News Archives: December, 2015

SEC's Statistics Show MMFs Down in Nov., SSGA on Liquidity Trends

Dec 31 15

The SEC released its latest "Money Market Fund Statistics" report, which shows a small decrease in assets for the month of November. The $6.6 billion decline was due to a huge $64.9 billion decline in Prime fund assets, offset almost entirely by a large $56.3 gain in Government funds, reflecting the conversion of some large prime funds to Government, including Fidelity Cash Reserves, now Fidelity Govt Cash Reserves. With this drop, money fund assets fell back into the red year-to-date in 2015. Meanwhile, yields kept moving up in anticipation of the Fed's December rate hike. The report, produced by the SEC's Division of Investment Management, summarizes monthly Form N-MFP data and includes totals on assets, yields, liquidity, WAM, WAL, holdings, and other money market fund trends. In other news, State Street Global Advisors a released a new white paper called, "Short-Term Cash Liquidity: What You Need To Know."

According to the SEC's latest update, total money market fund assets stood at $3.079 trillion overall at the end of November, down $6.6 billion (after rising $62.3 billion in October). (This series includes many private and internal funds not reported to ICI, Crane Data or other reporting agencies.) As mentioned, the decline was due to a big drop in Prime assets. Of the $3.079 trillion, $1.726 trillion was in Prime funds (56.1% of assets), down $64.9 billion from Oct. 31. Further, $1.097 trillion was in Government/Treasury funds (35.6% of the total), up $56.3 billion. Finally, $256.0 billion was in Tax-Exempt funds (8.23% of all assets; up $2.0B). Total assets are flat year-to-date, down a mere $1.3 billion through November 30. Prime assets are down $46.4 billion year-to-date, while Government/Treasury MMF assets are up $59.3 billion. Tax exempt assets are down $14.2 billion year-to-date. The number of money funds was 516, down 2 from last month and down 30 YTD.

The Weighted Average Gross 7-Day Yield for Prime Funds on November 30 was 0.27% (up from 0.25% the previous month), 0.15% for Government/Treasury funds (up from 0.12% in October), and 0.06% for Tax-Exempt funds (down from 0.07%). The Weighted Average Net Prime Yield for Prime Funds was 0.11% (up from 0.09% the previous month). The Weighted Average Prime Expense Ratio was 0.16% (unchanged). Gross yields for Prime MMFs are up 7 basis points YTD (to 0.27%); expense ratios for Prime MMFs are up 1 bp YTD (to 0.16%); and net yields for Prime MMFs are up 6 bps YTD (to 0.11%). (The spread between Prime and Govt fund Gross Yields was 12 basis points at the end of November.)

The Weighted Average Maturity, or WAM, was 32.8 days (down 3.0 days from the previous month) for Prime funds, 38.3 days (down 2.1 days) for Govt/Treasury funds, and 31.7 days (down 2.6 days) for Tax-Exempt funds. The Weighted Average Life, or WAL, was 66.7 days (down 3.4 days from last month) for Prime funds, 84.6 days (down 4.2 days) for Government/Treasury funds, and 31.7 days (down 2.6 days) for Tax Exempt funds. Total Daily Liquidity for Prime funds was 30.1% in November (up 2.6% from last month). Total Weekly Liquidity was 43.1% (up 1.4%).

In the SEC's "Prime MMF Holdings of Bank Related Securities by Country" table, Canada topped the list with $200.4 billion, followed by the US at $188.9 billion, and France with $179.9 billion. Japan was fourth with $172.1 billion, followed by Sweden ($108.6B), Australia/New Zealand ($88.2B), the UK ($73.6B), and The Netherlands ($51.0B). Switzerland ($45.1B) and Germany ($38.8B) round out the top 10. The only gainers for the month were Canada (up $11.9B), US (up $2.3B), Belgium (up $1.3B), and Spain (up $348M). The biggest declines came from Norway (down $13.1B) <b:>`_, France (down $8.1B), Germany (down $7.9B), Japan (down $6.9B), Sweden (down $5.0B), Netherland (down $2.5B), Aust/NZ (down $1.4B), and Switzerland (down $1.2B). For Prime MMF Holdings of Bank-Related Securities by Major Region, Europe had $550.2 billion (down from $586.6B from last month), while its subset, the Eurozone, had $284.5 billion (down from $302.1B). The Americas had $391.8 billion (up from $377.8B), while Asia and Pacific had $285.6 billion (down from $294.2B).

Of the $1.726 trillion in Prime MMF Portfolios as of Nov. 30, $509.0B was in CDs (down from $536.4B), $477.5B was in Government (including direct and repo, down from $482.5B), $409.0B was held in Non-Financial CP and Other Short term Securities (down from $423.5B), $232.8B was in Financial Company CP (down from $244.7B), and $98.1B was in ABCP (up from $97.9B). Also, the Proportion of Non-Government Securities in All Taxable Funds was 44.3% at month-end, down from 46.3%. All MMF Repo with Federal Reserve was $133.9 billion on November 30, down from $188.4B. Finally, the Trend in Longer Maturity Securities in Prime MMFs said 40.9% were in maturities of 60 days and over (down from 42.6%), while 7.5% were in maturities of 180 days and over (down from 8.6%).

In other news, SSgA published, "Short-Term Cash Liquidity: What You Need To Know," the latest in a series called "Yielding to a New Regulatory Reality." Its introduction says, "The new regulatory regime ... has changed the very meaning of liquidity in the short-term markets. There was a time when "liquidity" essentially meant the same thing to all market participants. It referred to the ease and quickness of issuing (from the suppliers' perspective) or selling (from the buyers' side) a particular instrument. Today, that is no longer the case."

SSgA explains, "Money market portfolio managers now think of liquidity in terms of their maturity profile. They primarily focus on using maturing bonds to provide readily available cash to meet shareholder redemptions. The 10 largest money market funds illustrate this point: They have seven-day liquidity on more than 40 percent of assets, on average. Note that this represents significant "excess" liquidity -- it is 10 percent higher than the SEC's mandatory liquidity requirement.... Today, the SEC's rule 2a-7 mandates 10 percent one-day liquidity and 30 percent seven-day liquidity for all funds. As a result, fund managers now use this level as a floor and hold an additional buffer to ensure they meet requirements."

They add, "These opposing incentives for dealers and money market funds led to the situation we see today: MMFs and primary dealers covet what each defines as liquidity; MMFs need more short-term debt, in particular securities with maturities within one or seven days; and dealers are hoarding HQLA and shifting issuance to longer-maturity bonds. The regulations appear to be succeeding at making the financial markets healthier. Yet they result in a severe mismatch between supply and demand. Money funds want and need more short-term assets. Yet banks are forced by regulations to issue less of their own short-term debt -- including the reverse repurchase agreements that made up much of the overnight market -- and to hoard government paper.... Investors looking to secure higher yields have to accept somewhat higher volatility or lower liquidity than they have been accustomed to from cash holdings."

The paper also discusses the impact of the Floating NAV, saying, "Institutional investors are widely anticipated to shift out of money market prime funds and into money market government funds during 2016. A widening of the spread between the prime and government money market fund yields will follow as the reduced demand for credit debt causes those yields to rise. This will provide a good opportunity for prime money market fund managers, who will now have the chance to be more choosy and to push back on offerings that look too expensive. We have had many conversations with our clients that lead us to believe that, for some, there will be a spread that will entice them to stay in an institutional prime fund and accept the variable NAV and potential for redemption gates and liquidity fees imposed by money market fund reform."

It continues, "Today investors with an appetite for longer-term repo structures are beginning to approve new counterparties that are in need of funding. Some of these counterparties are not the traditional primary dealers or banks. Further, the Federal Reserve, which has launched its own repo program, has provided significant funding for MMFs over the past few years.... The interaction between the traditional repo providers, the new repo counterparties and the Fed will make for an unpredictable mix since each provider may have a different goal in mind."

SSgA's piece concludes, "Many changes will come to the short-term fixed income market over the near term. Because portfolio managers now equate liquidity with maturity, money market funds will continue to hold more very-short-term securities than they have historically. If the 30 percent weekly fund liquidity requirement is the new minimum, then portfolio managers are likely to run money market funds with significant liquidity buffers above that level.... But as history has shown, the market and its participants will evolve to find new solutions and products to work in the new world of cash. We are already seeing new investment options and fund structures. Clients remain open to ideas to solve their investment needs, while portfolio managers are eager to explore new opportunities and structures to find ways to best serve their clients’ objectives."

MMF Yields Double on Fed, Prime Inst Rises First; Voya Goes Govt

Dec 30 15

Since the Federal Reserve raised interest rates on December 16, money market fund yields have doubled, rising from 0.06% to 0.12% over the past 2 weeks. (This is based on our Crane 100 Money Fund Index, the average of the 100 largest taxable money funds.) Yields increased slightly ahead of the Fed meeting, and fund increases have been tempered by unwinding fee waivers and market rates that haven't risen anywhere near 25 bps. As expected, the biggest jumps have been among the Prime Institutional funds, while the smallest have been among Treasury Retail MMFs. (Spreads between Prime Inst and Govt Inst funds have returned to their historical average of 10 bps.) We also write below about another money market fund family has opted to convert from Prime to Government -- Voya -- which was originally reported by ignites. Finally, we report that Federated and Wells Fargo have joined the list of managers renaming "Institutional" share classes to something more Retail-friendly.

As expected, the Fed's decision to raise interest rates has had an immediate impact on MMF yields, though it has been somewhat muted to date. On November 30, the 7-Day Yield (simple, net, annualized) for our Crane Money Fund Average (all taxable money funds, currently 817) was 0.03%, while Crane 100 (100 largest taxable funds) was 0.05%. On December 28, almost two weeks after the Fed move, the Crane MFA was up a modest 2 basis points to 0.05%, but the Crane 100 had jumped 7 basis points to 0.12%. (These yields set record lows of 0.01% and 0.02%, respectively, from July 2013 through Oct. 2014.)

The increases are more pronounced when you look at our Crane Prime Institutional Money Fund Index. On Nov. 30 it had an average 7-Day Yield of 0.07%, but it had climbed to 0.16% as of Dec. 27. The Crane Govt Inst Index went from 0.02% on Nov. 30 to 0.06% on Dec. 27. The spread now between the Prime Inst and Govt Inst Index is 10 basis points, which is about what it has been historically. Here's a look at how the other Crane MF Indexes have moved from Nov. 30 to Dec. 27: Crane Inst (0.04% to 0.09%), Crane Retail (0.01% to 0.02%), Treas Inst (0.01% to 0.04%), Govt Inst (0.02% to 0.06%), Treas Retail (0.01% to 0.01%), Govt Retail (0.01% to 0.02%), Prime Retail (0.01% to 0.03%), and the Crane Tax-Exempt MF Index (0.01% to 0.01%).

The top performing Institutional money funds are now yielding well over 0.30% while the highest-yielding Retail MMFs are well over 0.20%. This compares to yields of under 0.20% for Inst MMFs and under 0.10% for the best Retail MMFs. As of Dec. 27, Morgan Stanley Inst Liq MMP Inst yielded 0.36%, Deutsche Daily Assets Fund Cap yielded 0.35%, BlackRock Cash Inst MMF Inst yielded 0.34%, Wells Fargo Cash Inv Select yielded 0.33%, and Fidelity Instit MM: MM Port Inst yielded 0.33%. Among Retail funds, PNC Money Market Fund A yields 0.30% (this fund's yield includes an accounting adjustment), Vanguard Prime MMF yields 0.25%, Schwab Value Adv MF Ultra yields 0.24%, Fidelity Money Market Fund Premium yields 0.24%, and Schwab Value Adv MF Premier yields 0.21%.

While they have plateaued for the moment, money fund yields should continue to inch higher as the remainder of their portfolios turn over to the new, higher rate levels. (Funds have average Weighted Average Maturities, or WAMs, of 34 days, so on average the hike should be fully reflected around Jan. 21.) We don't expect the full 25 bps to show, however, as reduced fee waivers are no doubt taking a large share of any increases. We won't know, however, until we get expense info for December 31 how much this "waiver unwinding" represents. (Watch for the January issue of our Money Fund Intelligence and MFI XLS late next week for more details and data.)

We learned from a Dec. 24 ignites story, "Prime-to-Government Money Fund Conversions to Climb," that Voya (formerly ING) will convert its money funds from Prime to Government. The article says, "Three Voya prime money funds will become government funds: the $984 million Liquid Assets Portfolio; the $551 Money Market Portfolio; and the $225 Money Market Fund. Assets are as of Nov. 30. The change for all three funds takes effect May 1. According to the SEC filing, the Voya MMP will change to the Voya Government MMP. Further, the Voya Money Market Fund will be known as the Voya Government Money Market Fund, according to another SEC filing. Finally, the Voya Liquid Assets Portfolio will be called the Voya Government Liquid Assets Portfolio, states the 3rd filing. None of these funds will impose fees and gates.

The Ignites article, by Beagan Wilcox Volz, recaps other recent Prime to "Govie" changes by John Hancock, Cavanal Hill, Prudential, SunAmerica, Thrivent, and TIAA-CREF, which we'd originally reported in our Dec. 22 News, "More Funds Jump on Prime to Govt Conversion Bandwagon; Mergers. Including the Voya conversions, we now count about $264 billion in Prime to Govt fund conversions, with about $173 billion, or 65%, already converted. (Note: On Jan. 4, 2016, another $18.1 billion will convert to Government. These BlackRock fund conversions include the BBIF Money Fund, BIF Money Fund, FFI Institutional, FFI Premier, and FFI Select, Ready Assets, and Retirement Reserves.)

The Ignites pieces explains, "The fund firms that recently disclosed conversions don't have as many "moving parts" in their money fund lineups as larger ones, and this gave them more time to make decisions regarding product changes related to the SEC's reforms, says Peter Crane, CEO of Crane Data. In addition, most of the funds that are being converted exist mainly as a convenience for clients, who use them as they move between products within a manager's broader lineup, rather than as a strategic part of their portfolios, he says."

"Where convenience is king, the move to a government fund is a no-brainer," Crane told ignites, adding that government funds are also cheaper to manage than prime funds." The article continues, "Tightening Treasury supply may have factored into some firms' considerations of converting prime funds to government products. But when the Federal Reserve hiked interest rates on December 16, it also lifted the daily limit on its reverse repurchase program from about $300 billion to about $2 trillion, alleviating worries about supply, notes Crane."

In other news, GSAM filed to launch a new Goldman Sachs Tax Exempt Money Market Fund. We first reported on this launch in our Dec. 21 News, "Goldman Sachs AM Details More MMF Changes, Portal Enhancements." Goldman said in its press release, "GSAM has filed an initial registration statement for the Goldman Sachs Financial Square Tax-Exempt Money Market Fund, which plans to operate as an "institutional money market fund" (as defined by amended Rule 2a-7) by the regulatory deadline of October 14, 2016. The Fund is projected to be launched on or around March 31, 2016. At least 80 percent of the Fund's net assets will be invested in municipal obligations of U.S. states, territories, and possessions. The Fund will comply with floating NAV and liquidity fees and redemption gates requirements by the regulatory deadline of October 14, 2016."

There is also news from both Federated and Wells Fargo related to renaming Institutional shares. Federated informed us that the Institutional Shares (IS) for the following funds will be changed to "Wealth Shares (WS)" as of Dec. 31, 2015: Federated Prime Cash Obligations, Tax-Free Obligations, Municipal Obligations, California Municipal Cash Trust (MCT), Florida MCT, Michigan MCT, Minnesota MCT, New Jersey MCT, New York MCT, Ohio MCT, Pennsylvania MCT, and Virginia MCT.

Finally, Wells Fargo also filed to change its "Institutional" class to "Premier" class on several money funds. The filing explains, "On April 1, 2016, all references to the Institutional Class of Wells Fargo Advantage California Municipal Money Market Fund, Wells Fargo Advantage Municipal Money Market Fund and Wells Fargo Advantage National Tax-Free Money Market Fund in the prospectus, summary prospectuses and Statement of Additional Information are replaced with Premier Class."

Bond Fund Intelligence Profiles Federated Govt Ultrashort's Sue Hill

Dec 29 15

Our December Bond Fund Intelligence profiles Sue Hill, who is not only one of the leading authorities in the money market fund space as Senior Portfolio Manager for many of Federated's Government MMFs, she's also manager of Federated's Government Ultrashort Duration Fund. The $800 million fund is the only conservative ultra-short bond fund that invests exclusively in government securities. With the Federal Reserve voting to raise interest rates at its December 15-16 FOMC meeting, Hill shared her thoughts on the Fed and how the pending increase could ultimately help the ultra-short sector. She also talks about how this fund is built to weather market volatility. Here is a reprint of our Q&A with Hill from the latest BFI. (Note: Contact us if you'd like to see the latest Bond Fund Intelligence, Crane Data's newest product that tracks the bond mutual fund marketplace.)

BFI: How long has Federated been running short term bonds? Hill: The Federated Government Ultrashort Duration Fund launched in 1997. Obviously, Federated has a lot of expertise in the money fund space, and we leverage that expertise and commitment of resources as we take a step out the cash yield curve into the ultra-short space. We manage our government ultra-short portfolio with a team approach -- a combination of that money market expertise joined with our expertise on the fixed income side in the government mortgage-backed space.

We have products that span all the way out the yield curve in the fixed income arena, but this fund is kind of a niche product, believed to be the only one of its kind in the government ultrashort space. It is designed to be an incremental step out the yield curve for clients to gain additional incremental yield with relatively minimal principal volatility. We do have to emphasize that the NAV does fluctuate, although we can attempt to minimize volatility through conservative management and portfolio positioning. Generally speaking, it has not fluctuated very much over a variety of market environments.

BFI: What is the biggest challenge for this fund? Hill: The main challenge for ultra-short products recently has been the low rate environment. In a transition period between rates being so low for so long to -- knock on wood -- a rising rate environment, it may take a little bit of time for the income component of the fund to catch up to the price effect of rising rates. But as soon as rates rise -- and our expectation ... is that the Fed will do so in a very gradual, controlled fashion -- the lower volatility of that type of market environment may allow an ultra-short fund, on a total return basis, to do reasonably well.

BFI: What are you buying? Hill: The fund holds traditional government money market types of instruments to provide liquidity and to enhance principal stability. But the incremental yield comes from an allocation to government mortgage-backed securities that typically fall into two categories: adjustable rate mortgages and floating rate CMOs. Both are responsive to rising rates, but the reset feature of a floating rate CMO is a little more frequent than that of some of the adjustable rate mortgages. More recently we've shifted somewhat out of adjustable rate mortgages -- not entirely -- in favor of more floating rate CMOs in the anticipation of a rising rate environment. They tend to have a little less price volatility and a little more interest rate responsiveness; they adjust more often and more quickly to rates rising at the very front end.

BFI: Tell us more about portfolio construction. Hill: The allocation between the money market sector and the agency mortgage-backed sector of the portfolio tends to be split roughly in half. The purpose of the money market sector in many cases is not only to enhance the principal stability of the overall portfolio, but also to serve as the liquidity base for the ultra-short product. The fund is a home for investors that have a longer time horizon for their cash than would typically be the case in a money market product. But we still need to hold a liquidity position within the portfolio in order to meet the day-to-day redemption needs of investors. So, the repo positions that we know and love in our money market funds are also present in this ultra short product. We typically have somewhere between 20%-25% of the fund in repo -- usually overnight or short term repo to meet the liquidity needs.

The SEC has a very strong focus on the liquidity of bond funds these days, and this particular portfolio is naturally highly liquid by virtue of its money market exposure. We manage that core, money market position as we do our other money market funds: the same strategy, the same types of securities. The agencies that you'll see in the mortgage backed sector are the traditional ones -- Fannie and Freddie, and Ginnie Mae as well. Ginnie Mae is not a traditional money market issuer, but is the insurer in the agency mortgage-backed space. We have typically averaged about half a year in weighted average duration in this fund since the inception of the fund, although we have drifted shorter more recently.

BFI: Do you offer similar products? Hill: We do have two other ultra-short products -- Federated Municipal Ultra-Short Fund and Federated UltraShort Bond Fund -- both with long track records and good performance. We have also had substantial discussions with clients regarding how they may be adjusting their cash management strategies over the next year, and we do offer various separate account strategies that may be attractive to a client in the changing money market world to come.

BFI: What about investors and reforms? Hill: The portfolio has a fairly diverse investor base. We have a variety of types of institutional investors -- corporations or governmental entities, as examples -- and we expect it to continue to be attractive to that type of base going forward. None of us really knows how things will unfold as we move forward into October of next year, but we could see a shift of a portion of cash positions from larger institutions that traditionally have been in the money market space moving out to capture the additional yield that could be available in products just outside the money market world.

BFI: What are your expectations for rates? Hill: As we sit here today, we're looking for liftoff from the Fed later this week. [Note: This interview took place prior to the Fed's rate hike.] We've seen the front end of the curve re-price rather significantly, particular over the past couple of weeks. The money market sector now reflects a Fed that will be moving soon, but gradually. It's not priced to a 'one-and-done' scenario. There are a couple of rate hikes throughout 2016 built into the pricing of the curve depending on where you're looking. So, we are starting to see the reflection of that in the portfolio yields.

BFI: What are the risks? Hill: The biggest risk we face is how the net asset value of the fund will perform in a rising rate environment. Historically, we've done reasonably well with the strategy that we have -- the nature of the securities that the fund invests in are naturally defensive. It's really the pace of tightening that is important, and we believe that the pace of tightening will be relatively moderate. In addition, the Fed owns a significant amount of Treasuries and Agency mortgage backed securities on its balance sheet. How the Fed ultimately unwinds those holdings is a concern for the broader MBS market. That said, the nature of the securities in the agency mortgage-backed market that our fund holds are not those being held on the Fed's balance sheet. The adjustable rate and floating rate CMO market is something the Fed has not been purchasing, so I think we can weather that unwind when it eventually happens relatively well.

Finally, the future of Fannie and Freddie is always on the table. Given that Fannie and Freddie are primary investments in this particular portfolio, it's something that that we're watching. I do think that the political appetite to reform Fannie and Freddie and to move them out of conservatorship has cooled since the 2008-2009 period. There is some movement in Congress to define what the entities will look like once they emerge from conservatorship, but I think the eligibility of those securities for portfolios like Federated's should remain intact.

BFI: Are gradually rising rates an ideal scenario? Hill: Nirvana for portfolios like ours, but not necessarily in the money market world, is that the Fed raises rates in a gradual fashion. As rates rise, the income component of the portfolio eventually will rise to offset at least some of any price volatility. To the extent that we're wrong about that forecast and the Fed tightens aggressively -- obviously I'll be happy in the other part of my life here (from the money fund perspective). With a relatively low volatility rising rate environment, I would expect these funds to ultimately become more attractive -- not only from a total return perspective, but also among clients evaluating their investment strategies and feeling more comfortable taking steps out into a space like this where they have not gone before.

Northern on Reforms, Ultra-Short Strategies; First Form N-CR Filings

Dec 24 15

Northern Trust recently published a Q&A with Peter Yi, Director of Short-Duration Fixed Income, and Scott Warner, Director of Fixed Income Product Management, entitled, "Money Market Reform Arrives in 2016 -- Are You Prepared?." Subtitled, "Ultra-short strategies: A key approach to navigating money market reform," the piece says, "Money market reforms are no longer off in the distant future -- they take effect in 2016. At the same time, many investors expect the Federal Reserve will begin implementing a slow, but potentially steady, rate-hike campaign. With so much at play -- and so much at stake -- investors need innovative cash-management solutions to navigate this changing environment." Also, one of the first "live" pieces of the SEC's MMF Reform package, the "Form N-CR" disclosure mandates, which went into effect in July 2015, has recently seen its first batch of filings, we learned from Stradley Ronan's Joan Ohlbaum Swirsky. We look at the Q&A and at these recent filings below.

Northern's "Point of View" asks, "How do you anticipate cash management strategies will change after money market reform is in effect? Peter Yi answers, "Cash is going to be moving between products and strategies, most likely, into government funds or non-money-market mutual fund products. We're preparing for this shift and think it's going to require some advanced preparation and nimble portfolio positioning. We've been handling volatile liquidity flows since the 1970s and expect this to be very manageable given our experience. Prior to October 14, 2016, the date the industry must implement the structural changes, we believe it is wise to position cash portfolios with greater fund liquidity and monitor any changes in market structure that may affect liquidity."

He continues, "Post-reform, and over time, our forecasts anticipate the market will adjust and credit spreads will be wider for money market instruments. We believe this widening will occur as more investors shift into government strategies, creating more demand for U.S. Treasuries and agencies and less demand for credit instruments. Quite simply: It is our view that a new market equilibrium will emerge; the difference between the yield of a credit fund and a government fund will become much more meaningful. When that happens, we think investors who originally shifted into government funds will move back into credit funds because of the yield differential. It's logical, given supply and demand."

The piece asks, "How does the current lower-for-longer interest rate environment affect your approach to cash?" Scott Warner explains, "Cash has been costing our clients for the last five-plus years; it's been a very expensive insurance policy. But we now have multiple factors coming into play. Interest rates have recently drifted higher in anticipation of [the] Fed move ... as well as money market fund reform creating more uncertainty. So clients are starting to consider solutions such as ultra-short fixed income.... If they decide they have too much cash, what's an alternative? This naturally leads to additional conversations about ultra-short-duration capabilities, taking on marginal interest rate risks, marginal credit risk and albeit some liquidity risk, but very small -- above and beyond what they would get in a money market fund."

Yi adds, "Investors have been gravitating toward these strategies ever since we entered this unprecedented low interest rate environment. However, now the attraction to ultra-short fixed income has been coming from two directions. First are traditional retail and institutional money market investors who are starting to embrace cash segmentation strategies and putting more of their strategic cash allocations into non-money-market products with longer maturities.... Second are core fixed income investors in long-duration strategies that may be fearful of rising interest rates. Developing new innovative strategies in the ultra-short fixed income space has been a flagship capability for Northern Trust. And we've seen incredible success over the last few years accumulating new assets from retail and institutional investors considering new products outside of money market funds."

The Q&A also asks, "Against this backdrop, what is your top priority for your clients? Yi answers, "Now that we have clear guidance on what the final money market fund rules require, we want to be sure we have the right solutions to address clients' needs -- today and in the future. That's why we've spent an incredible amount of time engaging with the regulators and our industry peers to deeply understand the changes -- and why we've engaged with our clients to better understand their view on cash and our liquidity products. We wanted to ensure we considered all of the challenges our clients may face relating to the reforms. We've also done a thorough evaluation of our existing money market offerings, which allowed us to identify the characteristics and features that investors value and would like to retain."

He adds, "In short, `Northern Trust remains committed to the money market business. Our products will continue to evolve with the singular goal of providing a robust suite of liquidity solutions. And as we drive toward the final 2016 implementation deadline, we will continue to thoughtfully evaluate unique options and opportunities to assure investors that they will not have to react in a knee-jerk manner."

In other news, the new "Form N-MFP" requirement mandates that MMF managers disclose "bailouts" and certain specified events. Under the amendment, a money market fund will be required to file Form N-CR if "a portfolio security defaults, an affiliate provides financial support to the fund, the fund experiences a significant decline in its shadow price, or when liquidity fees or redemption gates are imposed and when they are lifted." In most cases, fund sponsors must fill out a brief summary within 1 business day of the event and a more complete follow up description within 4 business days.

Stradley's Joan Swirsky told us recently that a search of the SEC's EDGAR database shows that 5 Form N-CR's have been filed so far in connection with capital contributions, all related to fund liquidations or fund mergers (and none related to real "bailouts", the intent of the rule). Three of them are from the Huntington Funds, which were acquired by Federated (see our Sept. 10 News, "More Consolidation: Federated Buys Huntington"), while the others are from liquidating funds William Blair and Eaton Vance.

The N-CR filing for the Huntington US Treasury MMF says, "As a result of the upcoming merger of the Huntington U. S. Treasury Money Market Fund with another unaffiliated money market fund (scheduled for December 4, 2015), Huntington Asset Advisors is making a capital contribution to the Fund in the amount noted above ($2,431.17). This amount represents historical capital losses incurred on the sale of securities. The goal of the capital contribution is to ensure a $1.00 net asset value upon transfer of assets to the surviving fund."

Two of the filings are for the Huntington Money Market Fund, which is being liquidated. One is from November 2, and the other is from November 23. They say, "As a result of the liquidation of the Huntington Money Market Fund (completed on November 20, 2015), Huntington Asset Advisors is making a capital contribution to the Fund in the amount noted above. This amount represents capital losses incurred on the sale of securities since the last capital contribution as of October 30, 2015. The goal of the capital contribution is to ensure a $1.00 redemption price to shareholders upon liquidation." The capital contribution amounts are $174,689.80 and $7,483.67, respectively.

Yet another filing was made for the liquidation of the William Blair Ready Reserves Fund. (See our Oct. 29 News, "Pioneer, Nationwide Converting Prime to Govt; 2 More Exit MMF Space.") The N-CR filing says, "In anticipation of the Fund's liquidation on or about November 18, 2015, a capital contribution is being made in an amount equal to the difference between the Fund's net assets and the net asset value of shares outstanding." The amount of support was $173,543.69.

Finally, Eaton Vance filed a Form N-CR in connection with the liquidation of its Eaton Vance US Government MMF. (See our Sept. 27 News, "Forward Funds Liquidates US Govt MMF; Eaton Vance Liquidating US Govt MMF.") This filing explains that the "fund is liquidating and a capital contribution is being made in an amount equal to the difference between the Fund's net assets and the net asset value of shares outstanding on liquidation date." The amount of support was $32,315.

Dec. MFI Profile: BlackRock's Henderson on Tax-Exempt Money Funds

Dec 23 15

This month, Money Fund Intelligence interviews BlackRock's William Henderson, Managing Director & Lead Portfolio Manager on the Municipal Liquidity Portfolio Team, and Jack Erbeck, Managing Director & Municipal Credit Analyst. BlackRock manages $9.2 billion in Tax-Exempt money fund assets, including the $2.5 billion BIF Tax Exempt MF and the $1.4 billion BlackRock MuniFund. (BlackRock is also poised to almost double its Tax-Exempt MMF assets once it acquires BofA's cash business in April 2016.) Henderson has been running Tax-Exempt money funds for BlackRock since 1993, and Erbeck has been a credit analyst supporting Tax-Exempt funds since 1999. We discuss recent events in the Tax-Exempt or Municipal money markets below. (Note: This article originally appeared in the December issue of MFI on Dec. 7.)

MFI: How long has BlackRock been running Tax-Exempt cash? Henderson: Our flagship Tax Exempt money market fund, the BlackRock Muni Fund, began operations in 1980. We have a variety of Tax-Exempt funds -- the BlackRock Liquidity Funds, the BlackRock Institutional Funds, and the BlackRock retail funds. They are all managed here in Princeton, where we conduct tax-exempt fund portfolio management and credit research. It's all part of Blackrock's $110 billion municipal platform.... My number one priority is to keep the client and fiduciary responsibility front-and-center for the team.

MFI: What are the challenges in running these funds? Henderson: In the Tax-Exempt space, it's always been supply and demand, except for 2008 and 2009 when we had credit concerns that took precedence. This continues to be the biggest challenge in the industry. In fact, 2015 is the first time where total inventory of outstanding Variable Rate Demand Notes (VRDNs) fell below assets of Tax-Exempt money market funds. This puts constraints on our industry in terms of getting invested. This, along with collapsing TOBs (Tender Option Bonds), limited participation of new letters of credit, and fewer large issues of notes, are the key challenges. This year you have a lot of states not issuing one year paper -- Texas and California, for example. That took out additional supply that would have been creditworthy investments for our Tax-Exempt funds. So, it's an ongoing challenge of getting the funds invested in securities that we would deem credit worthy for the portfolios.

MFI: Are there regulatory reasons for constricting supply? Henderson: New regulations have impacted tender option bond issuance. It has changed the way banks are allowed to issue and support tender option bonds, and it doesn't make the creation of those securities as easy as it once was. So that's one small piece of the regulatory environment that has challenged what used to be [one] solution to the supply and demand issue. When there was a need for supply, banks issued tender option bonds. It was that simple. New regulations have placed restrictions on how TOBs are allowed to be issued and held by banks.

MFI: What are you buying now? Henderson: It's still approximately 75% VRDNs and 25% fixed rate paper, so notes, CP, and bonds. That mix really hasn't changed over the years -- it may get a little bit more skewed to notes after note season and then a little less so during tax season when you're building up liquidity. But we really aren't changing much in terms of the makeup of the portfolios. Muni funds are highly liquid and that's just by the nature of the way VRDNs are structured. There are certainly a greater number of smaller issuers than in the taxable space for sure. Here in the Tax-Exempt space there are a few big issuers -- California, Texas and New York -- and the rest is made up of all the other state, county, and local municipalities.

MFI: Tell us about your credit process. Erbeck: At a high level, it is dictated by the focus of the tax-exempt funds. We look at the small issuers for Bill's team, particularly Ohio, New Jersey, and places where we have state specific fund products. We evaluate municipal credits across the curve, looking at long term supply and we leverage the research team for our money market funds. The supply is down for cash flow notes, as well as for bond anticipation notes, so municipalities have been more conservative on their capital budgeting and reticent to borrow. Though lower borrowing and better liquidity is a better credit story for municipal governments.

Henderson: The same analysts at BlackRock that are looking at 1-year paper are also looking at 30-year paper. So if a serial bond comes, we're able to buy it all the way out the curve, from 1-year out to 30. We just place it in different funds depending on who needs it here on the desk -- it could be the bond funds, it could be the money market funds, it could be the separately managed accounts. [But] right now, we are challenged by a lack of supply. We've been at zero or one basis point for an unprecedented time period here for SIFMA, which is the 7-day index of VRDNs. When the bulk of your portfolio floats off of SIFMA, it's difficult to get a yield that is attractive.

MFI: Are there any municipalities you're worried about or avoiding? Henderson: We make sure every name meets the credit criteria and the team reviews it. Obviously, there are a lot of headline names that we would not own in the portfolio -- that's just not consistent with our 'quality, stability, liquidity, yield' mantra. In this environment when yields are so low it is definitely not prudent to reach for yield.

MFI: Tell us about weekly liquidity. Henderson: The VRDNs carry a guaranteed put at par, so 75% of the portfolio can be converted to cash in a week or less. That allows for a very stable NAV, and it allows for a very high level of liquidity. You can meet client redemptions, and certainly it meets all of the measures of the new money market reform rules in terms of the amount of liquidity a fund must carry. The rule for Munis is 30% in weekly liquidity, but we don't have a daily test like the taxable funds. If you're carrying 75% to 80% in weekly liquidity, you're well above the 30% rule. So it's highly unlikely that you would ever have an issue where you're not carrying the required amount of liquidity. Gates and fees seem to be an item that people are concerned about, and certainly they can be imposed if a fund's 7-day liquidity drops below 30%. But when your portfolio is carrying 75% in weekly VRDNs on average, it's unlikely that you ever drop below 30%. Most clients understand this.

MFI: Have you decided which funds will be Institutional and Retail? Henderson: Yes, we just made an announcement.... We're going to have AAA-rated institutional offerings with Floating NAVs, and ... retail offerings at a constant NAV. Many of these changes aren't effective until next September however. We will continue to have state-specific funds where we believe there's a large retail interest due to high state income taxes. The platform will be efficient, and it's going to have all the offerings for the current make-up of our clients. We think it'll offer the right balance and meet the needs of our diverse client base.

MFI: Do shadow NAVs in the Tax Exempt sector move? Henderson: They actually move less [than taxable funds']. Look, 75% of the fund is priced at par, highly liquid, very high credit quality, so the likelihood of your shadow NAV moving is actually diminished compared to a laddered portfolio from zero up to 397 days. We've been publishing our shadow NAVs for some time and will continue to do so. It wasn't something that we did [just for] money market fund reform. We also have always done stress testing on all the portfolios for many years -- long before it was required.

MFI: Are Retail investors more stable? Henderson: First off, retail Tax-Exempt investors tend to move [too], just more slowly, because you're talking about thousands of accounts with smaller balances. The other thing is they tend to really be tax averse. They do not want to pay taxes. Even if yields are 1 bp in munis vs. a prime fund yielding 7 or 8 bps, they would still rather not pay any taxes. So you have those two things working in favor for stability in balances of retail Tax-Exempt money market funds -- the slow movement in general and then the aversion to paying taxes.

MFI: What factors have driven assets down in Tax Exempts? Is it just low rates? Henderson: That's part of it. But I think a greater force is a large base of the Tax Exempt money fund industry was retail investors, and that's who has fueled the stock and bond rallies over the last 7 years. The money had to come from somewhere, so investors moved out of funds into the market, out the curve and into equity and longer term bond funds.

MFI: What is your outlook for 2016? Henderson: I really do think 2016 is going to be an exciting year. We have money fund reform; the Fed is going to (hopefully) be raising rates; and, we're going to see large cash movements by clients -- that just has to happen. I'm not just talking about in the Tax Exempt space, but all throughout the money fund industry. We're going to see big movements of client cash. That's going to make for an interesting and challenging year.

BlackRock has always been committed to the Tax-Exempt money fund industry. In these times, it's even more important that we do the right job for our clients, and scale is important for getting that job done. We have the people in place and the size to make it all work. It has been critical for us to have a research team that partners with portfolio management and has been able to weather multiple interest rates environments and credit cycles to make sure we get the job done well.

More Funds Jump on Prime to Govt Conversion Bandwagon; Mergers

Dec 22 15

Money market fund conversion announcements have accelerated in the final weeks of the year -- 6 additional fund managers have filed recently to change their Prime MMFs into Government funds since our last update. The recent batch of Prime to Govie conversions include: Cavanal Hill, John Hancock, Prudential, SunAmerica, Thrivent, and TIAA-CREF. These additional moves total well over $4.5 billion in assets, which brings our running conversion total to almost $262 billion in Prime to Govt fund shifts to-date. (Almost $173 billion, or 66% of the total, already converted in November and December.) We also report on Vanguard and Deutsche's renaming of Institutional share classes to Retail, on a batch of recent Federated fund mergers, and on a handful of BlackRock State Muni MMF liquidations. (See also our last "Prime-to-Govie" story, the Nov. 25 News, "OppenheimerFunds Latest MF to Go Govt," and contact us to request a copy of our "prime2govie.xls" listing of funds planning conversions.)

Cavanal Hill posted a statement on its $1.65 billion Cavanal Hill Cash Management Fund, saying, "Many investors have indicated a preference for money market funds with a stable NAV that will not be subject to liquidity fees or redemption gates, which would restrict the use of the funds. As a result, the Board of Trustees for the Cavanal Hill Funds has approved the operation of each of its Money Market Funds as either government or retail and will continue to offer shares at stable asset value, without liquidity fees or gates. Shareholder approval has been obtained, where necessary."

On the "Cavanal Hill Cash Management Fund," they say, "The Fund will become a government money market fund and will change its name to Cavanal Hill Government Securities Money Market Fund, effective April 2016. Regarding the "Cavanal Hill Tax Free Money Market Fund," they write, "The Fund will be a retail money market fund and the name of the Institutional Share Class will be changed to the Reserve Share class. The Fund will be closed to new institutional money on Jan. 1, 2016. Existing institutional shareholders will need to transition out of the Fund by April 2016."

Among the other Prime to Government conversion announcements is the $402 million John Hancock Money Market Fund, which will become John Hancock Government Money Market Fund. Its filing, says, "On December 10, 2015, the Board of Trustees approved the conversion of the fund to a government money market fund as defined under Rule 2a-7 under the Investment Company Act of 1940, effective April 6, 2016. In connection with this conversion, effective on the Conversion Date, the Principal Investment Strategies of the fund are amended and restated as follows: The fund operates as a "government money market fund" in accordance with Rule 2a-7 under the Investment Company Act of 1940."

The $672 million Prudential Money Mart Assets' filing says, "In connection with the amendments to Rule 2a-7 under the Investment Company Act of 1940, the Board of Trustees/Directors of the Fund has approved changes to the Fund's investment policies to allow the Fund to qualify and begin operating as a "government money market fund," as defined in the Amended Rule. In conjunction with these changes, the Board has also approved a name change for the Fund to "Prudential Government Money Market Fund".... It is currently expected that the changes described above will become effective on or about the end of March 2016."

Also, SunAmerica will convert the $780 million SunAmerica MMF to Government. The filing states, "At an in-person meeting held on December 1, 2015, the Board of Directors of the Fund considered the likely effects of the rule changes on the Fund and approved a proposal by the Fund's investment adviser, SunAmerica Asset Management, LLC, to convert the Fund to a government money market fund. The conversion, and the changes described in this supplement, will become effective on or about April 29, 2016. Upon the Fund's conversion to a government money market fund, the Fund will also change its name to "SunAmerica Government Money Market Fund." It is expected that the Fund gradually will allocate a larger percentage of its assets to government securities over time until it reaches its new allocation on or about April 29, 2016."

In addition, Thrivent is changing the nature of its $411 million Thrivent Money Market Fund. The filing says, "In connection with amendments to Rule 2a-7 under the Investment Company Act of 1940 -- which is the primary rule governing the operation of money market funds -- the Board of Trustees of Thrivent Money Market Fund approved changes to the Fund's principal investment strategies to allow the Fund to qualify and begin operating as a "government money market fund".... As a result, the Fund's prospectus will be amended as follows, effective February 1, 2016. The Fund's management fee ... will decrease to 0.35%."

Finally, the $667 million TIAA-CREF MMF is going government. The TIAA filing explains, "As a result of amendments to Rule 2a-7 under the Investment Company Act of 1940, as amended, the Board of Trustees of the TIAA-CREF Funds has approved a proposal for the TIAA-CREF Money Market Fund to convert to a "government money market fund," as defined in the amendments, on or before October 14, 2016 A government money market fund is not required to impose liquidity fees or redemption gates, and the Fund does not currently intend to impose such fees and/or gates."

Also, several firms have recently converted Institutional shares to Retail shares (or changed the name of share classes from "Institutional," including Vanguard and Deutsche. The prospectus supplement filing for Vanguard's $30 billion share class says, "The board of trustees of Vanguard Money Market Reserves has approved the conversion of Vanguard Prime Money Market Fund's Institutional Shares into Admiral Shares. This conversion is expected to occur in late 2015. The minimum investment amount and expense ratio are not expected to change from those listed in the current prospectus." (Note: This conversion occurred last week and caused a big shift from Inst to Retail in ICI's weekly numbers.)

Also, on Dec, 1, Deutsche converted the Institutional shares of its $3.4 billion Daily Assets Fund to Capital shares. (See our June 17, News, "Vanguard Sticks with Prime, Goes Pure Retail, Reopens Federal MMF," and our Oct. 13 News, "Schwab Going All Retail, Converting Inst Shares; MMP Switches to Govt.")

In fund merger news, Federated completed a set of mergers earlier this month. It explains in an earlier SEC filing, "Special Meetings of the shareholders of Federated Liberty U. S. Government Money Market Trust and Federated Automated Government Cash Reserves are proposed to be held on or about December 1, 2015 to approve or disapprove proposed Agreements and Plans of Reorganization pursuant to which: (a) Federated Government Reserves Fund would acquire all or substantially all of the assets of Federated Liberty U.S. Government Money Market Trust in complete liquidation and termination of Federated Liberty U.S. Government Money Market Trust; and (b) Federated Government Obligations Tax-Managed Fund would acquire all or substantially all of the assets of Federated Automated Government Cash Reserves in complete liquidation and termination of Federated Automated Government Cash Reserves." (See our June 25 News, "Federated Announces Retail Money Fund Plan, Streamlines MF Lineup.")

It continues, "Shareholders of the following Funds will receive information statements regarding proposed Agreements and Plans of Reorganization, proposed to close on or about December 4, 2015, pursuant to which: (a) Federated Trust for U.S. Treasury Obligations would acquire all or substantially all of the assets of Federated Treasury Cash Series in complete liquidation and termination of Federated Treasury Cash Series; (b) Federated Government Obligations Fund would acquire all or substantially all of the assets of Federated Government Cash Series in complete liquidation and termination of Federated Government Cash Series; (c) Federated Prime Cash Obligations Fund would acquire all or substantially all of the assets of Federated Automated Cash Management Trust and Federated Prime Cash Series in complete liquidation and termination of Federated Automated Cash Management Trust and Federated Prime Cash Series; and (d) Federated Municipal Obligations Fund would acquire all or substantially all of the assets of Federated Municipal Cash Series in complete liquidation and termination of Federated Municipal Cash Series."

Finally, BlackRock completed the liquidation of 3 Muni funds -- BlackRock New Jersey Muni MMF, BlackRock North Carolina MMF, and BlackRock Virginia Muni MMF. The filing says, "On or about December 15, 2015, all of the assets of the Funds will be liquidated completely." We originally wrote about this in our July 31 News, "BlackRock to Liquidate 3 Muni MMFs, Convert Old Merrill Primes to Govt."

Goldman Sachs AM Details More MMF Changes, Portal Enhancements

Dec 21 15

A press release posted Friday entitled, "Goldman Sachs Asset Management Announces Additional Updates to Money Market Fund Product Line in Anticipation of New Regulatory Requirements," is the latest announcement to detail money market mutual fund changes ahead of next year's regulatory reforms. It says, "Goldman Sachs Asset Management today announced further updates in its money market fund product line to prepare clients for the Securities and Exchange Commission's Rule 2a-7 amendments, which become effective in October 2016." (Note: Watch Tuesday for an update on several new firms "going Government," exiting the Prime space and converting to government money funds.)

Dave Fishman, Goldman Managing Director and Co-Head of Global Liquidity Management, says, "We are committed to making sure our clients and partners understand the new requirements so they can make an informed decision on how best to proceed with their investments in 2016. We continue to engage with them on how to best support their evolving investment needs and will continue to make updates as needed."

Friday's announcement features several changes, including the designation of two existing prime money market funds as institutional. The release says, "The Goldman Sachs Financial Square Money Market Fund ($37.8 billion in AUM) and the Goldman Sachs Financial Square Prime Obligations Fund ($13.2 billion in AUM) plan to operate as "institutional money market funds" (as defined by amended Rule 2a-7) by the regulatory deadline of October 14, 2016. The Funds will comply with floating NAV and liquidity fees and redemption gates requirements upon their transition."

GSAM is also repositioning of an existing prime money market fund. It explains, "Pursuant to a filing with the SEC on November 24, 2015, the Goldman Sachs Financial Square Prime Obligations Fund will expand its investment guidelines as of December 29, 2015 to invest in U.S. dollar-denominated obligations of foreign issuers, though the Fund does not intend to purchase U.S. dollar-denominated Euro certificates of deposit."

Also, the release tells us, "The Goldman Sachs Financial Square Tax-Free Money Market Fund plans to operate as a "retail money market fund" (as defined by amended Rule 2a-7) by the regulatory deadline of October 14, 2016. Effective March 31, 2016, the Fund will be renamed the "Goldman Sachs Investor Tax-Exempt Money Market Fund." The Fund will not change its investment policies, and will continue to invest at least 80 percent in municipal obligations of U.S. states, territories and possessions. The Fund will only be available to retail investors (as set forth by the SEC's new rules) on or before October 14, 2016."

Further, they state that the firm will launch a new institutional tax-exempt money market fund. It says, "GSAM has filed an initial registration statement for the Goldman Sachs Financial Square Tax-Exempt Money Market Fund, which plans to operate as an "institutional money market fund" (as defined by amended Rule 2a-7) by the regulatory deadline of October 14, 2016. The Fund is projected to be launched on or around March 31, 2016. At least 80 percent of the Fund's net assets will be invested in municipal obligations of U.S. states, territories, and possessions. The Fund will comply with floating NAV and liquidity fees and redemption gates requirements by the regulatory deadline of October 14, 2016." (See our latest Money Fund Intelligence for the short list of Institutional Tax-Exempt money funds to date.)

In addition, GSAM will 'liquidate two tax-exempt money market funds <b:>`_. The release explains, "The Goldman Sachs Financial Square Tax-Exempt New York Fund and the Goldman Sachs Financial Square Tax-Exempt California Fund will be liquidated on or before August 31, 2016. The liquidations are based on changing investor needs and are in response to the long-term investment environment."

James McNamara, Managing Director and President of Goldman Sachs Mutual Funds, comments, "We've come to these decisions on the current product line after careful consideration about the impacts to and preferences of our clients. More changes will be necessary as the regulatory landscape evolves and we will continue to ensure future modifications and product launches meet the expectations of the clients we serve."

In the release, GSAM outlines what its future money market fund lineup will look like. Government Funds include: Goldman Sachs FS Government Fund, GS FS Federal Instruments Fund, GS FS Treasury Solutions Fund, GS FS Treasury Obligations Fund, GS FS Treasury Instruments Fund, and GS VIT Government Money Market Fund; Prime Institutional Funds include: GS FS Money Market Fund and GS FS Prime Obligations Fund; Prime Retail Funds: GS Investor Money Market Fund; Tax-Exempt Institutional Funds: GS FS Tax-Exempt MMF; and, Tax-Exempt Retail: GS Investor Tax-Exempt Money Market Fund.

The release goes on, "In addition, GSAM's Global Liquidity Services Portal has been enhanced with functionality aimed at reducing the new operational and risk management challenges clients may face as a result of changing money market fund features. These enhancements will provide clients with critical insights into fund positioning and potential risks as well as daily tracking of fund prices, liquidity levels and shareholder flows. The GSAM's Global Liquidity Services Portal allows investors to analyze, track and trade GSAM money market funds as well as a broad array of money market funds from other providers." "Further updates to our Global Liquidity Services Portal are designed to provide a more robust user experience that will help facilitate confident and informed investment decisions in a changing regulatory and market environment," said Kathleen Hughes, Managing Director and Head of the Global Liquidity Sales Team.

It continues, "In January 2014, GSAM announced early compliance with Rule 2a-7, when the Goldman Sachs government money market funds adopted the holdings requirements applicable to government funds under amended Rule 2a-7. Each of the Goldman Sachs Financial Square Government Fund; Goldman Sachs Financial Square Federal Fund (as of September 30, 2015 repositioned to the Goldman Sachs Financial Square Treasury Solutions Fund); Goldman Sachs Financial Square Treasury Obligations Fund; and Goldman Sachs Financial Square Treasury Instruments Fund committed to hold at least 99.5% of their assets in cash, U.S. Government Securities, and/or repurchase agreements that are collateralized fully."

Finally, the release says, "On July 29, 2015, GSAM announced its intention to launch a new retail prime money market fund, the Goldman Sachs Investor Money Market Fund (scheduled to launch January 29, 2016) and a new government money market fund, the Goldman Sachs Financial Square Federal Instruments Fund (launched October 30, 2015), along with the repositioning of the Goldman Sachs Variable Insurance Trust ("VIT") Money Market Fund to the Goldman Sachs VIT Government Money Market Fund (effective April 15, 2016). In the July update GSAM also announced the Goldman Sachs Financial Square Federal Fund would reposition to the Goldman Sachs Financial Square Treasury Solutions Fund, effective September 30, 2015 in response to investor concerns about capacity in the Treasury markets. The Fund provides a unique investment approach of investing only in U.S. Treasuries and repurchase agreements with the Federal Reserve Bank of New York." (For more, see our July 30 News, "Goldman Sachs to Launch New Prime Retail, Treasury Fed RRP Funds.")

ICI, JPM on Nov. 30 Holdings, WAMs; Credit Suisse Asks What's Next?

Dec 18 15

The Investment Company Institute released its latest "Money Market Fund Holdings" summary (with data as of Oct. 31, 2015) yesterday, which reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds. Last week, JP Morgan Securities' also released its latest "Prime Money Market Fund Holdings Update, November 2015," which reviews holdings, as well as a trend toward shortening WAMs in advance of the Fed raising rates. (See too our Dec. 10 News, "Dec. Portfolio Holdings: Treasuries Skyrocket; Repo, CD, CP Decline.") We review these, and also quote from a Credit Suisse research piece, "Flying Blind", which discusses money fund and bank deposit flows, fee waivers and the Fed's RRP facility.

ICI's "Prime and Government Money Market Funds' Daily and Weekly Liquid Assets" table shows Prime Money Market Funds' Daily liquid assets at 30.1% as of November 30, up from 27.7% on October 30. Daily liquid assets were made up of: "All securities maturing within 1 day," which totaled 24.9% (vs. 24.0% last month) and "Other treasury securities," which added 5.3% (up from 3.6% last month). Prime funds' Weekly liquid assets totaled 42.3% (vs. 41.3% last month), which was made up of "All securities maturing within 5 days" (34.1% vs. 34.8% in October), Other treasury securities (5.2% vs. 3.6% in October), and Other agency securities (3.0% vs. 2.9% a month ago).

The report says, Government Money Market Funds' Daily liquid assets totaled 64.4% as of November 30 vs. 62.3% in October. All securities maturing within 1 day totaled 25.2% vs. 29.0% last month. Other treasury securities added 39.2% (vs. 33.3% in October). Weekly liquid assets totaled 80.7% (vs. 78.6%), which was comprised of All securities maturing within 5 days (35.4% vs. 38.9%), Other treasury securities (37.1% vs. 32.6%), and Other agency securities (8.1% vs. 7.1%).

ICI's "Prime and Government Money Market Funds' Holdings, by Region of Issuer" table shows Prime Money Market Funds with 46.1% in the Americas (vs. 45.2% last month), 18.5% in Asia Pacific (vs. 18.3%), 35.2% in Europe (vs. 36.4%), and 0.2% in Other and Supranational (vs. 0.2% last month). Government Money Market Funds held 86.5% in the Americas (vs. 84.2% last month), 0.8% in Asia Pacific (vs. 0.8%), 12.6% in Europe (vs. 15.0%), and 0.0% in Supranational (vs. 0.0%).

The table, "Prime and Government Money Market Funds' WAMs and WALs" shows Prime MMFs WAMs at 33 days as of November 30, down from 35 days last month. WALs were at 65 days, down from 69 days last month. Government MMFs' WAMs was at 38 days, down from 40 days last month, while Government fund WALs was at 85 days, down from 89 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.)

JP Morgan Securities' Short Duration Strategy team comments on Prime to Govie conversions in its latest "MMF Prime Holdings" update, "To date, the majority of prime to government fund conversions have already taken place.... In total, close to $200bn has been converted. So far, the conversion process has been fairly orderly, and has not directly impacted the short-term credit and rates markets. Currently, only $50bn is left for conversion, spread over the duration of 2016. We are inclined to think that the majority of conversion announcements have already been made. Accordingly, the next phase of the exodus from prime funds will likely come via investor outflows throughout next year. We estimate that an additional $400bn in AuM could eventually migrate away from prime funds and into government MMFs."

They add, "Since converting funds are still technically categorized as "prime" up until their respective conversion dates, total prime AuMs dropped significantly around the beginning of December as several funds officially switched their categories from prime to government status <b:>`_. Conversely, aggregate government fund AuM increased. As of the end of November, prime fund assets now total $1,280bn, down $163bn month-over-month, due to the final conversions that have taken place. Government AuMs totaled $1,178bn, up $164bn month-over-month. YTD, we have still not experienced any sizable investor outflows driven by MMF reform."

On Portfolio Holdings, they tell us, "Prime MMF holdings of bank debt decreased by $55bn month-over-month. In an otherwise normal month not affected by quarter-end technicals, the drop in prime fund bank holdings was driven almost entirely by fund conversions, as converting funds replaced bank holdings with government product. Most reductions were concentrated in CDs and time deposits, primarily for French, Norwegian, and Japanese banks. Aside from bank holdings, allocations to agencies and Fed RRP also decreased as a result of final fund conversions. Prior to their conversion dates, most funds were already heavily invested in government-eligible product. No longer classified as prime funds, the government holdings of these funds are no longer accounted for in the prime universe."

On WAMs, they continue, "During the course of November, money market funds shortened maturities in front of the December FOMC meeting. Prime funds shortened WAMs by 4 days to 30 days, while government funds shortened maturities by 3 days to 36 days. Furthermore, year-over-year, funds now hold more paper in the 0-60d maturity bucket. Looking forward, we expect funds to remain short as the possibility of additional Fed hikes and MMF reform come into play during early 2016."

In other news, Credit Suisse Research Analysts Zoltan Pozsar and James Sweeney write about money fund flows in the wake of the Fed action in a piece entitled, "Flying Blind." They explain, "For the first time in nearly a decade, the FOMC has raised interest rates. Now comes the hard part: interpreting the sequence of events that will follow.... Money funds are getting ready to bid away hundreds of billions in non-operating deposits from banks and invest those funds in reverse repos at the Fed. The more generous these funds are in passing on the first hike, the more deposits they will lure away from banks and the greater the usage of the RRP facility."

Credit Suisse writes, "Now that the Fed chose to uncap the RRP facility, the single most important factor that will determine the uptake will be how aggressive money funds will be in passing on the first rate hike. Counterparty caps are a pain, but large flows should wash them away.... If money funds are stingy (i.e., they hold on to the first hike through higher fees) money does not move. If banks don't pass on higher rates to wholesale depositors, and neither do money funds, money has no incentive to move. However, if money funds are generous and pass on the bulk of the first hike, money will have an incentive to move. How will money funds behave? The consensus assumption is that money funds, after seven years at the zero bound can't wait to get their margins back up to their historical average. As such, the thinking goes money funds will use the first hike to increase their fees, passing on little to end investors."

Finally, they add, "We disagree for two reasons. First, if money funds chose to go down this path with their retail funds, they will only make it easier for banks to attract business away (for the reasons discussed above). Second, it also makes little sense for money funds to behave like this with their institutional funds. If one thinks of the Fed's RRP facility as an all you can eat buffet of 'safe assets' that would help money funds get a large volume of new assets at a fixed price for every new dollar of AuM they manage to bring in as they lure non-operating deposits away from banks, it would make no sense to show up with a full stomach (i.e. raising returns on existing AuM by raising fees) and a lot more sense to show up hungry (i.e. raising returns primarily by increasing one's AuM and less by raising fees)."

Fed Hikes! Zero Yield Era Ends After 7 Years; MMF Yields Already Rising

Dec 17 15

The Federal Reserve raised interest rates yesterday for the first time in almost 10 years, lifting its Federal Funds rate off its zero to 0.25% range to a new 0.25%-0.50% range. (See the Fed's Statement here.) The historic move by the FOMC ends a seven-year yield drought for money funds -- the Fed Funds rate has been at virtually zero since December 2008. Money market fund yields should jump starting today; they've already moved higher in anticipation of the hike. Our Crane 100 Money Fund Index has increased from 0.03% at mid-year to 0.07% today. MMF yields should move higher by about 10 basis points over the next week and up to 25 bps by mid-January (though this will depend on how much of the hike is absorbed by the removal of fee waivers). In support of the Fed's move, the Federal Reserve Bank of New York announced that it was temporarily raising the cap on the Fed's Overnight Reverse Repo Program to $2 trillion.

The Fed's Press Release says, "The Committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2 percent objective. Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent. The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation."

It continues, "In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information.... The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way."

In her press conference, Fed Chair Janet Yellen explained, "This action marks the end of an extraordinary 7 year period during which the federal funds rate was held near 0 to support the recovery of the economy from the worst financial crisis and recession since the Great Depression.... With the economy performing well and expected to continue to do so the committee charged that a modest increase in the Federal Funds Rate target is now appropriate, recognizing that. Even after this increase, monetary policy remains accommodative. The process of normalizing interest rates is likely to proceed gradually."

Yellen added, "Were the FOMC to delay the start of policy normalization for too long, we would likely end up having to tighten policy relatively abruptly at some points to keep the economy from overheating and inflation from significantly over shooting our objective. Such an abrupt tightening could increase the risk of pushing the economy into recession."

The Fed's updated "dot plot" economic projections for rates shows expectation for 4 more rate hikes by the end of 2016, with the Fed Funds reaching 1.4%, and 5 more hikes in 2017 with the rate reaching 2.6%. By the end of 2018, the rate is expected to be at 3.5%. Yellen added, "Compared with the projections made in September, a number of participants lowered somewhat their paths for the Federal Funds Rate, although changes to the median path are fairly minor. However the actual path of the Federal Funds Rate will depend on the economic outlook as informed by incoming data."

In concert with the rate increase, the NY Fed released a "Statement Regarding Overnight Reverse Repurchase Agreements." It says, "During its meeting on December 15–16, 2015, the Federal Open Market Committee (FOMC) directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York (New York Fed), effective December 17, 2015, to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1/4 to 1/2 percent, including overnight reverse repurchase operations (ON RRPs) at an offering rate of 0.25 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account (SOMA) that are available for such operations and by a per-counterparty limit of $30 billion per day <b:>`_."

It continues, "[T]he Desk anticipates that around $2 trillion of Treasury securities will be available for ON RRP operations to fulfill the FOMC's domestic policy directive.... These ON RRP operations will be open to all eligible RRP counterparties, will settle same-day, and will have an overnight tenor unless a longer term is warranted to accommodate weekend, holiday, and other similar trading conventions. Each eligible counterparty is permitted to submit one proposition for each ON RRP operation, in a size not to exceed $30 billion and at a rate not to exceed the specified offering rate. The operations will take place from 12:45 p.m. to 1:15 p.m. (Eastern Time)."

On the RRP, Yellen added, "We also released an implementation note that provides details on the tools that we are using to raise the Federal Funds Rate into the new target range. Specifically, the board of governors raised the interest rate paid on required and excess reserves to one half percent and the FOMC authorized overnight reversed repurchase operations and an offering rate of one quarter percent. Both of these changes will be effective tomorrow. To ensure sufficient monetary control at the onset of the normalization process, we have for the time being suspended the aggregate cap on overnight reverse repurchase transactions that's been in place during the testing phase of this facility. Recall that the committee intends to phase out this facility when it is no longer needed to help control the Federal Funds Rate. We will be monitoring financial market developments closely in the coming days and are prepared to make adjustments to our tools if that proves necessary to maintain appropriate control over money market rates."

As we mentioned, money market mutual fund yields should begin rising in earnest starting Thursday. (We'll first see the yield jump in Friday morning's Money Fund Intelligence Daily.) Yields have risen gradually the last two weeks. Several Institutional funds are now yielding over 0.20%, their highest level since late 2012, and several Retail MMFs are now yielding over 0.10%. (See our Top 5 rankings on the www.cranedata.com homepage.) We initially expected about half of the Fed's increase to be absorbed by lower fee waivers, but we now believe that most of the hike will be passed through to investors.

Nonetheless, the quarter-point move, and market expectations of more in 2016, should bring a desperately needed boost to money fund managers' bottom lines. Funds have already seen almost a billion dollars more in annualized revenue as charged expenses have increased from 0.14% to 0.18% in 2015, and another 5-10 bps of fee waiver relief should bring an additional $1.5 billion to $3.0 billion in added (or restored) revenue in 2016. We'll keep you posted on yield and expense levels in the coming days as fund portfolios adjust to the new higher-yielding securities, and as markets begin speculation on when the Fed will next increase rates.

Treasury OFR Releases Financial Stability Report; MMFs Minor Concern

Dec 16 15

The U.S. Treasury's Office of Financial Research released its first annual "Financial Stability Report yesterday, which contains less on money market funds than last year's annual report, but which broadens out its scope to encompass liquidity pools. "Overall, threats to U.S. financial stability remain moderate, in other words, in a medium range, but they edged higher within that range over the past year," says OFR Director Richard Berner in a press release. He adds, "We see elevated and rising credit risks in U.S. nonfinancial business and in emerging‐market economies, the continued reach for yield in a climate of persistently low interest rates, and the uneven resilience of the financial system." Money market funds are cited a number of times in relation to repo, Fed RRP, stress-testing, and data collection.

The 138-page "Financial Stability Report 2015 comments on Repo and RRP. Under "Managing Short-Term Rates," it says, "The bifurcation between GCF repo rates and triparty repo rates is only one aspect of the way that post-crisis changes in money markets may add to the challenge of managing money market rates. This dynamic increases uncertainty about the trajectory for other market rates once the Federal Reserve raises the target range for the policy rate.... Strong demand may depress short-term rates on short-term government securities. The Federal Reserve has indicated that it will expand its reverse repo facility sufficiently to firm up the floor under short-term market rates once policy tightening commences, while avoiding a persistent and too-large footprint from that facility in financial markets that could affect financial stability."

It continues, "In 2013, the Federal Reserve expanded its list of authorized counterparties for its reverse repo operations beyond primary dealers to include selected money market funds, banks, and government-sponsored enterprises. As a result, the Federal Reserve has since become one of the largest repo counterparties for money market funds and its role is likely to remain substantial, subject to the current cap.... Money market fund reform, which requires prime institutional funds to shift to a floating rate net asset value structure, is expected to drive a substantial amount of assets from prime funds to government funds, according to market sources. Given the limited supply of short-term government securities, government money market funds are likely to increase their investments in the Federal Reserve's reverse repo operations."

On "Cash and Liquidity Management in Money Markets," OFR says, "Since the financial crisis, regulators have improved data availability on the management of cash and liquidity in short-term U.S. markets. The SEC introduced Form N-MFP in 2010 to collect data about money market mutual funds after regulators were unable to fully identify and respond to money market fund vulnerabilities during the crisis. Form N-MFP data are designed to analyze the portfolio holdings and risk characteristics of individual money market funds and industry trends."

They add, "The SEC adopted Form PF in 2011 to assess the potential systemic risk presented by large private fund advisors, a group that includes private liquidity funds. The SEC recently finalized amendments to Form PF to align the frequency and granularity of portfolio data required from private liquidity funds with those of money market funds. The change will be effective in April 2016 and will make it possible for the OFR to link the Form PF data with Form N-MFP data. A third dataset, collected by the OCC for banking supervision, requires national banks ... managing short-term investment funds to disclose monthly information about the funds.... The two data sources could be linked together."

The OFR report points out that MMFs are by far the largest cash management vehicle, with $3.0 trillion, followed by: "Parallel Managed Accounts" associated with Liquidity Funds ($359B), Liquidity Funds ($288B), State Banks short-term investment funds ($150B), and National Banks S-T investment funds ($135B). It adds, "At the international level, no European regulator collects granular portfolio holdings data needed for market monitoring. Data for European money market funds, which have about $1.2 trillion of assets under management, would enhance the OFR's analysis of the global allocation of short-term capital."

The report continues, "Form N-MFP data provide high visibility into the repurchase agreement (repo) market even though Form N-MFP was not specifically intended for this purpose. Money market mutual funds are among the most active investors in the repo markets and are required to report granular information on their repo holdings, including names of counterparties and collateral securities. No other financial firms report the same level of detail about repo activities as money market funds do on Form N-MFP."

It adds, "We are exploring linking the SEC's data on money market mutual funds and on private liquidity funds with the OCC's data on short-term investment funds in a prototype Money Market Fund Monitor to produce a more comprehensive analysis that could be shared with other regulators. This linking is made possible by the alignment of these three data sets by the SEC and OCC -- SEC's Form N-MFP, SEC's Form PF, and OCC's data on short-term investment funds."

The report also cites money funds in the section called "Asset Management Stress Tests." It says, "We focus primarily on money market funds, for which the SEC introduced a stress testing requirement in 2010 and an enhanced requirement in 2014.... For money market funds that allow investors to buy and sell shares at a fixed $1 share price, stress testing helps ensure that funds can meet the commitment to redeem shares at a fixed price.... The SEC's 2010 and 2014 rules for stress testing of money market funds require that results be presented to each fund’s board of directors at regular intervals. The rules do not, however, require reporting the results to regulators or the public."

OFR also comments on monitoring private "Liquidity Funds," "Form PF is not only a valuable tool for hedge fund analysis at the OFR, but also for analysis of liquidity funds. These private funds seek to generate income by investing in a portfolio of short-term obligations to maintain a stable net asset value per unit or minimize principal volatility for investors. Unlike money market funds, liquidity funds are available only to accredited investors. Liquidity funds are not subject to regulations imposed by the 1940 Investor Company Act and Rule 2a-7, including restrictions on portfolio maturity, liquidity, and concentration.... Given the recent speculation that institutional investors could move assets from prime money market funds to liquidity funds to avoid SEC amendments on floating NAV and redemption gates and suspensions, these funds will be important to continue to monitor."

The report also states, "A recently published OFR working paper shows evidence that U.S. broker-dealers owned by foreign banks engage in quarter-end "window dressing" of their U.S. triparty repo borrowing, which may help their overseas parent appear safer to foreign regulators. This activity leaves U.S. money market mutual funds with excess uninvested cash in the last days of the quarter. `Since late 2013, this excess cash has been placed into the Federal Reserve Bank of New York's Reverse Repurchase Program each quarter-end, providing money market funds with a de facto deposit account at the Fed, even though they are not banks.... This additional and predictable illiquidity, induced by window dressing, may have systemic implications, including an increased likelihood of fire-sale sell-offs or liquidity spirals."

Finally, OFR mentions a "Money Market Fund Monitor." They write, "To examine further risks in funding and liquidity, for example, we expect to make public our Money Market Fund Monitor, which we previewed at a public meeting of our external advisory committee in February 2015. The monitor employs monthly data provided to the Securities and Exchange Commission on Form N-MFP by money market funds registered under the SEC's Rule 2a7. Using this framework, we can examine portfolio statistics and holdings for individual funds and the industry as a whole on the basis of credit, interest rate, and liquidity risk. Over time, we expect to expand the fund monitor by incorporating aggregate data from non-2a7 funds with similar characteristics."

Outlook Flat for Money Market Supply in 2016 Says JPMorgan Securities

Dec 15 15

JP Morgan Securities recently released its "Short-Term Fixed Income 2016 Outlook," which discusses expectations for money market supply in 2016. They write, "For another year, the short-term markets will have to adapt to the presence of fewer investment opportunities. However, unlike prior years the contraction in supply will not be driven by issuers and their need to de-lever their balance sheets. Instead, it will be driven by investors and their demand for these products, which under MMF reform is expected to decrease materially. Overall, we think total money market supply (excluding Fed ON RRP) will remain flat year-over-year, decreasing by a moderate $48bn. However, credit supply (total ex-Treasuries) could decrease by 3.6% or $170bn." (Note: JPMorgan Securities' Teresa Ho will present the segment on "Instruments of the Money Market" at our upcoming Money Fund University, Jan. 21-22, 2016 in Boston.)

The piece contains a table that shows that "Total Money Market Supply (ex-Fed) at year-end 2015 includes: Dealer Repo ($1.625 trillion), Treasuries ($3.230 trillion), Agencies ($972 billion), Financials ($1.290 trillion, which includes $785B in Yankee CDs and $470B in CP), ABCP ($220 billion), Non-Financial CP ($286 billion), and Bonds <1Yr ($352 billion). For year-end 2016, they estimate these totals to be: Dealer Repo ($1.610 trillion), Treasuries ($3.803 trillion), Agencies ($906 billion), Financials ($1.105 trillion, which includes $700B in Yankee CDs and $355B in CP), ABCP ($200 billion), Non-Financial CP ($315 billion), and Bonds <1Yr ($376 billion). Total supply (ex-Fed) is expected to be $8.315 trillion at the end of 2016 (vs. $7.975 at the end of 2015), the report tells us.

JPM's Outlook takes a closer look at the various sectors, starting with Repo. They write, "Much like this past year, repo will remain a subject of discussion in 2016. The focus, however, will not necessarily be on the reduced level of tri-party repo outstandings. In fact, outstandings in this market have largely stabilized around $1.6tn and we would expect these balances to hold up next year.... As for tri-party repo, MMF reform is expected to significantly increase the demand for Treasury repo.... [I]t's likely that tri-party outstandings next year will remain around its current level of $1.6tn."

JPM continues, "Following the debt ceiling suspension to March 2017 earlier this year, Treasury outstandings are poised to increase fairly substantially in 2016. Much of the growth will be driven by an increase in bill supply, to the tune of $173bn, as Treasury looks to address the lack of liquidity in the bills market.... Treasury's desire to extend the WAM of its debt portfolio has pushed Treasury bill outstandings to a record low of 10% of its total debt.... Treasury has stated that it intends to increase the net supply of bills significantly in 2016.... [T]he additional bill supply is a welcome reprieve following months of reduced net bill issuances. On margin, this should also boost bill yields higher."

On Agencies, they explain, "In 2016, much of the factors that drove discount note outstandings over the course of this past year will likely apply again next year. Across the GSEs, our Agency strategists are projecting discount note outstandings to increase by $5bn year-over-year, with FHLB contributing $25bn of the increase while FNMA and FHLMC each see a decline of $10bn. For FHLB, its growth in the discount note market will continue to be driven by FHLB advances, which we expect will continue to rise next year.... Taken together, FHLB is on pace to represent more than 70% of the discount note market by the end of next year."

The piece tells us, "We estimate outstandings of financial CP/CDs will decrease by $150bn or 12% year-over-year. Central to our estimates is how MMF reform unfolds next year. The prospect of a mass cash exodus out of prime MMFs creates material challenges for bank issuers to continue to fund in the money markets. As of October month-end, roughly 45% of prime assets (or $631bn) is invested in bank CP/CDs. As a percentage of the market, MMFs fund about half of the total US CP/CD market. In 2016, our expectation is that an additional $450-$500bn (not including sponsor conversions) will exit prime MMFs and make their way to government MMFs as shareholders react to MMF reforms. All else equal, this would imply MMFs could withdraw about $220bn (45% x $500bn) from the bank CP/CD market. That said, monetary policy complicates our outlook.... Government MMFs are constrained in their ability to absorb a significant amount of cash from prime MMFs without an increase to the Fed's ON RRP facility. In such a scenario, the bid for government money market assets such as bills, discount notes and repo could be so intense that even as the Fed normalizes interest rates, yields on government assets could remain suppressed."

It continues, "Why does this matter? For some MMF shareholders, there is a level, and we don't know what that level is, that they might feel compelled to stay in prime MMFs provided they feel they are being sufficiently compensated for the risk of investing in a prime MMF over a government MMF.... On net, we are inclined to think bank CP/CD balances will move lower by $150bn next year, driven largely by the sizable outflows that are expected to take place to prime MMFs but offset by some of the other moving parts related to rates and other liquidity alternatives."

JPM also comments, "Similar to bank CP/CDs, ABCP will be subject to the same market forces next year. MMF reform and the potential associated outflows will see overall reduced demand from prime MMFs. The good news is that ABCP issuance tends to be short-dated in nature (roughly 70% of its issuance is in the 1-9 bucket), allowing prime MMFs to use some of these assets for liquidity purposes, softening some of the decline related to MMF reform. As a result, we expect balances to be relatively stable, perhaps falling to $200bn by the end of next year."

They add, "Similar to prior years, we expect balances for non-financial CP to continue to grow, with outstandings likely to surpass the $300bn mark in 2016. Market forces from both the supply and demand side of the market will contribute to its growth, boosting balances to the highest level over the past 15 years.... For prime MMFs that have historically relied on these asset classes for liquidity, going forward they may have to resort to alternatives to fulfill their liquidity requirements. Here is where non-financial CP would be an ideal substitute as most corporates issue CP on a very short-term basis. Additionally, the removal of credit ratings in Rule 2a-7 will likely encourage non-rated prime MMFs and "2a-7 like" investors to invest in more Tier-2 corporate paper, thus contributing to the overall increased demand for the non-financial CP sector."

Finally, regarding the Fed's ON RRP, JPM strategists write, "Following liftoff, the level of the ON RRP rate will be a function of the demand by approved counterparties relative to the available supply of both Fed ON and Term RRP. We expect the Fed to raise the ON RRP target to 25bp from its current offering rate of 5bp. The prospect of this 20bp bump will attract heavy interest from the approved counterparties. Although daily demand for ON RRP this year has averaged just over $100bn per day, we anticipate demand at the new higher rate will be several times this.... [W]e estimate investor demand for ON RRP could reach about $662bn in the weeks after liftoff."

Fed's Z.1: Corps, Sec Lenders Rise; Fitch Updates Ratings Criteria

Dec 14 15

Late last week, the Federal Reserve released its latest quarterly "Z.1 Financial Accounts of the United States for the Third Quarter, 2015" statistical survey (formerly the "Flow of Funds"). The tables it includes on money market mutual funds show that the Household sector remains the largest investor segment, though this segment dropped below the $1 trillion level earlier this year for the first time in a decade. Funding corporations (sec lenders) and nonfinancial corporations showed big gains in the latest quarter and year. We review the latest Z.1 numbers, and we also review Fitch Ratings' latest Criteria Changes to MMF Ratings below.

The Fed's "Table L.206," "Money Market Mutual Fund Shares," shows total assets increasing by $47 billion, or 1.8%, in the 3rd quarter to $2.627 trillion. Over 1 year assets are up $62 billion. The Household sector totals $990 billion -- or 37.7%. These increased by $5 billion in the 3rd quarter (after decreasing $45 billion in Q2), and have decreased by $97 billion the past 12 months. Household assets hadn't fallen below $1 trillion in a decade prior to last quarter, and they remain well below their record level of $1.581 trillion (from year-end 2008).

Nonfinancial corporate businesses were the second largest investor segment, according to the Fed's data series, with $571 billion, or 21.7% of the total. Business assets in money funds increased $10 billion in the quarter and have risen by $52 billion over the past year. Funding corporations, which includes securities lending cash, remained the third largest investor segment with $455 billion, or 17.3% of money fund shares. They increased by $21 billion in the latest quarter and $69 billion over 12 months. Funding corporations held over $906 billion in money funds at the end of 2008.

State and local governments held 6.5% of money fund assets ($171 billion) -- up $2 billion for the quarter. Private pension funds, which held $138 billion (5.2%), remained in 5th place. The Rest of the world category was the sixth largest segment in market share among investor segments with 4.2%, or $111 billion, while Nonfinancial noncorporate businesses held $90 billion (3.4%), State and local government retirement funds held $54 billion (2.0%), Life insurance companies held $29 billion (1.1%), and Property-casualty insurance held $18 billion (0.7%), according to the Fed's Z.1 breakout.

The Fed's "Flow of Funds" Table L.121 shows "Money Market Mutual Funds" largely invested in Debt securities ($1.442 trillion, or 54.9%), which includes: Open market paper ($332 billion, or 12.6%; we assume this is CP), Treasury securities ($385 billion, or 14.6%), Agency and GSE backed securities ($393 billion, or 14.9%), Municipal securities ($257 billion, or 9.8%), and Corporate and foreign bonds ($76 billion, or 2.9%).

Other large holdings positions in the Fed's series include Security repurchase agreements ($681 billion, or 25.9%) and Time and savings deposits ($477 billion, or 18.1%). Money funds also hold minor positions in Foreign deposits ($12 billion, or 0.5%), Miscellaneous assets ($13 billion, or 0.5%), and Checkable deposits and currency ($2 billion, 0.1%).

During Q3, Security Repurchase Agreements (up $45 billion), Agency and GSE-Backed Securities (up $59 billion), and Corporate and foreign bonds (up $9 billion), showed increases. Time and Savings Deposit (down $33 billion), Open Market Paper (down $4 billion), Treasury Securities (down $13 billion), Municipal Securities (down $1 billion), Misc. Assets (down $3 billion), Checkable Deposits and Currency (down $2 billion), and Foreign Deposits (down $10 billion) all showed declines.

In other news, a press release entitled, "Fitch Updates Global Money Market Fund Ratings Criteria," says, "Fitch Ratings has updated its global criteria for rating money market funds (MMFs) and other cash management vehicles, taking into account significant market and regulatory changes affecting the sector. No rating changes are expected. Fund managers may adjust their MMFs following the release of the new criteria and Fitch would expect those changes to be made by end-January 2016."

The Fitch release highlights key changes, explaining, "Changes to criteria include: 1) Clarification that the ratings assigned under these criteria apply to all liquidity management products, including vehicles that are not regulated MMFs.... 2) Emphasizing that these rating criteria are principle-based, focusing on funds' key risks -- credit, liquidity, and market risk -- in a holistic manner. 3) The ability for rated MMFs to engage in repurchase agreements (repo) with counterparties rated 'A-'/'F2' or 'BBB+'/'F2' for maturities of one week or less. Such repos must be 102% over-collateralized by high quality government securities, are subject to 10% counterparty concentration limits, and are limited in the aggregate to 25% of portfolio assets."

Other changes include: "4) Increased weekly liquidity threshold to 30% from 25% for 'AAAmmf' funds. 5) Incorporation of additional liquidity cushions for regulated MMFs that are subject to liquidity metrics triggers for the implementation of liquidity fees and redemption gates. 6) Explicit 10% limit introduced for illiquid securities combined with a 120 maximum maturity limit at the 'AAAmmf' level. 7) Increased maximum maturity for government floating-rate securities to 762 days from 730 days. 8) Reduced maximum maturity for non-government floating-rate securities at 'Ammf' level to 397 days from two years. 9) Simplified approach for a fund's exposure to its affiliates, with maximum maturity set at 45 days. 10) Restricted investments in other MMFs, provided they are rated 'AAAmmf', to 10%."

Further, Fitch writes, "11) Introduced explicit 10% limit for the notional value of derivatives (interest rate and currency) as percentage of total portfolio assets. 12. For currency derivatives, changed current criteria to focus on specific currencies <b:>`_. 13) Introduced limits on exposure to fund manager's affiliates at 'AAmmf' and 'Ammf' levels. 14) Surveillance frequency changed to twice per month from weekly. 15) MMF rating definitions changed to explicitly recognize the conditions under which negative interest rates can be consistent with preservation of principle."

Finally, they add, "The primary focus of this criteria report is on MMFs and other cash management vehicles that seek to achieve principal preservation and provide shareholder liquidity through managing credit, market, and liquidity risks. Under these criteria, MMF ratings can be assigned to those MMFs and liquidity vehicles that operate as constant net asset value (CNAV) funds as well as variable net asset value (VNAV) funds that are managed under the same mandate of safety of principal and timely liquidity and demonstrate NAV stability."

ICI Urges IRS to Exempt VA Government MMFs from Diversification Rule

Dec 11 15

The Investment Company Institute sent a comment letter entitled, "Re: Money Market Fund Reform – Diversification under Section 817(h)," to the Internal Revenue Service last week on how Variable Annuity, or Variable Insurance MMFs may run afoul of IRS diversification rules if they convert to Government money market funds. We learned of the news from mutual fund publication ignites, which covered the letter yesterday in its story, "ICI to IRS: Loosen Up on VA Money Market Regs." Over the past few months, we have heard from 7 VA MMFs with about $6 billion that they plan to convert from Prime to Government due to pending reforms. (For other recent insurance-related News, see Wednesday's, "MetLife Stable Value Study Says Time to Reconsider Money Markets.")

The 8-page ICI letter, addressed to Helen Hubbard, Associate Chief Counsel (Financial Institutions and Products) at the Internal Revenue Service, says, "The Investment Company Institute appreciates the opportunity to have spoken with you and your colleagues on November 5, 2015, regarding the effect of the recently adopted money market fund rules on variable annuity and life insurance products (collectively, "variable insurance products"). As we discussed in our meeting, money market funds that serve as investment vehicles underlying variable insurance products are concerned that the evolving market for U.S. government securities, in light of the new money market fund rules promulgated by the Securities and Exchange Commission ("SEC"), will make it increasingly difficult or impossible for the insurance company segregated asset accounts investing in those funds to satisfy the diversification requirements under section 817(h). As you know, the consequences of failing section 817(h) can be quite dire for the contract holders, insurance companies, and the underlying funds."

Author Karen Lau Gibian, ICI Associate General Counsel, Tax Law, continues, "Given the changing money market fund industry and the expected increased demand for government securities, we ask the Internal Revenue Service ("IRS") to provide a safe harbor under section 817(h) for segregated asset accounts that qualify as, or invest in, "government money market funds," as defined under Rule 2a-7 under the '40 Act. As explained in greater detail below, pursuant to this safe harbor, the IRS would view a segregated asset account investing in a '40 Act-registered fund as adequately diversified under section 817(h)(1) if, among other things: (1) the fund intends to qualify as a government money market fund under SEC Rule 2a-7; (2) the fund manager is authorized to invest in any and all money market fund-eligible government securities, as defined in section 2(a)(16) of the '40 Act; and (3) the fund manager uses its sole discretion to determine in which government securities it will invest."

The letter continues, "Money market funds are a typical investment option in variable insurance products and play a unique role in the functioning and operation of those products. In particular, in addition to serving as a stable very low risk option to which contract owners can allocate a portion of their contract value, they are utilized to process transactions and act as a temporary holding or "parking" place within variable insurance products."

ICI's letter explains, "It is imperative that variable insurance products be able to continue offering as an investment option stable NAV money market funds with no fees or gates.... The only way to continue doing so will be to offer government money market funds, under the recently adopted SEC rules. Given the anticipated increased demand for U.S. government securities, however, it likely will become increasingly difficult or impossible for variable insurance products that seek to qualify as government money market funds to obtain the variety of government securities necessary to satisfy any of the existing diversification tests under section 817(h) and Treas. Reg. S1. 817-5(b). This will have significant impact on the ability of firms to continue to offer these products. It also is likely to have a greater impact on smaller funds than large funds, creating inequities in the industry."

Further, they write, "We thus ask the IRS to issue guidance that would allow variable insurance products to continue to include government money market funds as underlying investment options. Specifically, we urge the IRS to issue a revenue procedure indicating that it will treat a segregated asset account as adequately diversified for purposes of section 817(h).... This revenue procedure would apply only to those variable insurance product funds that are intended to qualify as government money market funds under the SEC rules and would not alter the diversification test under Treas. Reg. S1.817-5(b) for other types of funds."

The ignites story explains, "The Investment Company Institute wants the IRS to provide relief for variable annuity products, loosening restrictions related to diversification requirements for government money market funds included within their investment menus. The concern hinges on requirements that government funds offered through VAs include holdings from at least five issuers in according to certain proportions and the impact on the availability of such products in the face of sweeping industry reform. The ICI notes that there are only five major issuers of government securities in which money funds invest: Treasurys, Federal Home Loan Bank, Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac); and the Federal Farm Credit Bank System (Farmer Mac)."

It adds, "In response, many providers have converted or announced plans to convert prime retail and prime institutional funds, which will be subject to fees and gates, to government products. Crane Data projects that at least $257 billion will move from prime to government money market funds by October 2016." It quotes Joan Ohlbaum Swirsky, counsel at Stradley Ronon, "I understand the hardship.... `Likely, there will be an increased demand for government securities and that might make it difficult for funds to satisfy the test."

As mentioned previously, our running tally of funds planning to convert to Government include 7 Variable Annuity MMFs with about $6 billion in assets. These include: Fidelity VIP MMF, Goldman Sachs VIT MMF, Invesco VI MMF, Dreyfus Variable Investment MMP, Deutsche MM VIP, Nationwide VIT, and Oppenheimer MM VA. To date, we have not heard from VA MMFs from Vanguard, Sunamerica, Transamerica or others, but we'll continue watching filings and announcements.

Dec. Portfolio Holdings: Treasuries Skyrocket; Repo, CD, CP Decline

Dec 10 15

Crane Data released its December Money Fund Portfolio Holdings Wednesday, and our latest collection of taxable money market securities, with data as of Nov. 30, 2015, shows a huge gain in holdings of Treasuries, and declines in Repo, CDs, and CP. Money market securities held by Taxable U.S. money funds overall (those tracked by Crane Data) decreased by $7.8 billion in November to $2.608 trillion. MMF holdings increased by $61.8 billion in October, decreased by $30.1 billion in September, increased by $35.0 billion in August, and increased by $55.0 billion in July. Repos remained the largest portfolio segment, but Treasuries jumped into second place. CDs fell to 3rd place, and Agencies were in fourth with their first decline since July. These sectors remained ahead of Commercial Paper, which was the 5th largest composition segment. Other (mainly Time Deposits) securities were sixth, followed by VRDNs. Money funds' European-affiliated securities represented 25.2% of holdings, down slightly from the previous month's 27.3%. Below, we review our latest Money Fund Portfolio Holdings statistics.

Among all taxable money funds, Repurchase Agreements (repo) decreased $49.9 billion (8.2%) to $558.7 billion, or 21.4% of assets, after decreasing $119.8 billion in October, increasing $172.6 billion in September and decreasing $2.5 billion in August. Treasury holdings spiked $110.2 billion (26.0%) to $534.0 billion, or 20.5% of holdings, after increasing $9.3 billion in October. This is Treasuries' highest level in money fund portfolios since Crane Data began tracking Portfolio Holdings in January 2011. Certificates of Deposit (CDs) were down $36.1 billion (7.3%) to $461.7 billion, or 17.7%, after increasing $15.8 billion in October, dropping $55.3 billion in September and increasing $1.1 billion in August.

Government Agency Debt decreased $3.6 billion to $448.7 billion, or 17.2%, after increasing $34.1 billion in October, $34.5 in September and $29.8 billion in August. It was the first decline in 4 months for Agencies, despite the final stage of conversion of the $115 billion Fidelity Cash Reserves from Prime to Government. Cash Reserves increased its holdings in Agencies by $13.4 billion in its final shift towards becoming Fidelity Govt Cash Reserves (Dec. 1). (Fidelity Cash Reserves held 67% in Agencies as of Nov. 30, up from 56% in Oct., 41% in Sept., 26% in August, and 19% July 31.) Commercial Paper (CP) fell $24.6 billion (6.2%) to $369.9 billion, or 14.2% of assets. Other holdings, primarily Time Deposits, dipped $4.9 billion (2.2%) to $217.6 billion, or 8.3% of assets. VRDNs held by taxable funds increased by $1.0 billion (6.4%) to $17.4 billion (0.7% of assets).

Among Prime money funds, CDs represent just under one-third of holdings at 29.5% (down from 30.8% a month ago), followed by Commercial Paper at 23.7% (down from 24.5%). The CP totals are primarily Financial Company CP (13.7% of total holdings), with Asset-Backed CP making up 5.6% and Other CP (non-financial) making up 4.4%. Prime funds also hold 11.5% in Agencies (up from 11.7%), 6.4% in Treasury Debt (up from 3.7%), 3.5% in Treasury Repo (down from 5.5%), 3.8% in Other Instruments, 4.9% in Other Instruments (Time Deposits), and 5.2% in Other Notes. Prime money fund holdings tracked by Crane Data total $1.565 trillion (down from $1.614 trillion last month), or 60.0% of taxable money fund holdings' total of $2.608 trillion.

Government fund portfolio assets totaled $541 billion, up from $511 billion in November, while Treasury money fund assets totaled $502 billion, up from $491 billion in November. Government money fund portfolios were made up of 49.5% Agency Debt, 18.5% Government Agency Repo, 11.7% Treasury debt, and 19.9% in Treasury Repo. Treasury money funds were comprised of 73.9% Treasury debt, 25.3% in Treasury Repo, and 0.9% in Government agency, repo and investment company shares. Government and Treasury funds combined total $1.043 trillion, or 40.0% of all taxable money fund assets.

European-affiliated holdings fell $55.4 billion in November to $657.8 billion among all taxable funds (and including repos); their share of holdings decreased to 25.2% from 27.3% the previous month. Eurozone-affiliated holdings fell $23.5 billion to $377.1 billion in November; they now account for 14.5% of overall taxable money fund holdings. Asia & Pacific related holdings decreased by $12.7 billion to $289.9 billion (11.1% of the total). Americas related holdings increased $59.9 billion to $1.657 trillion, and now represent 63.5% of holdings.

The overall taxable fund Repo totals were made up of: Treasury Repurchase Agreements, which was down $51.2 billion, or 15.0%, to $290.1 billion, or 11.1% of assets, Government Agency Repurchase Agreements (up $1.1 billion to $192.9 billion, or 7.4% of total holdings), and Other Repurchase Agreements ($75.7 billion, or 2.9% of holdings, up $0.2 billion from last month). The Commercial Paper totals were comprised of Financial Company Commercial Paper (down $9.2 billion to $213.7 billion, or 8.2% of assets), Asset Backed Commercial Paper (down $7.4 billion to $87.1 billion, or 3.3%), and Other Commercial Paper (down $7.9 billion to $69.1 billion, or 2.6%).

The 20 largest Issuers to taxable money market funds as of Nov. 30, 2015, include: the US Treasury ($534.0 billion, or 20.5%), Federal Home Loan Bank ($303.1B, 11.6%), Federal Reserve Bank of New York ($124.7B, 4.8%), Credit Agricole ($73.8B, 2.8%), Wells Fargo ($72.6B, 2.8%), BNP Paribas ($70.8B, 2.7%), Bank of Tokyo-Mitsubishi UFJ Ltd ($63.7B, 2.4%), RBC ($56.8B, 2.2%), Federal Home Loan Mortgage Co. ($55.4B, 2.1%), JP Morgan ($54.6B, 2.1%), Bank of America ($54.2B, 2.1%), Bank of Nova Scotia ($52.8B, 2.0%), Federal Farm Credit Bank ($48.6B, 1.9%), Societe Generale ($46.1B, 1.8%), Credit Suisse ($44.3B, 1.7%), Toronto-Dominion Bank ($42.0B, 1.6%), Bank of Montreal ($40.7B, 1.6%), Federal National Mortgage Association ($38.7B, 1.5%), Sumitomo Mitsui Banking Co ($37.1B, 1.4%), and Natixis ($36.8B, 1.4%).

In the repo space, the Federal Reserve Bank of New York's RPP program issuance (held by MMFs) remained the largest repo program with $124.7B, or 22.3% of money fund repo. The 10 largest Fed Repo positions among MMFs on 11/30 include: Wells Fargo Adv Govt MMkt ($13.2B), JP Morgan US Govt ($8.7B), Fidelity Cash Reserves ($7.9B), Morgan Stanley Inst Lq Gvt ($7.8B), State Street Inst Lq Res ($6.8B), Fidelity Cash Central Fund ($6.3B), Northern Inst Gvt Select ($5.4B), UBS Select Treas ($5.3B), Fidelity Govt Money Market ($5.2B), and Morgan Stanley Inst Liq Trs ($4.7B).

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 ($124.7B, 22.3%), Wells Fargo ($43.3B, 7.7%), Bank of America ($42.6B, 7.6%), BNP Paribas ($41.9B, 7.5%), Societe Generale ($37.1B, 6.6%), Credit Suisse ($33.9B, 6.1%), Credit Agricole ($29.8B, 5.3%), JP Morgan ($26.7B, 4.8%), Citi ($20.8B, 3.7%), and RBC ($19.6B, 3.5%).

The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: Bank of Tokyo-Mitsubishi UFJ Ltd ($49.7B, 5.3%), Credit Agricole ($44.1B, 4.7%), RBC ($37.2B, 4.0%), Sumitomo Mitsui Banking Co ($37.1B, 3.9%), DnB NOR Bank ASA ($34.5B, 3.7%), Skandinaviska Enskilda Banken AB ($34.3B, 3.7%), Bank of Nova Scotia ($34.1B, 3.6%), Bank of Montreal ($32.9B, 3.5%), Toronto-Dominion Bank ($29.8B, 3.2%), and Wells Fargo ($29.3B, 3.1%).

The 10 largest CD issuers include: Bank of Tokyo-Mitsubishi UFJ Ltd ($33.3B, 7.3%), Bank of Montreal ($29.9B, 6.5%), Toronto-Dominion Bank ($27.8B, 6.1%), Sumitomo Mitsui Banking Co ($27.1B, 5.9%), Wells Fargo ($22.7B, 5.0%), Bank of Nova Scotia ($22.2B, 4.8%), Canadian Imperial Bank of Commerce ($21.8B, 4.8%), RBC ($20.3B, 4.4%), Sumitomo Mitsui Trust Bank ($18.8B, 4.1%), and Mizuho Corporate Bank Ltd ($18.3B, 4.0%).

The 10 largest CP issuers (we include affiliated ABCP programs) include: JP Morgan ($20.9B, 6.7%), Commonwealth Bank of Australia ($17.6B, 5.6%), BNP Paribas ($16.7B, 5.3%), Westpac Banking Co ($15.6B, 5.0%), RBC ($13.3B, 4.2%), Bank of Tokyo-Mitsubishi UFJ Ltd ($11.8B, 3.8%), Bank of Nova Scotia ($10.7B, 3.4%), HSBC ($10.4B, 3.3%), Australia & New Zealand Banking Group Ltd ($10.2B, 3.3%), and Credit Agricole ($10.2B, 3.3%).

The largest increases among Issuers include: US Treasury (up $110.2B to $534.0B), Bank of Montreal (up $10.6B to $40.7B), Canadian Imperial Bank of Commerce (up $7.6B to $26.8B), ING Bank (up $2.7B to $24.3B), DZ Bank AG (up $2.6B to $10.6B), Lloyds Banking Group (up $2.6B to $13.7B), Societe Generale (up $2.3B to $46.1B), Bank of America (up $2.0B to $54.2B), KBC Group NV (up $1.7B to $10.6B), and Sumitomo Mitsui Trust Bank (up $1.5B to $22.1B).

The largest decreases among Issuers of money market securities (including Repo) in November were shown by: Federal Reserve Bank of New York (down $49.8B to $124.7B), DnB NOR Bank ASA (down $10.9B to $34.5B), Credit Suisse (down $10.7B to $44.3B), Wells Fargo (down $9.3B to $72.6B), Sumitomo Mitsui Banking Co. (down $6.5B to $37.1B), Federal National Mortgage Association (down $5.2B to $38.7B), JP Morgan (down $5.0B to $54.6B), Credit Agricole (down $4.6B to $73.8B), Natixis (down $4.2B to $36.8B) and Swedbank AB (down $4.1B to $22.8B).

The United States remained the largest segment of country-affiliations; it represents 54.3% of holdings, or $1.417 trillion (up $42.0B). France remained in second (10.0%, $261.8B), remaining ahead of third place Canada (9.1%, $237.6B) and fourth place Japan (7.1%, $184.2B). Sweden (3.9%, $101.1B) remained in fifth, followed by the United Kingdom (3.3%, $86.3B) in sixth and Australia (3.1%, $81.1B) in seventh. The Netherlands (2.3%, $60.5B) moved ahead of Switzerland (2.1%, $55.9B), and Germany (1.6%, $41.0B) ranked No. 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 Nov. 30, 2015, Taxable money funds held 29.8% (down from 30.7%) of their assets in securities maturing Overnight, and another 12.0% maturing in 2-7 days (down from 12.9%). Thus, 41.8% in total matures in 1-7 days. Another 22.2% matures in 8-30 days, while 13.9% matures in 31-60 days. Note that over three-quarters, or 77.8% 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 10.6% of taxable securities, while 9.8% 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 Wednesday, and our MFI International "offshore" Portfolio Holdings and Tax Exempt MF Holdings will be released late 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.

MetLife Stable Value Study Says Time to Reconsider Money Markets

Dec 09 15

MetLife released a "2015 Stable Value Study," which surveyed retirement plan sponsors, stable value fund providers and investment advisors, who, unsurprisingly, predicted that stable value funds will take market share from money market funds in the coming years. The study's introduction explains, "Stable value funds have played an important role in defined contribution (DC) plans for many years, and we believe that they have an equally important -- if not greater -- role to play in the years ahead. Stable value is the most widely used safe option by asset volume." (ICI's last study on "401(k) Plan Asset Allocation" shows that among the approximately 53 million workers with $4.2 trillion in these retirement plans, about 7% ($294 billion) is in GICs and Stable Value funds and about 3% ($126 billion) is in money market funds.)

The MetLife study claims, "Stable value offers significantly higher returns than alternatives in the capital preservation space, with less risk. It is this combination that makes stable value options popular among plan participants. Most DC plans offer a stable value option. Industry estimates of the percentage of DC assets allocated to stable value range from 17 to 37 percent. According to the Stable Value Investment Association (SVIA), over $700 billion is allocated to stable value options."

It continues, "New in this year's study are comparisons to the other main capital preservation option, money market funds, with special attention to why one is chosen over the other. The survey explores familiarity with recent regulatory and legal cases applicable to money market funds as plan options. It also examines the degree of awareness of how stable value performance compares to money market performance, and how the performance of each compares to the rate of inflation. Finally, it assesses the extent to which plan sponsors and their advisors are reconsidering the appropriateness of money market as a capital preservation option, and it looks at emerging uses of stable value in the DC space."

The study's "Principal Findings" include: Most plan sponsors (82%) surveyed for this study currently offer stable value funds as an option within their DC plans. Close to half of plan sponsors (45%) have both stable value and money market funds in their lineup, while relatively few plan sponsors (18%) offer money market but not stable value funds; and, Small plans with fewer than 100 plan participants are more likely than larger plans to offer money market (76% vs. 58%) either as a stand-alone option or alongside stable value."

MetLife's press release, entitled, "Stable Value Increasingly Recognized as a More Attractive Capital Preservation Option for Defined Contribution Plans," says, "A vast majority (82%) of defined contribution (DC) plan sponsors who are familiar with the U.S. Securities & Exchange Commission's (SEC) amendments to the rules governing money market funds (MMF) feel that stable value is a more attractive capital preservation option for plan participants, according to MetLife's 2015 Stable Value Study, released today. Additionally, most stable value fund providers and advisors -- interviewed for the study and familiar with MMF reforms -- predict that the use of money market funds in defined contribution plans will decline over the next few years."

It tells us, "The leading reason that plan sponsors give for offering stable value is to provide a capital preservation option (65%); guaranteed rate of return (50%); and, better returns compared to money market and other capital preservation options (49%). Among plans with more than 100 participants that added stable value in the past two years, 77% offer stable value because it offers better returns than money market and other capital preservation options, up significantly from 38% in the MetLife 2013 Stable Value Study."

Thomas Schuster, VP and head of Stable Value and Investment Products with MetLife, comments, "Stable value has a 40-year track record of performing exceptionally well -- no matter what the market conditions. Educating plan sponsors and participants about the advantages of stable value will not only help move plan assets to stable value, but will also help retain assets in qualified retirement plans, offering participants enhanced retirement income security."

MetLife says, "When it comes to stable value's performance against money market funds, the Study found that almost half of sponsors (47%) are unaware that stable value returns have outperformed money market returns: 22% believe that stable value and money market returns have been about equal and 21% don't know how the returns compare. Additionally, 4% actually believe that money market funds have performed better than stable value over this time period."

Warren Howe, national director of Stable Value Markets for MetLife, states, "Two rounds of reforms have reduced money market's expected returns and made them less customer friendly. The reforms have also highlighted the fact that money market funds are designed for general retail use. In contrast, stable value funds, which are designed specifically for employer-sponsored plans, are uniquely structured to maximize returns while preserving principal."

Finally, the release adds, "To conduct the research, MetLife engaged Greenwald & Associates and Asset International, Inc., publishers of PLANSPONSOR and PLANADVISER magazines. Three separate studies were conducted -- an online survey of 205 plan sponsors conducted in June 2015, as well as in-depth phone interviews with 20 stable value fund providers and nine advisors during July 14 to August 28, 2015. Assets under management for plans included in the study ranged from under $10 million to $2.5 billion or more."

Fidelity, Wells, Goldman Gain in Nov.; Federated Absorbs Huntington

Dec 08 15

Crane Data's latest Money Fund Intelligence XLS, which includes a market share ranking of managers of money market mutual funds in the U.S., was sent out to shareholders yesterday. The December edition, with data as of Nov. 30, 2015, shows asset increases for just over half of the largest US money fund complexes in the latest month and increases for most complexes over the past 3 months. Assets increased by just $3.5 billion overall, or 0.1%, in November; over the last 3 months, assets are up $50.2 billion, or 1.9%. For the past 12 months through Nov. 30, total assets are up $80.7 billion, or 3.2%. Below, we review the latest market share changes and figures, and we also quote from a Federated press release, which completed the acquisition of Huntington's money fund assets.

The biggest gainers in November were Fidelity, Wells Fargo, Goldman Sachs, Morgan Stanley, SSgA, and Northern, rising by $9.9 billion, $9.1B, $8.0B, $2.7B, $2.4B, and $2.0 billion, respectively. Wells Fargo, Fidelity, SSgA, Western, and BlackRock had the largest increases over the 3 months through Nov. 30, 2015, rising by $22.4 billion, $14.4B, $14.1B, $3.9B, and $3.5B, 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.)

Over the past year through Nov. 30, 2015, Fidelity showed the largest asset increase (up $26.1B, or 6.4%), followed by Morgan Stanley (up $20.7B, or 19.4%), Wells Fargo (up $15.6B, or 13.5%), SSgA (up $14.0B, or 17.5%), and Goldman (up $8.6B, or 5.9%). Other asset gainers for the year include: BlackRock (up $6.7B, or 3.2%), Vanguard (up $4.9B, or 2.8%), Northern (up $4.1B, 5.2%), Franklin (up $3.8B, 19.4%), and Western ($3.7B, 8.5%). The biggest decliners over 12 months include: Invesco (down $6.1B, or -10.0%), Dreyfus (down $4.2B, or -2.5%), BofA (down $2.7B, or -5.4%), RBC (down $2.3B, or -13.0%), and Schwab (down $1.9B, or -1.2%). (Note that money fund assets are volatile month to month.)

Our latest domestic U.S. money fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $431.5 billion, or 16.4% of all assets (up $9.9 billion in November, up $14.4B over 3 mos., and up $26.1B over 12 months). Fidelity was followed by JPMorgan with $249.1 billion, or 9.4% market share (down $13.1B, down $8.1B, and up $968M for the past 1-month, 3-mos. and 12-mos., respectively). BlackRock remained the third largest MMF manager with $215.7 billion, or 8.2% of assets (down $9.7B, up $3.5B, and up $6.7B). (BlackRock should become the 2nd largest manager once it acquires BofA's approximately $47.9B in money market fund assets around April 2016; see our Nov. 3 News, "BlackRock Taking Over BofA MMFs in One of Biggest Acquisitions Ever.") Federated Investors was fourth with $204.7 billion, or 7.8% of assets (down $3.3B, down $581M, and down $419M). Vanguard remained in fifth place with $177.2 billion, or 6.7%, (down $14M, up $2.6B, and up $4.9B).

The sixth through tenth largest U.S. managers include: Dreyfus ($162.0B, or 6.1%), Schwab ($159.9B, 6.1%), Goldman Sachs ($154.3B, or 5.8%), Wells Fargo ($130.8B, or 5.0%) and Morgan Stanley ($127.6B, or 4.8%). The eleventh through twentieth largest U.S. money fund managers (in order) include: SSgA ($93.8B, or 3.6%), Northern ($82.9B, or 3.1%), Invesco ($54.7B, or 2.1%), BofA ($47.9B, or 1.8%), Western Asset ($47.4B, or 1.8%), First American ($40.7B, or 1.5%), UBS ($36.3B, or 1.4%), Deutsche ($33.4B, or 1.3%), Franklin ($23.7B, or 0.9%), and American Funds ($15.6B, or 0.6%), which displaced RBC from the top 20. Crane Data currently tracks 66 U.S. MMF managers, one less than last month. (Huntington exited the space; see the Federated press release below.)

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 Wells Fargo moving to 10, dropping SSgA to 12 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 ($438.0 billion), JPMorgan ($380.6 billion), BlackRock ($318.2 billion), Goldman Sachs ($243.8 billion), and Federated ($212.9 billion).

Dreyfus/BNY Mellon ($188.9B), Vanguard ($177.2B), Schwab ($159.9B), Morgan Stanley ($147.7B), and Wells Fargo ($131.7B) round out the top 10. As previously mentioned, Wells Fargo moved up from 12 to 10, displacing SSgA, which dropped to 12, and moving ahead of Western, which remained in 11. These totals include offshore US Dollar money funds, as well as Euro and Pound Sterling (GBP) funds converted into US dollar totals.

Finally, our December 2015 Money Fund Intelligence and MFI XLS show that both net and gross yields ticked up November. The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 817), rose one basis point to 0.03% for the 7-Day Yield (annualized, net) Average. The 30-Day Yield remained at 0.02%. The Gross 7-Day Yield and 30-Day Yield were 0.18% (the same as last month). Our Crane 100 Money Fund Index shows an average 7-Day and 30-Day Yield of 0.05%, the same level as in October. Also, our Crane 100 shows a Gross 7-Day and 30-Day Yield of 0.22% (up one bps). For the 12 month return through 11/30/15, our Crane MF Average returned 0.02% and our Crane 100 returned 0.04%. The number of funds dropped to 817, from 820 last month.

Our Prime Institutional MF Index (7-day) yielded 0.07% (up 1 bps), while the Crane Govt Inst Index was at 0.02% (unchanged). The Crane Treasury Inst, Treasury Retail, 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 0.27% (up from 0.26% last month), Govt Inst 0.14% (up 1 bps), Treasury Inst 0.10% (up 1 bps), and Tax Exempt 0.08% (down 1 bps) in November. The Crane 100 MF Index returned on average 0.00% for 1-month, 0.01% for 3-month, 0.03% for YTD, 0.04% for 1-year, 0.03% for 3-years (annualized), 0.04% for 5-year, and 1.29% for 10-years. (Contact us if you'd like to see our latest MFI XLS, Crane Indexes file or market share numbers.)

In other news, a press release issued late yesterday entitled, "Federated Investors, Inc. Completes Transition of Assets into Federated Money Market Funds," says, "Federated Investors, Inc., one of the nation's largest investment managers, completed the acquisition of certain assets of Huntington Asset Advisors, Inc. relating to its management of two money market funds. In connection with the acquisition, approximately $930 million in Huntington money market assets transitioned to Federated money markets funds with similar investment objectives and strategies, including through the orderly liquidation of Huntington Money Market Fund on Nov. 20, 2015 and the reorganization of Huntington U.S. Treasury Money Market Fund into Federated Treasury Obligations Fund effective as of the close of business on Dec. 4, 2015."

Joe Machi, director of alliances at Federated, comments, "Many different types of organizations turn to Federated, a leading provider of liquidity management products and services, as they evaluate their cash-management needs. We will continue to consider and evaluate alliance and acquisition opportunities with asset managers, banks, insurers and broker/dealers in the United States and around the world."

Finally, the release adds, "Federated Investors is a leading provider of cash management products and solutions for banks and other financial institutions, and has more than 40 years of experience in institutional cash management. Federated is uniquely positioned to work with these organizations as they navigate the increasingly complex array of choices for cash management."

Dec. MFI: Asset Flat in '15, Prime Exodus; BlackRock's Henderson, T-E

Dec 07 15

The December issue of our flagship Money Fund Intelligence newsletter, which was sent to subscribers Monday morning, features the articles: "Assets Flat 4th Year in a Row; Prime Exodus Begins, Lineups," which says MMF assets are flat again in 2015 and discusses the latest Prime to Govt moves; "BlackRock's Henderson & Erbeck on Tax-Exempt MMFs," where we interview BlackRock's Muni money market team; and "Tax Exempt MFs Hit by Ultra-Low Yields; Will Any Go Inst?," which reviews recent trends in the municipal money market. We have also updated our Money Fund Wisdom database query system with Nov. 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 December Money Fund Portfolio Holdings are scheduled to ship Wednesday, December 9, and our December Bond Fund Intelligence is scheduled to go out Monday, December 14.

MFI's lead "Assets Flat 4th Year" article says, "As the year winds down, money fund assets continue their second half rebound. For the fourth year in a row, MMFs fell by about 5% in the first half of the year, then recovered all of the deficit to end the year slightly positive. Assets are now flat YTD in 2015. Meanwhile, changes continue as more managers announce lineup tweaks and assignments, and a major chunk of assets shifts from Prime to Government. We review 2015 and the latest reform-related moves below."

It continues, "Following a surge in October, money fund assets inched higher in November, up $3.5 billion. Assets have increased in 9 out of the last 11 weeks, hitting their highest levels of 2015. Below, we show assets over the past 5 years, and on page 2 we show historical MMF asset levels. Overall, assets have increased in five of the last 6 months. The only month that showed a decline was September, when assets were down $5.1 billion. Assets are currently at their highest levels of 2015 and appear poised to move higher in December, particularly if the Federal Reserve raises interest rates at its Dec. 15-16 FOMC meeting, as expected."

Our latest MFI "profile," reads, "This month, Money Fund Intelligence interviews BlackRock’s William Henderson, Managing Director & Lead Portfolio Manager on the Municipal Liquidity Portfolio Team, and Jack Erbeck, Managing Director & Municipal Credit Analyst. BlackRock manages about $9.2 billion in Tax-Exempt money fund assets, including the $2.5 billion BIF Tax Exempt MF and the $1.4 billion BlackRock MuniFund. (BlackRock is also poised to almost double its Tax-Exempt MMF assets once it acquires BofA’s cash business in April 2016.) Henderson has been running Tax-Exempt money funds for BlackRock since 1993, and Erbeck has been a credit analyst supporting Tax-Exempt funds since 1999. We discuss recent events in the Tax-Exempt or Municipal money markets below."

We ask, "MFI: How long has BlackRock been running Tax-Exempt cash? Henderson: Our flagship Tax Exempt money market fund, the BlackRock Muni Fund, began operations in 1980. We have a variety of Tax-Exempt funds -- the BlackRock Liquidity Funds, the BlackRock Institutional Funds, and the BlackRock retail funds. They are all managed here in Princeton, where we conduct tax-exempt fund portfolio management and credit research. It’s all part of Blackrock’s $110 billion municipal platform. MFI: What is your biggest priority currently? Henderson: My number one priority is to keep the client and fiduciary responsibility front-and-center for the team."

The "Tax-Exempt MMF" article says, "While Taxable money fund assets have held steady the past 5 years, Tax Exempt MMFs have not fared as well. Tax-Exempt MMFs total $244.6 billion, down almost 50% from Dec. 2008 when the zero yield environment began, and down 23% over the past 5 years. (Assets peaked at over $500 billion in Aug. 2008.) We briefly review this sector below, and we discuss recent designations fund companies have made in the Tax-Exempt space. Also, though taxable MMFs have seen some relief of late, yields in the Municipal money markets continue making record lows. Crane’s Tax Exempt MF Index remains at 0.01%, down from 0.91% at year-end 2008."

We also review the month's lineup change announcements in a sidebar entitled, "Managers Firm Up Lineups." It says, "BlackRock, Federated, Dreyfus, and Invesco all made announcements recently that provide a clearer picture of how their money fund lineups will look after MMF reforms take effect in October 2016. Federated further laid out its Institutional offerings, designating four -- Federated Money Market Management, Prime Obligations, Prime Value Obligations, and Tax-Free Trust."

Our December MFI XLS, with Nov. 30, 2015, data, shows total assets increasing $3.5 billion in November after increasing $56.5 billion in October, declining by $9.4 billion in September, rising $7.2 billion in August, and jumping $52.4 billion in July. YTD, MMF assets are flat, down by just $8.4 billion, or 0.3% (through 11/30/15). Our broad Crane Money Fund Average 7-Day Yield rose by one bps to 0.03%, while our Crane 100 Money Fund Index (the 100 largest taxable funds) remained at 0.05% (7-day).

On a Gross Yield Basis (before expenses were taken out), funds averaged 0.18% (Crane MFA, same as last month) and 0.22% (Crane 100, up one bps). Charged Expenses averaged 0.16% (up one bps) and 0.17% (unchanged) for the two main taxable averages. The average WAMs (weighted average maturities) for the Crane MFA was 33 days (down 3 days 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.)

Fitch Gives MMFs Stable Outlook for 2016; SandP Sees Shifting Sands

Dec 04 15

Both Fitch Ratings and Standard & Poor's Ratings Agency released 2016 outlooks for triple-A rated money funds and the U.S. and global money market mutual fund sectors this week. Fitch gives the money market fund industry a "Stable" rating for 2016 in its new "2016 Outlook: Money Market Funds." The press release, entitled, "Consolidation, Shift to Alternatives, Divergent Rate Paths Key Themes for Money Funds in 2016," explains, "Fitch Ratings says money fund managers' active management of credit, market and liquidity risks underpins its stable outlook for the sector. However, the sector faces several headwinds, including low or negative yields, constrained investment supply, and the impact of regulatory reform globally." We review Fitch's outlook, as well as the new Standard and Poor's publication, entitled, "Identifying The Shifting Sands For Money Market Funds In 2016," below.

Fitch's release explains, "Fund managers in the US are repositioning cash management offerings ahead of the implementation of money fund reform. Fitch expects alternative liquidity products to grow as well as a shift to government assets, as investors reassess floating NAV US prime money funds. In Europe, discussions on money fund regulation continue, although the final form and timing are not settled. Fitch expects further consolidation of money funds and asset managers active in that space in 2016 driven by the cost of reform implementation and sustained low yields. The low yield environment is particularly acute for euro money funds, even as investors are beginning to accept negative euro money funds yields due to the lack of alternatives."

They write, "A shift of assets from prime funds to government funds is likely, as many investors dislike the new floating NAV and fees and gates features of prime funds. In many cases fund managers are converting funds from prime to government to pre-empt potentially disruptive investor redemptions and the operational challenges of the new features. So far USD240bn of prime fund assets are slated to convert to government assets, or 15% of the USD1.6trn in total prime funds' assets at end-September 2015. Investors may shift cash out of prime funds in the first or second quarter of 2016, but so far there have been no significant flows."

Further, it says, "Market participants expect interest rate paths divergence in the US/UK versus the Eurozone. Money funds will shorten their duration in anticipation of their expectations of the Federal Reserve and the Bank of England to start raising rates in late 2015 and 2016, respectively. The European Central Bank continues to ease monetary policy, forcing euro funds to contend with negative yields. Credit quality for the banking sector is stabilising as Fitch has completed its review of sovereign support assumptions in most European, Swiss, US and Canadian bank ratings to reflect newly-adopted bank resolution regimes. Banks will remain an important segment of eligible issuers for money funds, albeit declining in portfolios' allocation as Basel III rules discourage banks from obtaining short-term funding."

The piece adds, "Fitch believes money funds will pursue further reallocation towards securities issued by sovereigns, supranationals and government agencies (SSA), non-financial corporates or, in the case of large US money funds, the Fed's reverse repo programme. The expected flows into government money funds in the US will pose a challenge as the available supply and yields on government assets remain low. The USD4.6trn of global money fund assets predominantly reside in the US and Europe; however, money fund products are growing in other markets, most notably in China, which now comprises 8.5% of global money fund assets."

S&P's report says, "Years ago, the advantage of operating in the short-term, money market fund (MMF) industry was that negative events could be fleeting. A credit event or change in monetary policy would seemingly hit the short-duration markets quicker than expected and then was gone, sometimes leaving a mark but generally not staying long enough to cause permanent pain. In the past several years, we've seen significant changes in the MMF industry. Prior to 2007, most MMFs and local government investment pools had sporadic fire drills. They made the occasional misstep, an inverse floater here, a toggle bond there, and even, perhaps, a funding agreement lurking behind a closed door. But these are different times. Shifts in the operating conditions for MMFs seem to have more staying power and certainly are proving to shape the industry more than ever before."

It continues, "Indeed, in Standard & Poor's Ratings Services' opinion, 2016 promises to be an eventful year for short-duration investors. Some of the industrywide issues, such as implementation of regulatory reform, may cause a shudder of dread, while others promise some hope -- such as a possible U.S. interest rate hike in the near term. We expect such issues as liquidity, fee waivers, and looming credit events to not only keep investment managers on their toes, but to also make the upcoming year a memorable one for the industry. Each of these could pressure how these funds operate, and while managers in this space have historically shown an ability to properly balance themselves in the midst of shifting sands, that's not to say that will be the case this time."

Finally, in a section entitled, "Saying Goodbye To Fee Waivers," S&P comments, "After nearly a decade of coping with low rates of return, there appears to be a light at the end of the tunnel. After years of waiving fees and adjusting expense ratios so that their MMFs return something, anything, to shareholders, U.S. MMFs are finally seeing some movement in longer-term rates, buttressing their hopes for growth in gross yields. Certainly, the rise in gross returns is nothing dramatic, but when discussing the difference between 1 basis point and 3 basis points, well, everything is truly relative. If nothing else, it is providing a ray of hope to what has otherwise been a dreary operating environment. The number of firms over the past decade waiving a portion of their fees had risen to the point that by 2011, it was virtually 100% of those operating government institutional, prime institutional, and tax-free MMFs."

SEC Statistics Show MMFs in the Black YTD; Yellen Gets Ready on Rates

Dec 03 15

The SEC released its latest "Money Market Fund Statistics" report, which like ICI's latest "Trends in Mutual Fund Investing" (see our Nov. 27 News) and our November Money Fund Intelligence XLS, shows big asset gains for the month of October. (Money fund assets continued inching higher in November too.) The $62.3 billion increase in October actually pushes money fund assets into the black year-to-date in 2015. The report, produced by the SEC's Division of Investment Management, summarizes monthly Form N-MFP data and includes totals on assets, yields, liquidity, WAM, WAL, holdings, and other money market fund trends. We also review Federal Reserve Chair Janet Yellen's speech yesterday on "The Economic Outlook and Monetary Policy," where she appears to set the groundwork for a hike in short-term interest rates at the FOMC’s Dec. 16 meeting.

Total money market fund assets stood at $3.086 trillion overall at the end of October, up $62.3 billion (after falling $2.6 billion in September), according to the SEC's broad total. (This series includes many private and internal funds not reported to ICI, Crane Data or other reporting agencies.) Of the $3.086 trillion in assets, $1.791 trillion was in Prime funds (58.0% of assets, up $42.6B from September 30), $1.041T was in Government/Treasury funds (33.7% of the total, up $18.4B), and $254.0 billion was in Tax-Exempt funds (8.2% of all assets; up $1.3B).

Total assets are now up $5.3 billion year to date through October 30. Prime assets are up $18.5 billion year-to-date, while Government/Treasury MMF assets are up $3.0 billion year-to-date. Tax exempt assets are down $16.2 billion year-to-date. The number of money funds was 518, down 3 from last month and down 35 from a year ago.

The Weighted Average Gross 7-Day Yield for Prime Funds on October 30 was 0.25% (down from 0.26% the previous month), 0.12% for Government/Treasury funds (unchanged), and 0.07% for Tax-Exempt funds (unchanged). The Weighted Average Net Prime Yield was 0.09% (unchanged). The Weighted Average Prime Expense Ratio was 0.16% (down 1 basis point from the previous month). Gross yields for Prime MMFs are up 5 basis points YTD (to 0.25%); expense ratios for Prime MMFs are up 1 bp YTD (to 0.16%); and net yields for Prime MMFs are up 4 bps YTD (to 0.09%).

The Weighted Average Life, or WAL, was 70.1 days (up 3 days from last month) for Prime funds, 88.8 days (up 6 days) for Government/Treasury funds, and 34.3 days (up 0.3 days) for Tax Exempt funds. The Weighted Average Maturity, or WAM, was 35.8 days (up 3.8 days from the previous month) for Prime funds, 40.4 days (up 2.4 days) for Govt/Treasury funds, and 32.1 days (up 0.3 days) for Tax-Exempt funds. Total Daily Liquidity for Prime funds was 27.5% in October (up 3.2% from last month). Total Weekly Liquidity was 41.7% (down 0.5%).

In the SEC's "Prime MMF Holdings of Bank Related Securities by Country" table, Canada topped the list with $188.6 billion, followed by France with $188.0 billion, and the US at $186.6 billion. Japan was fourth with $179.0 billion, followed by Sweden ($113.6B), Australia/New Zealand ($89.6B), the UK ($73.7B), and The Netherlands ($53.5B). Norway ($48.5B) and Germany ($46.7B) round out the top 10.

The biggest gainers for the month were France (up $71.6B), Norway (up $41.6B), Sweden (up $29.9B), Aust/NZ (up $10.0B), Belgium (up $7.9B), Japan (up $4.3B), the US (up $3.3B), and Switzerland (up $2.5B). The biggest drops came from Canada (down $17.9B), The Netherlands (down $2.7B), Germany (down $1.7B), Singapore (down $529M), and Spain (down $234M). For Prime MMF Holdings of Bank-Related Securities by Major Region, Europe had $586.6 billion (up from $425.6B from last month), while its subset, the Eurozone, had $302.1 billion (up from $226.8B). The Americas had $377.8 billion (down from $392.8B), while Asia and Pacific had $294.2 billion (down from $279.0B).

Of the $1.785 trillion in Prime MMF Portfolios as of October 30, $536.4B was in CDs (up from $518.8B), $482.5B was in Government (including direct and repo) (down from $567.6B), $423.5B was held in Non-Financial CP and Other Short term Securities (up from $318.2B), $244.7B was in Financial Company CP (up from $231.5B), and $97.9B was in ABCP (down from $98.3B). Also, the Proportion of Non-Government Securities in All Taxable Funds was 46.3% at month-end, up from 42.4%. All MMF Repo with Federal Reserve was $188.4 billion on October 31, down from $414.4B. Finally, the Trend in Longer Maturity Securities in Prime MMFs said 42.6% were in maturities of 60 days and over (up from 38.3%), while 8.6% were in maturities of 180 days and over (down from 8.8%).

In her speech yesterday, Yellen discussed monetary policy and the prospect of raising interest rates. She says, "Reflecting progress toward the Committee's objectives, many FOMC participants indicated in September that they anticipated, in light of their economic forecasts at the time, that it would be appropriate to raise the target range for the federal funds rate by the end of this year. Some participants projected that it would be appropriate to wait until later to raise the target funds rate range, but all agreed that the timing of a rate increase would depend on what the incoming data tell us about the economic outlook and the associated risks to that outlook.... As I have already noted, I currently judge that U.S. economic growth is likely to be sufficient over the next year or two to result in further improvement in the labor market. Ongoing gains in the labor market, coupled with my judgment that longer-term inflation expectations remain reasonably well anchored, serve to bolster my confidence in a return of inflation to 2 percent as the disinflationary effects of declines in energy and import prices wane."

Yellen continues, "However, we must also take into account the well-documented lags in the effects of monetary policy. Were the FOMC to delay the start of policy normalization for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession. Moreover, holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and thus undermine financial stability."

She adds, "As you know, there has been considerable focus on the first increase in the federal funds rate after nearly seven years in which that rate has been at its effective lower bound. We have tried to be as clear as possible about the considerations that will affect that decision. Of course, even after the initial increase in the federal funds rate, monetary policy will remain accommodative."

Finally, Yellen concludes, "And it bears emphasizing that what matters for the economic outlook are the public's expectations concerning the path of the federal funds rate over time: It is those expectations that affect financial conditions and thereby influence spending and investment decisions. In this regard, the Committee anticipates that even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.... The economy has come a long way toward the FOMC's objectives of maximum employment and price stability."

FT Says Lux Blocking European MF Reforms; MFI Intl Update, Holdings

Dec 02 15

This past weekend, the Financial Times wrote about delays in passing European money market fund reforms in the article, "Luxembourg 'blocking' money market reform." Luxembourg, a major European money fund domicile, currently has the EU parliament Presidency, and reforms have been stalled for months over onerous proposals similar to ones rejected by the U.S. S.E.C. in 2014. (See our Sept. 23 News, "European Money Fund Symposium: Kooy, Lardner Push Viable Solutions.") Year-to-date through 11/30, European money fund assets (365 funds) are down $59.4 billion, or 7.9%, to $695.3 billion combined USD, Euro and Sterling assets), according to our Money Fund Intelligence International, though assets are up in the latest month and quarter. We review the latest on European money fund reforms, assets and yields, and recap our latest MFI International Money Fund Portfolio Holdings report below.

The FT article says, "Luxembourg has been accused of blocking the reform of Europe's $700bn money market fund industry, with critics claiming the country is putting its own interests first. Luxembourg took over the EU presidency in July, but little progress has since been made on reforming money market funds, which are used by companies and investors to park cash. The reforms are being proposed to avoid investor runs in a crisis, but industry figures say the changes would be detrimental to Luxembourg's money market fund sector."

The piece quotes Eva Joly, an MEP and spokesperson for the Green party, "The Luxembourgish presidency seems to be blocking the [money market fund] reform. Luxembourg does not want to move forward." The article continues, "Luxembourg, Ireland and the UK are home to the majority of Europe's so-called constant NAV funds, a type of money market fund that has a fixed share cost. These funds are set to be most affected by the planned changes."

They also quote Moody's analyst Marina Cremonese, "[Luxembourg is] not a neutral party [when it comes to money fund reform]." The article alleges, "It is understood Luxembourg, with support of some other member states, is arguing for watered-down reforms. A spokesperson for the grand duchy's presidency said: "Luxembourg is certainly not blocking the reform, but is actively working with the other member states to find a solution."

Finally, the FT piece adds, "Sources say Luxembourg wants the sunset clause [on a compromise LVNAV option] removed, which would lead to a clash with other countries on the European Council, the body made up of the 28 EU member states. A spokesperson for the European Council said there is little sign the current deadlock between member states around money market fund reforms will be broken. "Very little progress has been made in recent months. It will be for the incoming Netherlands presidency to decide what the next move should be," he added. A spokesperson for the Dutch presidency, which takes over from Luxembourg in January, said money market funds are not among its priorities for its time in charge."

Assets in "offshore" money market mutual funds, U.S.-style funds domiciled in Dublin or Luxemburg and denominated in USD, Euro and GBP (sterling), were up slightly in November, increasing by $3.6 billion to $695.3 billion through 11/30/15. U.S. Dollar (USD) funds (157) tracked by Crane Data's Money Fund Intelligence International account for over half ($388.9 billion, or 55.9%) of the total, while Euro (EUR) money funds (98) total E73.1 billion and Pound Sterling (GBP) funds (110) total L148.2. USD funds were up $13.3 billion, or 3.5%, in November and $5.2 billion, or 1.4%, YTD through 11/30. Euro funds are down E3.7 billion, or 4.8%, for the month and E17.6 billion, or 19.4%, YTD, while GBP funds are down L3.6 billion in November, or 2.4%, and down L4.2 billion, or 2.8%, for the year through 11/30. Yields of offshore funds vary depending on the currency. Offshore USD MMFs yielded 0.08% (7-Day) and 0.06% (30-Day) as of November 30, while `EUR MMFs yielded -0.14% for 7-Day, and GBP MMFs yielded 0.38% for both 7-Day and 30-Day.

The USD funds tracked by MFI International contain, on average (as of 10/31/15), 21.0% in Certificates of Deposit (CDs), 27.0% in Commercial Paper (CP), 20.0% in Treasury securities, 14.0% in Other securities (primarily Time Deposits), 13.0% in Repurchase Agreements (Repo), 3.0% in Government Agency securities, and 2.0% in VRDNs (Variable-Rate Demand Notes). USD funds have on average 28.7% of their portfolios maturing Overnight, 9.2% maturing in 2-7 Days, 17.4% maturing in 8-30 Days, 8.9% maturing in 31-60 Days, 15.4% maturing in 61-90 Days, 16.7% maturing in 91-180 Days, and 3.6% maturing beyond 181 Days. USD holdings are affiliated with the following countries: US (33.2%), France (16.0%), Japan (9.3%), Canada (8.0%), Sweden (6.8%), Great Britain (4.7%), Australia (4.6%), Germany (4.6%), Netherlands (2.5%), and Switzerland (2.4%).

The 20 Largest Issuers to "offshore" USD money funds include: the US Treasury with $87.4 billion (20.1% of total portfolio assets), Credit Agricole with $19.7B (4.5%), BNP Paribas with $13.7B (3.1%), Bank of Tokyo-Mitsubishi UFJ Ltd with $11.8B (2.7%), Natixis with $11.1B (2.5%), DnB NOR Bank ASA with $10.4B (2.4%), Bank of Nova Scotia with $9.7B (2.2%), Societe Generale with $9.7B (2.2%), Svenska Handelsbanken with $9.0B (2.1%), the Federal Reserve Bank of New York with $8.9B (2.0%), JP Morgan with $8.7B (2.0%), Wells Fargo with $8.5B (1.9%), Skandinaviska Enskilda Banken AB (SEB) with $8.3B (1.9%), Sumitomo Mitsui Banking Co with $7.9B (1.8%), Credit Mutuel $7.4B (1.7%), Rabobank with $7.2B (1.7%), Nordea Bank with $7.1B (1.6%), RBC with $6.9B (1.6%), Norinchukin Bank with $6.7B (1.5%), and HSBC with $6.4B (1.5%).

The EUR funds tracked by Crane Data contain, on average 24.0% in CDs, 43.0% in CP, 18.0% in Other (primarily Time Deposits), 10.0% in Repo, 1.0% in Agency securities, and 4.0% in Treasury securities. Euro funds have on average 22.0% of their portfolios maturing Overnight, 5.1% maturing in 2-7 Days, 17.2% maturing in 8-30 Days, 15.9% maturing in 31-60 Days, 17.3% maturing in 61-90 Days, 19.0% maturing in 91-180 Days, and 3.3% maturing beyond 181 Days. EUR MMF holdings are affiliated with the following countries: France (31.1%), US (13.3%), Japan (10.2%), Sweden (8.2%), Great Britain (7.8%), Germany (7.2%), Netherlands (6.7%), Belgium (4.1%), and Switzerland (1.7%), and Canada (1.2%).

The 15 Largest Issuers to "offshore" EUR money funds include: BNP Paribas with E4.7B (6.3%), Republic of France with E3.9B (5.2%), Credit Agricole with E3.3B (4.4%), Societe Generale with E3.0B (4.1%), Nordea Bank with E3.0B (4.1%), Proctor & Gamble with E3.0B (4.0%), Rabobank with E3.0B (4.0%), HSBC with E2.9B (3.9%), Svenska Handelsbanken with E2.8B (3.7%), Sumitomo Matsui Banking Co. with E2.1B (2.8%), BRED Banque Populaire SA with E2.0B (2.6%), Credit Suisse with E1.9B (2.6%), Bank of Tokyo-Mitsubishi UFJ Ltd with E1.9B (2.6%), Standard Chartered Bank with E1.9B (2.5%), and `JP Morgan with E1.7B (2.3%).

The GBP funds tracked by MFI International contain, on average (as of 10/31/15) 26.0% in CP, 33.0% in Other (Time Deposits), 29.0% in CDs, 5.0% in Repo, 5.0% in Treasury, 1.0% in Agency, and 1.0% in VRDNs. Sterling funds have on average 21.2% of their portfolios maturing Overnight, 7.4% maturing in 2-7 Days, 14.4% maturing in 8-30 Days, 16.1% maturing in 31-60 Days, 16.8% maturing in 61-90 Days, 18.0% maturing in 91-180 Days, and 6.1% maturing beyond 181 Days. GBP MMF holdings are affiliated with the following countries: France (16.1%), Great Britain (12.9%), Japan (12.3%), Germany (11.0%), US (7.4%), Netherlands (7.2%), Australia (6.1%), Canada (6.0%), Sweden (4.6%), and Switzerland (3.6%).

The 15 Largest Issuers to "offshore" GBP money funds include: Bank of Tokyo-Mitsubishi UFJ Ltd with L4.6B (3.6%), UK Treasury with L4.6B (3.6%), FMS Wertmanagement with L4.5B (3.6%), Sumitomo Mitsui Banking Co with L4.4B (3.5%), BNP Paribas with L4.2B (3.4%), Credit Agricole with L3.7B (2.9%), Rabobank with L3.6B (2.8%), Lloyds TSB Bank PLC with L3.3B (2.6%), Standard Chartered Bank with L3.3B (2.6%), BRED Bank Populaire SA with L3.2B (2.6%), HSBC with L3.2B (2.5%), ING Bank with L3.0B (2.4%), Mizuho Corporate Bank Ltd with L2.9B (2.3%), Australia & New Zealand Banking Group Ltd. with L2.8B (2.2%) and Bank of America with L2.8B (2.8%). (E-mail us at info@cranedata.com to request a copy of our latest MFI International or MFII Portfolio Holdings.)

RBC Latest to Abandon Prime MMFs; BlackRock Designates Retail, Inst

Dec 01 15

RBC is the latest in a string of managers to announce plans to abandon Prime money market funds. A press release issued Monday, entitled, "RBC Global Asset Management Announces Planned Changes to U.S. Money Market Funds." RBC, the 20th largest money fund manager with $16.5 billion in total MMF assets, will close its roughly $8 billion RBC Prime Money Market Portfolio (with Prime Retail and Institutional shares) in September 2016 and force investors to shift into either the $6.5 billion RBC US Government MMF, ultra-short bond fund options or separately managed accounts. In other news, BlackRock sent a note to clients yesterday, which further detailed their MMF restructuring plans and laying out which money funds will be categorized as Retail and Institutional.

Yesterday's press release says, "RBC Global Asset Management-US announced today actions of the RBC Funds Trust Board of Trustees regarding changes to its money market funds in response to amendments to regulations governing money market mutual funds. Mike Lee, CEO and CIO of RBC GAM-US, comments, "RBC Global Asset Management has a long history of offering liquidity and fixed income strategies as part of our investment platform. With money market reform on the horizon, many investors are rethinking their approach to cash management and looking for alternative solutions. Following close consultation and discussion with our clients, we feel that our lineup of cash management options is well positioned to serve the long term interests of investors as they navigate these changes."

RBC's release explains, "The U.S. Government Money Market Fund will continue to be offered to all investors. The fund currently invests 99.5% or more of its assets in U.S. Government securities or repurchase agreements and plans to continue to operate in accordance with money market reform amendments, including seeking to maintain a stable $1.00 net asset value per share (NAV). The Board of Trustees also stated its intention to not currently implement liquidity fees or redemption gates for the U.S. Government Money Market Fund.” RBC US Government Money Market Fund has about $6.5 billion in assets, according to our MFI XLS.

It continues, "The Prime Money Market Fund will no longer be offered to institutional or retail investors after September 30, 2016 and will be closed to new investments at a date to be determined, pending final Board approval and appropriate notice to shareholders. Shareholders invested in the fund will be notified of their options, including eligibility to exchange shares of the Prime Money Market Fund for shares of the U.S. Government Money Market Fund. Under the amendments to Rule 2a-7, effective October 14, 2016, institutional prime and municipal money market funds are required to price and transact shares of such funds at a floating NAV. Retail and U.S. government money market funds may continue to seek a stable $1.00 NAV. In addition, both prime and municipal money market funds may be subject to liquidity fees and redemption gates in the event weekly liquid assets fall below a designated threshold."

John C. Donohue, Managing Director and Head of Liquidity Management, says, "This is an opportune time for investors to review their cash management strategies as they look to maintain liquidity and flexibility in their investment portfolio. Government money market funds address that need by seeking to offer safety, liquidity and a competitive yield."

Finally, RBC's release adds, "In addition to several cash management options, including the U.S. Government Money Market Fund, RBC GAM-US also offers short term fixed income products such as the RBC Short Duration Fixed Income Fund and RBC Ultra Short Fixed Income Fund, which can serve to assist our shareholders who have shorter investment horizons. RBC Global Asset Management has over $28 billion in global institutional cash management assets, including over $19 billion in the U.S., as of September 30, 2015."

BlackRock's latest note to clients says, "As previously communicated in April and July, we continue to make progress on evolving our money market fund platform in preparation for full compliance with the amendments to Rule 2a-7 under the Investment Company Act of 1940 announced by the Securities and Exchange Commission in 2014. We are pleased to bring you the latest news on this front, dealing specifically with the designation of certain of our funds as retail and others as institutional."

On their Retail designations, it explains, "The funds' board of trustees has approved the designation of the following as retail money market funds effective September 1, 2016. To qualify as a retail money market fund, the funds must have implemented policies and procedures reasonably designed to limit the beneficial owners of the fund to natural persons." The Retail funds are: BlackRock Liquidity Funds MuniFund, BLF California Money Fund, BLF New York Money Fund, BlackRock Cash Fund: Municipal & Municipal Money Market Master Portfolio, BlackRock Money Market Portfolio, BlackRock Municipal MMP, BlackRock Ohio Municipal MMP, BlackRock Pennsylvania Municipal MMP.

On its Institutional funds, BlackRock says, "The funds' board of trustees has also approved the designation of the following as institutional money market funds. These funds have been operating as institutional money market funds so this does not reflect a change. They will not be adopting a floating NAV or liquidity fees and gates at this time, but will comply with these requirements by October of 2016." The Institutional funds are: BLF TempFund; BLF TempCash; BLF MuniCash; BlackRock Cash Funds: Prime & Prime Money Market Master Portfolio; and BlackRock Cash Funds: Institutional & Money Market Master Portfolio.

The letter concludes, "We are proud to serve a variety of clients who use money market funds for many different reasons. Our platform is reflective of the types of clients we serve and the varying needs which drive their use of these investment vehicles, both now and in the future." (See also our April 7 News, "BlackRock Announces Changes, Keeps Options Open; TempFund Floats" and our July 31 News, "BlackRock to Liquidate 3 Muni MMFs, Convert Old Merrill Primes to Govt.")

With RBC's plans to close its $8 billion Prime MMF next Sept. 30, we now count over $257 billion in total money fund assets that will convert (or has already converted) from Prime to Government. Among the major conversions to date: Franklin converted over $25 billion and Dreyfus converted $2.2 billion (Inst Reserves) on Nov. 1; Fidelity converted its $16.1 billion CMF Prime Fund on Nov. 13; and the $115 billion Fidelity Cash Reserves, the $12 billion Fidelity MMT: Retirement Port II, and $1.4 billion American Century Premium MMF will all convert today. Note: Deutsche will also rename its $3.8 billion Daily Assets Fund Institutional as Daily Assets Fund Capital today (Dec. 1).