contact us if you'​d like to see our latest MFI XLS, Crane Indexes file or market share numbers.)

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The October issue of our flagship Money Fund Intelligence newsletter, which was sent out to subscribers Wednesday morning, features the articles: "Year to Go for Fund Changes; A Look at Floating NAV MMFs," which summarizes which large funds will have floating NAVs in October 2016; "Morgan Stanley Talks Growth, New Products," where we profile the money fund team at MS Investment Management; and "SEC Finalizes Ratings Removal from Rules," which recaps the recent SEC ruling on the removal of credit ratings from money funds. We have also updated our Money Fund Wisdom database query system with Sept. 30, 2015, performance statistics, and sent out our MFI XLS spreadsheet earlier. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our October Money Fund Portfolio Holdings are scheduled to ship Friday, October 9, and our October Bond Fund Intelligence is scheduled to go out Thursday, Oct. 15.

MFI'​s lead "Year to Go for Changes" article says, "With now just a year to go until the main piece of the SEC'​s 2014 Money Fund Reforms -- the floating NAV and emergency gates & fees for Prime and Municipal money funds -- goes into effect (​Oct. 14, 2016), we wanted to again summarize some of the work done by fund companies to date. We also wanted to focus on the pending class of floating NAV money funds, Prime Inst in particular."

The piece continues, "First, while it'​s been a month since we'​ve seen any major announcements from money market fund managers on reform-​related changes, there have been a `​flurry of smaller moves, including liquidations, name changes, share class launches, and changes in investment guidelines. PNC just merged its PNC Advantage Inst Govt MMF into PNC Govt MMF. Also, Dreyfus changed the names of several funds. (​See the "`​Changes" tab in our MFI XLS, and see our Oct. 5 News, "Lull in Major Announcements, But Minor Moves Continue: American, PNC") In addition, Goldman Sachs FS Federal Fund changed its name to Goldman Sachs FS Treasury Solutions on Oct. 1, 2015, and Fidelity recently provided another update to advisors on some previously announced fund mergers."

Our latest MFI "​profile," "Morgan Stanley Talks Growth, New Products," reads, "​The October issue of our flagship Money Fund Intelligence newsletter features an interview with the cash management team at Morgan Stanley Investment Management -- Managing Director Fred McMullen, Managing Director, Sr. Portfolio Manager Jonas Kolk, and Executive Director, Product Management Scott Wachs. Morgan Stanley, which has been managing money funds since 1975, is the 7th largest global institutional MMF manager with over $​120 billion in MMF assets. McMullen, Kolk, and Wachs talk about Morgan Stanley'​s industry leading growth over the past 5 years and new product development."

MFI asks, "What is your biggest priority right now? McMullen: There are several priorities -- one is working with our clients to help them strategize around the impending rate and regulatory changes. Two is our focus on new product development. We'​re fortunate that we have a large retail fund money fund lineup as well as a large institutional fund lineup. Some in the marketplace have to create new retail funds to deal with the bifurcation the SEC created between institutional and retail investors. We don'​t have to worry about that so we'​re more freed up to focus on new product development. We'​ve already announced some changes that we'​ve made to our product lineup in response to the regulations and we'​ve shared our views on several aspects of the regulations and the competitive landscape. A few months ago, we provided clients our perspectives on the announcements that several of our competitors had made to date. We'​ll soon post a more comprehensive update on our progress to date and on some of our key product development issues. Three, we are very focused on growing our European liquidity business."

The third article, "SEC Finalizes Ratings Removal from Rules," says, "The U.​S. S.​E.​C. finalized one of two remaining supporting rules for its July 2014 Money Fund Reforms, the "`​Removal of Certain References to Credit Ratings and Amendment to the Issuer Diversification Requirement in the Money Market Fund Rule." A press release says, "The Securities and Exchange Commission adopted amendments to remove credit rating references in the principal rule that governs money market funds and the form that money market funds use to report information to the Commission each month about their portfolio holdings. The Commission also adopted amendments that would subject additional securities to issuer diversification provisions in the money market fund rule." Thus, as expected, money funds' "​First Tier" and "​Second Tier" credit regime, which required (​roughly) A-​1, P-​1, F-​1 ratings (​or A-​2, P-​2, F-​2), will be replaced by a new "​minimal credit risk" test that doesn'​t reference ratings."

We also briefly recap two sessions from our recent, European Money Fund Symposium, which was held September 17-​18 in Dublin. One story, "Irish Funds' CEO on CNAV: Legitimate Reason to Exist," features commentary from Irish Funds' CEO Pat Lardner and Regulatory Affairs Head Patrick Rooney. The other, "French MMFs Have '​Continuum of Strategies'," says, "As the US money market fund industry braces for Floating or Variable NAV funds, it can look to France, for some insights into VNAV funds. France, with $​329 billion in MMF assets, is almost entirely made up of VNAV funds."

Our October MFI XLS, with Sept. 30, 2015, data, shows total assets declining by $​9.​4 billion in September, after rising $​7.​2 billion in August, $​52.​4 billion in July, and $​15.​2 billion in June. YTD, MMF assets are down by $​64.​7 billion, or 2.​5% (​through 9/​30/​15). 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) remained at 0.​04% (​7-​day).

On a Gross Yield Basis (​before expenses were taken out), funds averaged 0.​17% (​Crane MFA, up from 0.​16% last month) and 0.​21% (​Crane 100, up from 0.​20% from last month). Charged Expenses averaged 0.​15% (​up from 0.​14% last month) and 0.​16% (​unchanged) for the two main taxable averages. The average WAMs (​weighted average maturities) for the Crane MFA was 34 days (​up one day from last month) and for the Crane 100 was 35 days (​down one day). (​See our Crane Index or craneindexes.​xlsx history file for more on our averages.)

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Usage of the Fed'​s reverse repo "​RRP" program broke a record last week on the Sept. 30 quarter-​end with $​450 billion in combined usage. In the weekly "Short-​Term Market Outlook and Strategy, J.​P. Morgan Securities' Alex Roever writes, "It was all about quarter-​end in the money markets last Wednesday. For the most part, what transpired met our expectations. As a result of typical dealer pullbacks in the short-​term wholesale funding markets and dealers having to adhere to the final G-​SIB reporting date, usage of the Fed reverse repo facility surged on 9/​30. The overnight RRP drew $​200bn in demand, while both term RRP operations were oversubscribed and totaled $​250bn in usage." (Note: Watch for our Sept. 30 Money Fund Portfolio Holdings on Friday, and commentary on money fund holdings in RRP next Monday.)

He explains, "The combination of the overnight and term facilities put total usage at $​450bn on 9/​30, an all-​time high in demand for the RRP, and in line with our forecasts." Roever continues, "Repo rates also temporarily spiked at quarter-​end, which has been another dynamic that has been evident through the course of this year. As a result of dealers migrating to the GCF market for regulatory netting benefits, overnight Treasury GCF rates spiked by 12bp on 9/​30 to 35bp. Non-​GCF rates also rose, albeit more modestly. Both GCF and non-​GCF rates were quick to snap back post quarter-​end. Additionally, the $​250bn in term RRP that matured on Thursday and Friday also helped to richen GCF and non-​GCF rates by the end of the week. GCF closed at 16bp on Friday."

Bloomberg also writes about the quarter-​end repo usage in, "An Interesting Thing Happened in the Repo Market." The piece explains, "At this past quarter-​end repo rates surged, with the move most pronounced in what is known as general collateral finance (​GCF) rates between large dealer-​banks. While a spike in repo rates has often indicated stress in the banking system, JPMorgan argues that the third quarter'​s upward move was the result of "​financial stability" rather than financial stress.... But the typical end-​of-​month activity was exacerbated as Sept. 30 also coincided with the day the Federal Reserve took a snapshot of the finances of the largest U.​S. banks to gauge the extra capital they will need to hold as part of being categorized as global systemically important banks, or G-​SIBs."

The article continues, "​Investors such as money-​market mutual funds have had the option of parking their cash elsewhere at these times when dealers are shunning them, even as rates are lower. That'​s because the Fed has been testing an overnight, and at quarter-​end extended maturities, reverse repo program, or RRP, ahead of a potential move to higher interest rates. This quarter-​end period, investors placed $​250 billion at the Fed in their term operations at 0.​07 percent and on the 30th a total of $​200 billion at 0.​05 percent."

Wells Fargo Securities' Garrett Sloan too weighed in on the repo market, writing last week in his "Daily Short Stuff," "Quarter-​end came and went and short-​term markets were able to endure the balance sheet reductions that were anticipated in the repo market. The absorbent capacity came from the Fed'​s Reverse Repo Program, which was available both in overnight and term markets. In both term reverse repo auctions, the bid exceeded the amount offered, and as a result, the spread narrowed by a basis point in each instance. Last Thursday'​s $​100 billion 7-​day auction offered at +​3 to the overnight RRP had just over $​112 billion in bids."

He explained, "​Yesterday'​s $​150 billion 3-​day auction had $​163 billion in bids, and yesterday'​s overnight auction had $​300 billion on offer with $​200 billion accepted. In total, the amount of collateral provided by the Fed to the repo market amounts to $​450 billion. A staggeringly large amount, and 50 percent larger than the current stand-​alone overnight reverse-​repo program. Whether the Fed has found an effective policy tool remains to be seen, as markets may react somewhat differently once the Fed attempts to move policy rates."

Sloan adds, "Looking back at previous auctions, month-​end RRP activity remains heavily dominated by money market funds, both before and after the introduction of the term RRP. That need appears to be growing as well. In June 2014, 90 percent (​or $​306 billion) of the RRP was allocated to money market funds, in September 2014 that number rose to 98 percent (​or $​294 billion). By December the figure fell to 94 percent, but includes both term and overnight RRP totaling $​371 billion allocated to money funds. In March 2015 the amount allocated to money funds fell to 91 percent, or $​345 billion, and in June the percentage allocation to money funds was 95 percent, totaling $​372 billion between term and overnight operations."

He tells us, "The most recent $​450 billion RRP quarter-​end allocation is again expected to be dominated by money market funds. If we assume that the June and September RRP allocations are similar, this quarter-​end could see money market fund RRP usage climb to $​427 billion. Comparing estimated September quarter-​end RRP usage to average non-​quarter-​end RRP usage by money funds illustrates the magnitude of calendar effects in this new collateral paradigm. Based on these estimates, incremental RRP demand alone in money funds may have risen by as much as $​345 billion."

In a separate "Money Market Monitor" commentary, Sloan discussed Treasury Bills and repo supply. "The current contraction in Treasury bill supply is likely to be temporary, and cash bills will likely turn positive once the market moves beyond the most recent debt ceiling issues, though that is potentially a 2016 event. In the meantime, buyers that want to own bills may struggle finding dealers to short bills due to the sheer cost. But longer-​term structural issues remain, raising the question of how aggressively the Fed needs to increase the size of the Reverse Repo Program to see short-​term rates move in conjunction with policy goals."

He writes, "​Based on our estimates, the combined size of the most recent term and overnight RRP offerings at September quarter-​end appear sufficient to handle the combined influence of calendar effects and reduced balance sheet availability, without seeing a sharp movement in yields outside the inter-​dealer market. However, the uncertainty around additional dealer balance sheet reductions, increased demand from government money market funds, and the potential for the U.​S. Treasury to further extend its liabilities, could require the Fed to provide even more support via the RRP (​i.​e. unlimited support) or face the possibility that overnight rates may stubbornly decide they like being close to zero after all."

In another recent commentary, entitled "History Repeats Itself: The Debt Ceiling," Barclays' Joseph Abate looks at the impact of the debt ceiling battle on T-​bills. He writes, "The bill market is most sensitive to debt ceiling developments. As we have been writing for several weeks, the Treasury has sharply reduced its bill issuance in order to preserve borrowing capacity to keep the coupon auctions as regularly sized and on schedule as possible. Together with the re-​pricing of Fed rate hike expectations, the expected $​180bn or more reduction in bill supply through late October has pulled bill yields to 0% or less through the end of the year. However, as the debt ceiling deadline approaches, investors will become more selective about which bills they are willing to buy."

He continues, "​We expect the November 5 bills to become the principal "​debt ceiling" issue, although investors are likely to avoid the October 29 and November 12 bills. Regardless of their underlying reasoning, the debt ceiling bills started to cheapen sharply. Money funds held over $​434bn in Treasuries at the end of August. But they held only $​32bn of issues maturing in the final week of October, and another $​6bn in Treasuries maturing in the first week of November. It is difficult to determine if this was a deliberate strategy on the part of managers in anticipation of a potentially uneven debt ceiling process."

Finally, Abate writes, "Alternatively, money funds may have avoided the sector given their super-​low yields caused by the supply reductions the Treasury has undertaken to keep the coupon auction cycle regular and predictable while the debt ceiling is negotiated. In past debt ceiling episodes, demand at bill auctions slackens and the bid-​to-​cover ratio declines as investors become leery of taking on more short-​term Treasury obligations ahead of Congressional action to increase the debt ceiling. Similarly, dealers reduce their bill inventories and their trading volumes in the market fall, especially for the debt ceiling-​affected issues. As they step away from intermediating in the bill market, bid-​ask spreads widen and liquidity declines."

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It'​s been a month since we'​ve seen any major announcements from money market fund managers on reform-​related changes, but there have been a flurry of smaller moves, including liquidations, name changes, share class launches, and changes in investment guidelines. While there have been a couple of minor announcements -- see our Sept. 10 News, "More Consolidation: Federated Buys Huntington; Am Century Goes Govt -- the last big news we saw was Sept. 1, "Franklin Goes Government; $​200 Billion To-​Date to Convert from Prime." Among the latest set of tweaks: PNC merged two government funds, Dreyfus initiated a number of name changes, and Fidelity provided an update on some of its already announced money market fund mergers. Also, as expected (​see our July 29 News, "​​American Funds Leans Government"), American Funds filed to convert its American Funds Money Market Fund to a Government money fund.

The $​12 billion American Funds Money Market Fund will convert to American Funds US Government MMF. The SEC filing states, "​In July 2014, the U.​S. Securities and Exchange Commission announced revisions to the rules governing money market funds. Under the revised rules, government money market funds and retail prime money market funds can continue to maintain a stable net asset value per share, while tax-​exempt and institutional prime money market funds will be required to float their net asset values. During times of stress, redemption gates and liquidity fees could be imposed on all non-​government money market funds at the discretion of the fund'​s board. Government money market funds will be excluded from this requirement but can opt in with proper notice to investors."

The American Funds Money Market Fund Prospectus Supplement continues, "​In order to qualify as a government money market fund, the fund must invest at least 99.​5% of its assets in government securities, cash or repurchase agreements backed by government securities. The fund has historically invested between 85% and 90% of its assets in qualifying government securities; as a result, the fund'​s Board of Trustees has approved a proposal to formally establish the fund as a government money market fund and, relatedly, to increase the allocation of government securities in the fund'​s portfolio to 99.​5%. As a government money market fund, the fund will seek to maintain a stable $​1.​00 net asset value and will not implement redemption gates and liquidity fees. The fund'​s investment adviser expects this change to go into effect on or about April 1, 2016. Accordingly, effective on or about April 1, 2016, the fund also expects to change its name to American Funds U.​S. Government Money Market Fund."

PNC'​s liquidation/​merger filing says, "​The Boards of Trustees of PNC Funds and PNC Advantage Funds approved an Agreement and Plan of Reorganization pursuant to which PNC Advantage Institutional Government Money Market Fund (​the "​Target Fund") would be reorganized with and into PNC Government Money Market Fund (​the "​Acquiring Fund"). Upon completion of the Reorganization, Institutional Class shareholders of the Target Fund will become Class I shareholders of the Acquiring Fund, and Advisor Class shareholders of the Target Fund will become Advisor Class shareholders of the Acquiring Fund. Both Funds are managed by PNC Capital Advisors, LLC."

It adds, "​The Target Fund and Acquiring Fund have substantially similar investment objectives and their principal investment strategies are identical. The expense ratios borne by shareholders of the Target Fund are expected to remain the same or to be reduced modestly." According to our Money Fund Intelligence XLS, the merged PNC Advantage Institutional Government Money Market portfolio had $​90 million in assets, while PNC Government Money Market portfolio has $​1.​4 billion.

Also in our pending MFI XLS, Dreyfus is changing the names of several money market funds. Dreyfus Institutional Reserves Treasury will become Dreyfus Institutional Treasury and Agency Cash Advantage (​Agency, Classic, Hamilton, Inst and Premier shares are all changing); Dreyfus Inst Reserve Treasury Premier will become Dreyfus Institutional Treasury Premier Cash Advantage; and Dreyfus US Treasury Reserves will become Dreyfus General Treasury and Agency Money Market.

We also reported last month that Dreyfus liquidated its Dreyfus Basic Municipal Money Market Fund, and the manager will liquidate its Dreyfus Basic New York Municipal MMF and Dreyfus New York AMT-​Free Municipal MMF on Oct. 28, 2015. Dreyfus AMT-​Free Municipal Reserves was also renamed Dreyfus General AMT-​Free Municipal MMF. See our Sept. 7 Link of the Day," "Forward Funds Liquidates US Govt MMF; Eaton Vance Liquidating US Govt MMF," and see our Aug. 17 News, "Another Muni Money Fund Liquidates: A Recap of Recent Expirations." See also, Thursday'​s LOTD, which reported that Goldman Sachs Financial Square Federal Fund changed its name to Goldman Sachs Financial Square Treasury Solutions Fund on Oct. 1, 2015.

Finally, Fidelity recently provided another update to advisors on some previously announced fund mergers. (​See our April 14 News, "Fidelity Operational Update Details More Changes; Alpine Liquidates" for a full recap.) The new communication is entitled, "Important Fidelity Money Market Fund Soft Closings and Merger Information," says, "Please be advised, the following funds are scheduled to merge throughout the month of November 2015: Select Money Market (​FSLXX) into Fidelity Money Market Premium Class (​FZDXX); CMF Prime: Daily Money Class (​FDAXX) into Fidelity Government Money Market: Daily Money Class (​FZBXX); CMF Prime: Capital Reserves Class (​FPRXX) into Fidelity Government MM: Capital Reserves Class (​FZAXX); and US Government Reserves (​FGRXX) into Fidelity Government MM: Premium Class (​FZCXX)."

Previous News stories on major fund changes include: Aug. 21, "T Rowe Price to Launch Prime Inst MMF," July 31 "BlackRock to Liquidate 3 Muni MMFs, Convert Old Merrill Primes to Govt," July 21, "Deutsche Announces Reform Plans, Will Convert Most Prime MFs to Govt," and, the one that started it all, Feb. 2, "Fidelity Announces Major Changes to MMFs; Staying Stable, Going Govt." To date, we count about $​205 billion worth of Prime funds converting to Government funds.

​

According to an article in RIA Biz, a publication for investment advisors, "Schwab Advisor Services alerted its 7,​000 RIAs that it will liquidate the money market holdings in their client accounts by Dec. 1 and put the money in Schwab Bank." The article, entitled, "Schwab Alerts its RIAs that it Will Liquidate Client Money Market Holdings by Dec. 1," and subtitled, "The San Francisco-​based broker is shipping all cash in sub-$​500K accounts to its bank," explains, "The cash-​sweeping to Charles Schwab Bank applies to households with accounts totaling less than $​500,​000 and apply to accounts that were opened prior to Oct. 1, 2014." In other news, we also report on the latest in a legal fight between Double Rock, Reserve Funds' former FDIC insured deposit "​amalgamation" unit, and Reich & Tang.

The article on Schwab'​s sweeps says, "​The email from the San Francisco-​based custodian was unsigned but in the space reserved typically for a signature were the words: "​Own your tomorrow," written in the company'​s stylized handwritten script. The cash-​sweeping to Charles Schwab Bank applies to households with accounts totaling less than $​500,​000 and apply to accounts that were opened prior to Oct. 1, 2014."

Ria Biz explains, "​In the initial test-​the-​waters roll-​out last year, only new accounts -- one opened after Oct. 14 -- were subject to Schwab'​s enforced allocation to its own bank. "On or after December 1, 2015, their cash feature will be changed from the Money Fund Sweep feature to the Bank Sweep feature," Schwab writes. "​Accounts with Household Balances greater than $​500,​000 will not be affected." Schwab spokesman Greg Gable confirmed by email."

It continues, "Norm Boone, founder and president of San Francisco-​based Mosaic Financial Partners Inc., with more than $​6.​1 billion of assets under management, says he is not concerned about the change. "​Almost none of our clients use the sweep feature. Cash amounts paid -- typically for interest or dividends -- stay in the accounts wherein the payment arose, and as needed, we reinvest it," he writes in an email. "The change from the Schwab MMF to the Schwab Bank MMF actually will help clients, based on today'​s interest rates.""

The piece adds, "Michael Halloran, chief of West Coast business development for MaxMyInterest.​com, left Morgan Stanley to help build this company aimed at boosting returns on cash held by financial advisors. He says Schwab is actually slow in making this play for cheap assets. "Merrill Lynch implemented this prior to Morgan Stanley in the mid-​2000'​s," he says." (​For more on brokerages switching sweeps to banks from money funds, see our June 3 News, "Bank Deposit Keep Growing Despite Regs; Amalgamated FDIC Insurance.")

Schwab'​s Joe Martinetto wrote in a recent "CFO Commentary," "​We noted ... that average interest bearing assets reached $​161 billion in August, up 16% year-​over-​year. This strong growth reflects our continued success in building our client base, as well as our focus on transitioning a significant portion of client sweep cash balances to Schwab Bank as capital levels allow.... As discussed during our Business Update back in July, we expect to utilize this additional capital to support the transition of certain client sweep cash balances from money funds to Schwab Bank. Our initial plans call for moving approximately $​4 billion of these balances over several months, beginning in September, with the majority transferring in December."

In other FDIC sweep news, Island Intellectual Property and Double Rock, owned by Bruce Bent, and formerly affiliated with The Reserve Fund'​s Reserve Management Company, filed a motion with the New York County Clerk on September 14 in opposition to defendant Reich & Tang'​s motion to dismiss the lawsuit that Double Rock filed against Reich & Tang. Double Rock sold its FDIC-​insured cash management business to Reich & Tang in 2010, but the two entities got into a dispute over the payment of royalties to Double Rock.

Double Rock sued Reich & Tang earlier this year seeking royalty payments according to the "​Summons with Notice" filing in the Supreme Court State of New York, County of New York. Justice Shirley Werner Kornreich is hearing the case. In September, Reich & Tang bought itself out from Natixis Asset Management as we reported in the story, "Reich and Tang Buyout; TCG Funds Acquired by Catalyst; FDIC Update."

The accompanying "Memorandum of Law" says in its Preliminary Statement, "Relying on Defendants' false promise to make ongoing royalty payments, Double Rock sold its entire FDIC-​insured cash management business to Reich & Tang for a cash payment that was just a fraction of that business' true value. In particular, to induce Double Rock to sell the business, Defendants promised to make an upfront cash payment of $​15 million and to cover the remainder of the consideration for the business through ongoing royalty payments under a separate license agreement, which were projected to yield approximately $​92 million over the life of the license. Defendant Michael Lydon, Reich & Tang'​s President and Chief Executive Officer, personally (​and repeatedly) assured Double Rock that Defendants were committed to growing the FDIC-​insured cash management business and to honoring the royalty payments. However, almost immediately after executing the transaction, it became clear that Defendants never intended to perform under the license agreement. After making the very first royalty payment, Mr. Lydon demanded that Double Rock renegotiate the license terms to substantially reduce the royalty rates, and claimed that Reich & Tang did not have to satisfy its payment obligations at all since it was no longer using the licensed intellectual property, knowing full well that the royalty payments are not conditioned on use. Mr. Lydon persisted in trying to renegotiate more favorable terms over the next few years."

It adds, "Then, in 2014, the U.​S. Supreme Court issued the Alice Corp. v. CLS Bank Int'​l, 134 S. Ct. 2347 (​2014) decision, which held that the particular software patents at issue in that case were invalid. Although Island IP'​s patents were not addressed or at issue in Alice, almost immediately after the decision was issued, Reich & Tang unilaterally proclaimed that the licensed patents were "​void" and that it was no longer obligated to honor its remaining royalty payments. Shortly thereafter, despite having acquired a very valuable business for its own benefit and profiting from Plaintiffs' business and intellectual property, Reich & Tang breached the license agreement by failing to make its first and second quarter 2015 royalty payments. Defendants also made it clear that they have no intention of honoring their remaining contractual obligations."

In related news, an update was recently posted on "Reserve'​s Yield Plus Fund - In Liquidation," which says, "This Fund Update is intended to provide shareholders of the Yield Plus Fund -- In Liquidation with current information regarding litigation that could affect the amount of assets available for distribution in the future. A consolidated class action entitled William Ross and Dawn Ross v. Reserve Management Company, Inc. et al. involving the Yield Plus Fund-​In Liquidation ("​Fund") has been pending since 2008, (​U.​S.​D.​C. Southern District of New York, No.​08-​cv-​10261-​PGG) ("​Class Action")."

The site explains, "​On June 4, 2015, the Settling Parties in this matter filed a Stipulation [​that] would resolve all outstanding claims among the Settling Parties, including certain potential claims for indemnification, expenses and management fees involving the Fund. The filing of the Stipulation is the first step in a process that may result in the conclusion of the Class Action and the making of a distribution to Class Members and shareholders of the Yield Plus Fund."

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The Investment Company Institute'​s latest "Trends in Mutual Fund Investing" shows that total money fund assets increased by $​8.​1 billion in August. However, looking at the numbers for September, it appears that the 4-​month winning streak may be in jeopardy as assets appear to be down slightly month-​to-​date. We review recent flows and ICI'​s latest Trends, as well as their "Month-​End Portfolio Holdings of Taxable Money Funds" below. The latter verifies our previously reported increase in money fund holdings in Agencies and Time Deposits (​the latter which ICI categorizes within CDs). (​See Crane Data'​s Sept. 11 News, "Portfolio Holdings Show Jump in Agencies; Prime to Govt Shift Starts.")

Despite finishing September with a bang, money market fund assets will likely finish the month flat to slightly down; this would be the first month since April that MMF assets have declined. Assets were up $​8.​1 billion in August, $​45.​9 billion in July, $​12.​9 billion in June, and $​38.​0 billion in May. Over the past week (​through 9/​29), according to our Money Fund Intelligence Daily, MMF assets were up $​21.​8 billion. However, month-​to-​date, MMF assets are down $​3.​9 billion. (​ICI'​s weekly "Money Market Mutual Fund Assets showed assets jumping $​14.​0 billion last week through Sept. 23, but they had declined the previous 3 weeks in a row.)

ICI'​s August Trends says, "​The combined assets of the nation'​s mutual funds decreased by $​648.​78 billion, or 4.​0 percent, to $​15.​63 trillion in August, according to the Investment Company Institute'​s official survey of the mutual fund industry. Equity funds posted an outflow of $​9.​22 billion in August, compared with an outflow of $​10.​19 billion in July.... Bond funds had an outflow of $​22.​97 billion in August, compared with an outflow of $​8.​20 billion in July."

It continues, "Money market funds had an inflow of $​8.​77 billion in August, compared with an inflow of $​47.​87 billion in July. In August funds offered primarily to institutions had an outflow of $​12.​66 billion and funds offered primarily to individuals had an inflow of $​21.​42 billion." Money funds now represent 16.​4% of all mutual fund assets, while bond funds represent 21.​6%.

Big bond fund outflows continue in September too. Looking at ICI'​s latest weekly "Long-​term Mutual Fund Flows," bond funds have experienced $​15.​1 billion in outflows through September 23. Bond funds have had 9 straight weeks of outflows.

ICI'​s latest Portfolio Holdings summary shows that CDs (​including Eurodollar CDs) increased by $​6.​8B, or 1.​1%, in August to $​650.​2 billion. (​ICI'​s CD total likely includes Time Deposits, which we, and the SEC, categorize as "​Other" -- we reported a big increase in Other in August.) CDs remained ahead of Repo as the largest segment of taxable fund holdings, making up 26.​8% of holdings. Repo holdings decreased $​6.​2 billion, or 1.​1%, in August to $​538.​5 billion, representing 22.​2% of taxable MMF holdings.

Treasury Bills & Securities remained in third place among composition segments, decreasing by $​1.​7 billion, or 0.​4%, in August to $​412.​5 billion (​17.​0% of assets). U.​S. Government Agency Securities moved ahead of CP into fourth place, after increasing $​29.​4 billion, or 8.​6%, to $​370.​3 billion (​15.​3% of assets). We believe that is due in part to asset shifts in the largest money fund, Fidelity Cash Reserves, which is in the process of converting from Prime to Government. Commercial Paper was fifth, falling $​3.​1B, or 0.​9%, to $​360.​1 billion (​14.​8% of assets). Notes (​including Corporate and Bank) dropped by $​1.​8 billion, or 2.​4%, to $​75.​1 billion (​3.​1% of assets), and Other holdings (​including Cash Reserves) stood at $​19.​4 billion, down $​17.​7 billion.

The Number of Accounts Outstanding in ICI'​s series for taxable money funds increased by 55.​5 thousand to 23.​335 million, while the Number of Funds fell 1 to 352. Over the past 12 months, the number of accounts fell by 174.​7 thousand and the number of funds declined by 9. The Average Maturity of Portfolios was 36 days in August, down 2 days from July. Over the past 12 months, WAMs of Taxable money funds have declined by 9 days. At 36 days, WAM'​s remain at the lowest level since June 2010, according to our analysis of ICI'​s data.

Note: Crane Data has update its Sept. MFI XLS to reflect the 8/​31/​15 composition data and maturity breakouts for our entire fund universe. Note 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 what paper. (​Visit our Content Center and the latest Money Fund Portfolio Holdings download page to access our Sept. Money Fund Portfolio Holdings and the latest version of this new file.)

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