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The European Parliament approved a law Wednesday that would reform money market funds in Europe and retain constant NAV funds, though with severe restrictions. It'​s a major step forward in the reform process, but not a done deal. The legislation must clear at least one final hurdle. A press release entitled, "European Parliament Plenary vote on EU Money Market Fund Regulation," from the U.​K.-​based Institutional Money Market Funds Association, which represents CNAV, "​U.​S.-​style" money funds in Europe, says "Today a full plenary session of the European Parliament (​EP) agreed its position on Money Market Fund Regulation (​MMFR). This report is the Parliament'​s response to a legislative proposal put forward by the European Commission (​EC) in September 2013. The agreement by Parliament is another milestone in the EU '​codecision' process. Separately, the Council of Ministers (​CoM), senior representatives from the 28 EU Member States, is still debating its own position on MMF. Once both the EP and the CoM have agreed their respective positions on the MMFR, the final legislative stage, the Trilogue negotiation with the European Commission, takes place." Irish MEP Brian Hayes, who represents Ireland, the largest money fund market in Europe, also released a statement more supportive of the legislation, but IMMFA has some concerns with the law and supports a more feasible solution.

The IMMFA statement explains, "It is a positive development that the EP report recognizes that the capital buffer originally suggested by the EC was not a viable proposal for an investment product. It is also worth noting that many of the good market practices which IMMFA funds already adopt voluntarily under the IMMFA Code of Practice, such as credit diversification, prescribed levels of liquidity and a high level of transparency, have been incorporated into the future regulation of money market funds in Europe. Overall, however, the political compromise that has been reached by Parliament does not augur well for the European capital markets."

It continues, "​AUM in European MMF stands at approximately E1 trillion. If implemented, the changes suggested by the EP would have wide-​ranging and long-​term ramifications for both the constant net asset value (​CNAV) and variable net asset value (​VNAV) sectors of the money market fund market. The impact on many everyday businesses, local authorities, charities and other MMF investors should not be underestimated. The EP'​s proposals reflect the political agenda of various MEPs rather than a serious attempt to reduce systemic risk within the European money markets."

IMMFA adds, "The options presented to the CNAV industry, which makes up >​50% of AUM, are severely limited under the Parliament'​s draft. The Retail CNAV and EU Public Debt CNAV options are restricted in scope, and under current market conditions together account for less than 10% of the CNAV AUM. The shortcomings of these two options were clearly identified in the impact assessment commissioned by the European Parliamentary Research Service (​EPRS) but do not seem to have been taken into account by MEPs. The proposed LVNAV structure is not an adequate substitute for the CNAV product. Only a very small proportion of the current CNAV market would be able to transition into this new MMF formulation. Furthermore it is unclear how useful this construct would be to investors. Even then, under a so-​called '​sunset clause' the authorisation of these funds would lapse five years after the Regulation comes into force. These measures have potential to destabilise the short-​term capital markets for years to come."

Finally, the release tells us, "IMMFA remains confident that through the ongoing negotiation a more feasible solution for the MMF industry will be found -- that promotes financial stability whilst preserving efficient short term capital markets in Europe. IMMFA remains committed to working with all parties involved in the regulatory debate and hopes that in the long run an approach which is both practical and effective will prevail."

Irish MEP Brian Hayes, a member of the EU'​s Econ Committee who helped craft the bill, called it "​an important development in legislating the shadow banking sector in Europe." In a statement Hayes says, "​As lead negotiator in Parliament for the European People'​s Party (​EPP) on this file, I believe a balanced compromise has been agreed. This is a crucial first step before Parliament enters negotiations with the European Council for a final decision on the EU Money Market Funds Regulation. The file still requires more work but the Parliament text recognises that both parts of the MMF industry -- Constant Net Asset Value funds (​CNAV) and Variable Net Asset Value Funds (​VNAV) -- will continue into the future. Ireland is a leading European domicile for Money Market Funds with over E300 billion worth of assets held in CNAV Money Market Funds in Ireland."

Hayes continued, "The Parliament'​s agreement has replaced current CNAV funds with three new types of funds -- Government CNAVs, Small Investor CNAVs and Low Volatility NAV funds. Additional safeguards will be applied to these funds to ensure that they can cope with market shocks. I have always taken the position that new financial regulation must not disproportionately affect a small number of small Member States. There has been a push from various EU lawmakers to completely eliminate CNAV funds as they consider them a threat to financial stability. Yet no CNAV fund in the EU has ever '​broken the buck' or returned less than its share price to investors. These funds are very important to the financing of large businesses, charities, local authorities and pension funds."

The Irish Times broke the news with its story, "European Parliament Approves New Law on Money Market Funds." It says, "It is understood that Ireland, along with Luxembourg and Britain which also offer CNAV funds, came under significant pressure from other member states including France which dominates the Variable Net Asset Value Funds (​VNAV) market and favoured phasing out CNAVs. The European Commission had also proposed that CNAVs be phased out when it first announced the new Money Markets legislation in 2013."

The article continues, "The European Council, the EU institution which represents member states, must now formulate its joint position on the proposed legislation before entering negotiation with the European Parliament. `​With Luxembourg due to assume the rotating presidency of the EU in July, it is hoped that progress may be made on the legislation before the end of the year."

The Econ Committee originally detailed the proposed changes in a February 26 news release." It says, "​Under the draft law, ECON committee MEPs proposed to limit CNAV MMFs to two types: Retail CNAV that would be available for subscription only for charities, non-​profit organisations, public authorities and public foundations; Public Debt CNAV which would invest 99.​5% of its assets in public debt instruments. There would be a new type of MMF: Low Volatility Net Asset Value MMF (​LVNAV MMF) that might display a constant net asset value but under strict conditions."

It adds, "The draft law should also require MMFs to diversify their asset portfolios, investing in higher-​quality assets, follow strict liquidity and concentration requirements and have in place sound stress testing processes, MEPs decided. MMFs would have to have in place a rigorous internal assessment procedure to determine the credit quality of money market instruments. The assets of a MMF would have to be valued at least once a day and the result should be published daily on the website of the MMF. As the discretionary nature of external support contributes to uncertainty in times of instability, MEPs decided that a MMF should not receive external support from a third party including from its sponsor, if any." The MEPs also tightened the transparency rules in the draft law. MMFs would have to report weekly to investors: liquidity profile, credit profile and portfolio composition, WAM, WAL, and concentration of the top five investors. Finally, "Public Debt and Retail CNAVs and LVNAVs should apply "​liquidity fees" "​redemption gates" in circumstances to help stem sudden outflows."

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Last week we reported on the SEC'​s response to Frequently Asked Questions from money managers and others in the space about money market reforms. (​See our story from April 23 News, "SEC Posts 2014 Money Market Fund Reform Frequently Asked Questions.) One of the 53 FAQs dealt with 60-​day and under maximum maturity funds, which have been proposed by at least two major fund complexes so far, Federated and BlackRock, although the latter proposed 7 day and under maximum maturity funds. Others have said they are considering this option. The idea of these short duration funds is to limit the ability for these floating NAV institutional funds to float. JP Morgan Securities strategist Alex Roever singled out this particularly question in his commentary this week, discussing the SEC'​s response to the question and the broader implications of these funds. We also excerpt from SEC FAQ updates from Wells Fargo'​s Garret Sloan and from Ropes & Gray.

Writes Roever, "While most of the questions represent minor technical and legal topics, there were a couple questions that we think have broader implications for the short-​term fixed income market, particularly as it relates to 60-​day prime MMFs. In particular, the SEC clarified two aspects with respect to the establishment of 60-​day MMFs. First, a MMF that is subject to a floating NAV may not advertise that it will seek to maintain a stable NAV by limiting its portfolio securities to a maturity of less than 60 days and valuing those securities using amortized cost. The SEC staff believes that such a statement would be confusing or misleading to investors, particularly during periods when the security’​s amortized value differs from the security'​s mark-​to-​market value. This could happen during credit events or sudden market moving events. Under such a scenario, the MMF'​s NAV will fluctuate and not remain stable."

He continues, "While NAVs do fluctuate in value, over the past few years they have not deviated much from the $​1.​0000 stable NAV. Even during those circumstances, the lowest shadow NAV value carried among the prime funds was 0.​9976. Still, the SEC advises that a floating NAV fund must advertise that the fund’​s share price will fluctuate, which we suspect will deter at least some existing and potential institutional shareholders from participating. Second, a 60-​day MMF that intends to use amortized cost to value its securities may not use "​maturity shortening" provisions of Rule 2a-​7 to determine the maturity date of those securities. Currently, Rule 2a-​7 allows MMFs to shorten the maturities of variable and floating rate securities and repurchase agreements to their reset date or demand date for purposes of calculating their weighted average maturities. For example, MMFs are able to deem 1-​year floaters whose benchmark resets every 90 days or 1-​year floaters that are putable within 60 days or 3m repos that are putable within 7 days as having a maturity of 90 days, 60 days and 7 days respectively. However, for purposes of determining inclusion eligibility for 60-​day MMFs, the funds would have to use the securities' legal final maturity."

He adds, "At various times, we have expressed our concern about the difficulty in establishing 60-​day prime MMFs given the challenge in finding suitable supply to meet its specific type of demand. The inability to use current maturity shortening provisions raises further challenges. We estimate the elimination of this provision removes on average about $​266bn of eligible supply based on money market floating rate note and putable note issuance over the past five years. Alternatively, funds may buy other short-​term credit products such as CP or bank time deposits, but the stock of those assets don'​t fare much better. Indeed, as of April 17 the Fed reports that only about 56% or $​568bn of CP outstanding mature in less than 42 days, consistent with the theme of banks trying to push out their short-​term borrowings for liquidity purposes. With respect to bank time deposits, while most of these deposits are done on an overnight basis, banks are currently looking to shed their exposure given the deposits' regulatory burden."

Further, "Conceivably, given the supply constraint it'​s possible that returns on 60-​day MMFs could yield very close to government MMFs, particularly considering there are a host of other short-​term investors (​e.​g., 397-​day max prime institutional MMFs, retail prime MMFs, corporations, hedge funds, etc.) competing for the same credit supply that is eligible for 60-​day MMFs in order to meet their liquidity requirements. The lack of sufficient, suitable credit products could encourage them to buy more eligible rates products such as bills, repo, and discos. Faced with the choice to shift money into 60-​day MMFs or government MMFs with no yield differential between the two, institutional shareholders could be inclined to choose the latter given the absence of a floating NAV and more importantly liquidity fees and gates. If this scenario is realized, we suspect this will incrementally increase the demand for short-​term government securities. Fortunately, the SEC also clarified in the FAQs that the Fed'​s overnight repurchase agreements (​ON RRP) are considered a government security and is not subject to issuer diversification limits. However, bank certificate of deposits, which are insured up to the $​250,​000 FDIC insurance limit, are not considered a government security."

Wells Fargo strategist Garret Sloan also had some thoughts on these funds. He writes in his April 23 commentary, "​Following questions on form N-​MFP, form N-​CR and website disclosures, the first question we found to be meaningful was the clarity that investors will likely garner from the response to the question of whether 60-​day funds will be able to be marketed as seeking to maintain a stable NAV by purchasing securities with a final maturity of 60 days or less, and valuing them at amortized cost? The SEC said that funds could not do this. In its response, the SEC noted that "​a floating NAV money market fund (​which would include 60-​day institutional prime and municipal funds) may not state in its advertising, sales literature, or prospectus that it will seek to maintain a stable NAV by limiting its portfolio securities to only those securities with a remaining maturity of 60 days or less and valuing those securities using amortized cost, as such a statement would be misleading to investors." The SEC noted that if a security exhibited credit deterioration, amortized cost may not reflect fair market value even fore securities with maturities less than 60 days."

Sloan adds, "​In response to a second question on amortized cost, the SEC clarified the differences between amortized cost usage in floating-​NAV funds and stable-​NAV funds by stating that amortized cost may be used in floating-​NAV funds on an individual basis, but stable-​NAV funds "​may value their entire portfolio using the amortized cost method." This should help investors understand more fully that 60-​day money funds will remain floating-​NAV funds for operational purposes, and the perceived advantages associated with these structures may be somewhat spurious."

Finally, a brief entitled, "SEC Staff Responds to Frequently Asked Questions on 2014 Money Market Reform Release, Including Valuation Guidance," from Ropes & Gray, says, "On April 22, 2015, the Securities and Exchange Commission ("​SEC") staff released guidance titled "​2014 Money Market Fund Reform Frequently Asked Questions," that discusses various interpretive issues arising from the SEC'​s 2014 Money Market Fund Reform release (​the "​2014 Reform Release"). On April 23, 2015, the SEC staff released additional guidance, titled "Valuation Guidance Frequently Asked Questions," that discusses the valuation guidance applicable to all mutual funds that was included within the 2014 Reform Release. Both the April 22 release and the April 23 release (​together, the "​Guidance") were in a question-​and-​answer format and represent the views of the SEC'​s Division of Investment Management'​s staff (​the "​IM Staff"). This Alert discusses the highlights of the Guidance.

On "Valuation Guidance," Ropes writes, "In the Guidance, the IM Staff sought to clarify the scope of the responsibilities of a mutual fund'​s board of directors ("​Board") when determining whether an evaluated price provided by a pricing service, or some other price, constitutes a fair value for a fund'​s portfolio security. In the 2014 Reform Release, the SEC made these three points: A Board has a non-​delegable responsibility to determine whether an evaluated price provided by a pricing service, or some other price, constitutes a fair value for a fund'​s portfolio security. It is incumbent upon a Board to satisfy itself that all appropriate factors relevant to the fair value of securities have been considered, and that the Board must continuously review the appropriateness of the method used in fair valuing each security owned by the fund. Although a fund'​s Board cannot delegate their statutory duty to determine the fair value of fund portfolio securities, a Board may appoint others, such as the fund'​s investment adviser or a valuation committee, to assist them in determining fair value, and to make the actual calculations pursuant to the fair valuation methodologies previously approved by the Board."

The brief continues, "Arguably, these three points in the 2014 Reform Release suggested that a Board must be more intimately involved in the fair value process, perhaps even in real-​time determinations of the appropriate methodology to fair value individual securities, than many practitioners had previously thought to be the case. In the Guidance, the IM Staff reiterated these three points. However, in the Guidance, at the outset of its response, the IM Staff stated: The staff believes that the guidance provided in the [​2014 Reform Release] was not intended to change the general nature of the board'​s responsibility to oversee the process of determining whether an evaluated price provided by a pricing service, or some other price, constitutes a fair value for a fund'​s portfolio security or limit a board'​s ability to appropriately appoint others to assist in its duties. Therefore, it would appear that the IM Staff believes the 2014 Reform Release'​s valuation guidance does not expand a Board'​s responsibilities with respect to the fair value process. Instead, the Guidance indicates that a Board may wish to consider various factors in its oversight of evaluated prices that are supplied by third-​party pricing services."

Finally, Ropes & Gray writes on "Additional Guidance?," "The Guidance stated that the IM Staff expects to update the Guidance from time to time to include responses to additional questions. Most notably, in early 2015, the Investment Company Institute (​the "​ICI") and the Securities Industry and Financial Markets Association submitted to the SEC a draft Q&​A regarding the 2014 Reform Release. However, only two of the answers in the Guidance were expressly identified as corresponding to questions submitted by the ICI. Therefore, it should not be surprising if the IM Staff issues additional guidance in the near future, as the compliance dates for additional provisions of Rule 2a-​7 approach."

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Today, we excerpt from the April issue of Crane Data'​s newest publication, Bond Fund Intelligence, which tracks the bond fund marketplace with a focus on the ultra-​short and most conservative segments. The article says: Our April Bond Fund Intelligence "​profile" interviews `​Putnam Investment'​s Portfolio Managers Joanne Driscoll and Michael Salm, who is also Co-​Head of Fixed Income at the firm. Driscoll and Salm run the $​2.​2 billion Putnam Short Duration Income Fund, one of the largest funds in our Conservative Ultra Short Bond Fund universe. They talk about the importance of differentiating between various types of Ultra Short Bond Funds and why this niche is poised for growth in an environment of rising rates and more regulations.

BFI: How long have you been involved in this space? Driscoll: I have been at Putnam for almost 20 years and currently oversee the short-​term liquid markets team where I'​m responsible for all of our front-​end strategies. Putnam launched Short Duration Income Fund in October 2011 -- with Mike and I serving as the lead managers. In 2009, we looked at the changing regulatory environment for money funds, driven by the pending amendment to SEC Rule 2a-​7. While money funds were forced to shorten their investments, issuers were being told by regulators that they needed to become less reliant on the front end and extend the duration of their debt. So, our goal in launching this fund was to leverage the changes in money funds and the opportunities that were created in the market by this change. We felt this would create a demand for a fund just outside of 2a-​7, but something more conservative than a short term bond fund.

Salm: During my 18 years at Putnam, I have focused quite a bit on structured products, mortgages in particular. Over time, I have worked a lot on liquid markets in general, focusing on interest rates and volatility, as well as our views about the Fed. In thinking about this strategy, there was a lot of overlap in using our expertise on the front end of the curve and in using our expertise just beyond the traditional 2a-​7 venue. We wanted to leverage this very interesting combination of investment processes that you don'​t necessarily see blended together in normal fund structures.

BFI: How has the Short Duration Income Fund been received? Driscoll: The fund has grown to about $​2.​2 billion in assets under management. The objectives of our fund are capital preservation and income maximization. Our process is primarily built around the best ideas of our credit team, which focuses on alpha generation within a host of areas. We believe that prudent short term investing requires relentless focus on credit quality and risk management. Due to the nature of the fund, we focus on credit fundamentals and the risk-​return trade off. Something that really differentiates Putnam in this space is the way our fixed income team works: We can leverage the entire research team; our analysts cover the sectors across all asset types -- high yield, high grade, money markets, and munis in some cases. With our broader coverage, we can put an intense focus on credit analysis.

We have found that the fallout from the financial crisis has made the ratings agencies reactionary and that impacts many issuers. While our analysts view some of these companies to be either equal to or stronger than prior to the downgrade, due to the ratings requirements of 2a-​7, they cannot be purchased by money funds, even though internally we feel that they would be appropriate. These institutions are attractive purchases for Putnam Short Duration Income Fund and add some good yield to the portfolio.

There'​s a big difference between our fund and our peer group. Putnam Short Duration Income Fund is generally higher quality than many of its peers. We don'​t buy below investment grade, so we don'​t have high yield or floating rate bank loans like you see in some competitors. We limit our investments in the low triple-​B category because we'​re trying to minimize the volatility in this fund as much as possible. The reception to the fund has been very positive. We find a lot of investors are challenged by the low level of interest rates and the new 2a-​7 amendments. We see more and more interest in the fund because they are looking for products that can add incremental yield over a money fund with low NAV volatility.

BFI: What are the challenges for this fund? Driscoll: For us, it'​s making sure that financial advisors understand that this is not a money fund or a cash alternative. Prior to the crisis, many firms sold cash alternatives that behaved and looked more like a short term bond fund, and those outcomes, as we know, weren'​t always good. We spend a significant amount of time educating our financial advisors on the strategy and the risk-​return tradeoff, so there are few, if any, surprises. We'​ve seen a large amount of variability in this peer group, so we want to make sure the advisors understand what this fund is.

Salm: In fact, we'​re very sensitive about distinguishing ourselves so that people know that this category itself can be very heterogeneous. Don'​t mistake us in any way, shape, or form as a money market fund. We think there'​s a really good space between the ultra-​short bond fund and money market fund categories, which is where the Short Duration Income Fund resides. The fund has been able to meet its objective in the last three years, delivering a high degree of capital preservation and a consistent return.

Watch for more of our latest BFI profile in coming days, or contact us to see the latest issue of our Bond Fund Intelligence. (​BFI is $​500 a year, or $​1,​000 including our BFI XLS spreadsheet.)

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Federated Investors, the 4th largest manager of money market funds with $​205.​7 billion, held its 1st Quarter earnings call Friday, and CEO Chris Donahue, CFO Tom Donahue and CIO Debbie Cunningham discussed Federated'​s money fund product plans, fee waivers, potential asset flows, and more. Donahue comments, "We continue to make progress in reshaping our Money Market fund product line in response to the 2014 rules. The fund'​s Board will consider a variety of related proposals next month and we expect to be able to fill in additional details on product changes in the coming months. We expect to have products in place to meet the needs of all of our money fund clients. These will likely include prime and muni money market funds modified to meet the new requirements, government money funds, separate accounts and offshore money funds." (​See the Seeking Alpha transcript of the call here.)

He continues, "We'​re also working to develop privately placed funds in an attempt to mirror existing Federated money market funds to serve the needs of groups of qualified institutional investors unable or unwilling to use money funds modified by the new rules. The new rules are subject to a lengthy implementation period. The floating NAV requirement for institutional prime and muni fund takes effect in October 2016.... Last week we announced a deal with Reich & Tang Asset Management to transition approximately $​7 billion in money fund assets to Federated money funds. We'​re working with Reich & Tang financial intermediaries and fund shareholders to transition these assets, which we expect will begin in June.... We recently announced the addition of the West Virginia local government investment pool and expect about $​1.​2 billion to fund in the third quarter."

CFO Tom Donahue comments, "The impact of money fund yield waivers of $​27 million was down from the prior quarter and year-​over-​year. Based on current assets and assuming overnight repo rates for treasury and mortgage backed securities, we'​re on roughly 9 to 12 basis points over the quarter and T-​bills stay in the two to 10 basis point range. The impact of these waivers to pretax income for Q2 would be around $​24 million. `​Looking forward, we estimate that gaining 10 basis points in gross yields from beginning Q2 levels would likely reduce the impact of yield waivers by about 40% and the 25 basis point increase would reduce the impact by about 65%. We continue to expect to recover about 75% of money fund yield waiver related pretax income when yields increase to the point of eliminating these waivers."

He explains, "This estimate is based on our assessment of competitive market conditions including the expectation that we will incur higher distribution expense as a percentage of money fund, money market revenues when rates and yields increase. Multiple factors impact waiver levels and we expect these factors and their impact to vary. These factors include changes in fund assets, available yields for investments, actions by regulators, changes in the expense levels of the funds, changes in the mix of customer assets, changes in product structure, changes in distribution fee arrangements with third parties. Federated'​s willingness to continue to see waivers and changes in the extent to which the impact of the waivers is shared by third parties. Q1 effective tax rate was about 38% as expected and that continues to be our expectation going forward. Looking at the balance sheet, cash and investments totaled $​280 million at quarter end."

During the Q&​A, Chris Donahue commented, "[​W]​hat I expect to happen over the longer term is that in a post October 16 environment, Federated will see increases in assets in the money market fund area because the dust will settle, all of the education will have occurred on the efficacy of the new product offerings and the things that exist in the marketplace now to encourage more cash use will continue, for example banking regulations that causes certain customers to not be favored as deposit customers.... [​It] used to be [​that] half of the corporation'​s [​cash was in] money funds. Today that number is closer to 20%, and I think they will come back in. So overall I think we will begin to see increases in assets, which I think will turn back to increases in market share for our offerings."

Debbie Cunningham commented on the potential prime vs. govt fund spreads, "[​Historically it'​s been] 12 basis points [​so a 60 day maturity fund would be] somewhere in the six basis point neighborhood. [​T]​here will likely be some swell of assets that initially takes the easy path ... going into a government fund from a prime fund.... [​But] supply/​demand differences in the marketplace ... would probably cause that 12 basis point spread on historic basis to go a little bit wider. How much wider? 20 basis points, 30 basis points, 40 basis points? You pick the number. But at some point [​investors] yet have the allowances to go back into prime at that point. There will be a point at which they then look at whatever that spread differential is and think it'​s fairly attractive. What we think will be the case is that there will be sort of reverse swells that go back in the other direction probably over a longer period of time, but with less volume in each one of them."

Chris Donahue commented, "​As regards to roll up activity, as I'​ve said on these calls before, before the '​08 timeframe, there were over 200 firms offering money funds. Today if you look at the list there are 80, and the bottom 25 or so don'​t have enough of assets to really make a third-​party go of it. And so increasingly, you see one at a time type things like Touchstone or like Reich & Tang or others that we'​ve done come along.... If you look at the whole picture of it you would say gee, '​08 caused people to leave the money funds, the '​10 amendments caused others to leave. The '​14 amendments will cause still others to leave, and the actual implementation date in '​16 will cause others. So it is more or less a steady March, but it is without a sudden catalyst."

Donahue adds, "​What we'​ve said is that at the fund Board meetings, which is mid-​May, we will go to the Board with the proposals as to which funds will end up in which category. We have already announced the types of buckets and the types of funds that we will have, and so we'​re sticking with that and now we'​re putting the finishing touches on getting clearance from the Boards that this particular fund will be a retail fund, this particular fund will be an institutional fund, this fund will be a 60-​day fund etcetera. And I won'​t commit to a time right now, but it will be some time after that Board Meeting when will say which funds are going to be going in which direction and it maybe that there are more than one announcements that come out. In addition, we have a large proxy that we'​re working on for our one fund that has several portfolios in it equal to $​175 or so billion of our money fund assets, and so that is a big effort to get that proxy statement done and that will be occurring. We'​ll also have seven or so fund mergers and will probably spawn 20 or 22 new classes. So there will be a lot of those kinds of changes and they may take enough time that we go through and have more than one announcement about what'​s going on. The proxy statement of course itself will be a large and substantial public announcement."

Cunningham answers, "From a spread differential perspective between prime and government, like I said before, it'​s definitely going to increase. [​W]​e'​re [​likely] going to see spreads increasing in some way, shape or form. From 12 to 20 to 40, I don'​t know exactly where it stops, but at some point there is a trade off that customers who chose to go into the government option then don'​t need to will want to rethink ... their options in the marketplace because the differential is now large enough. Historically that'​s been somewhere in the 20, 25 basis point range but, [​this] could be different, and certainly in the context that we'​ve been at zero for so long, who knows what holds going forward. But it'​s not that we think that there will be government yields going in one direction while prime goes in the other. We do think that they will both be [​higher but with] prime going up a little bit higher."

Donahue commented, "At this point, I don'​t see anything in changing what we have determined we are going to do in terms of the kinds of funds that we'​re going to offer. In other words, we'​re still going to offer 60 day funds, and, as I mentioned, we'​re going to work on private funds. We'​re looking at separate accounts, and we'​re going to have '​Mary Jo White' funds -- that'​s what I call institutional prime funds that have a floating net asset value that are greater than 60 days. So we'​re going to score on all those streets."

On the SEC'​s FAQs, he said, "It was interesting to note that on the 60 day funds, they'​ve gotten into the communication and marketing of it, and here you'​re not permitted to say that you seek to maintain a $​1 net asset value on your 60 day fund. Regardless of whatever intents you have or however Debbie is managing the fund, you'​re not allowed to say that and further you must say that the NAV will fluctuate. So you have these two things to deal with. This will require increased education, and that'​s why I said in answer to an earlier question that once people see how these products work the education is complete, the dust settles, then people can logically see how these things are all being interpreted."

Donahue also stated, "In terms of amount of money in motion ... on the money fund side, we'​ve heard estimates from $​100 billion to $​500 billion of money moving from prime to govie on an initial basis. And I can'​t really put my finger on either side of that or come up with a good estimate myself.... We'​ve been having discussions with some of our larger clients [​about] increasing balances because of the Basel III impact of non-​operational deposits.... In terms of clients they'​re waiting to see how the dust settles. So I'​m not able to say what exactly our client base will do, and believe me we talk to them quite often. But they look at cash management as something that'​s simple and that'​s done and they'​ll decide when they have to. So I don'​t have a precise answer on what amount of our clients will go in which direction."

Cunningham adds, "I would say that from a retail prime perspective, that there will be something on the order of maybe 10% of those assets from a Federated standpoint shifting into something other than where they are now in that prime retail category. And it mostly has to do with broker-​dealer sweep.... The vast majority of our intermediaries that offer that service won'​t have an issue with it, but we found a few that likely could. On the higher side so that'​s sort of the low end of estimation of assets switching and money in motion. On the higher end, we'​re probably up in the third of the assets that would be and what would be our true institutional clients most of them retaining the capability.... So I think we have a variation depending upon the types of clients and I think that'​s probably ranging somewhere in the 10% up to 30%, 35%, 40% range with the initial money in motion change. And then with ultimately some of the portion of that going back into their original type of product at some point when spread to widen out. What that takes from a spread perspective is hard to say."

When asked about $​1 trillion possibly moving out of banks, Federated'​s Donahue answered, "​I can'​t comment on how you got the trillion dollars. I think it'​s big in terms of an opportunity. But don'​t forget that those banks are going to be doing everything they can to somehow keep that money in the family in some way, meaning their own family that doesn'​t negatively impact their capital, the ratios or how they run their business. So they'​re going to want to try to keep it, and they already have it. But on the other hand, that'​s why they'​re talking to us, because we'​re a warm and loving home. So I can'​t put a number on what we'​ll get. But there is a substantial opportunity and that'​s why I said at one point that I believe in the post 2016 environment you will see up assets in money funds."

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The Office of Financial Research published a brief entitled, "Repo and Securities Lending: Improving Transparency with Better Data" yesterday, which discusses "data gaps in U.​S. repurchase agreements and securities lending markets." Written by OFR'​s Viktoria Baklanova, it says, "​A paucity of data and a limited understanding of the institutional structure of these markets prevented regulators from fully identifying and responding to vulnerabilities during the 2007-​09 financial crisis. The OFR and Federal Reserve are conducting a pilot data collection to close these data gaps." We excerpt from the OFR paper below, and we also excerpt from J.​P. Morgan Securities most recent analysis of the securities lending cash reinvestment space. (Note: Federated Investors will also host its latest quarterly earnings call this morning at 9am; watch for coverage Monday.)

The OFR brief says, "Before the crisis, regulators had only limited information on the nature of funding obtained in the repo market, the quality of collateral, and the adequacy of risk management practices in securities lending. During the crisis, three types of vulnerabilities emerged to threaten financial stability: (​1) risk related to the leverage and liquidity incurred by market intermediaries, (​2) weaknesses in the market infrastructure, and (​3) the risk of asset fire sales."

It continues, "​Regulators have taken important steps to address some of these vulnerabilities. New standards for leverage and liquidity have led banks and affiliated dealers to reduce their repo dealings. Clearing banks addressed the intraday credit to repo dealers and market participants took steps to improve their liquidity and credit risk management, following the recommendations of a private sector task force sponsored by the Federal Reserve Bank of New York."

The OFR piece explains, "This brief reviews available data sources about repo and securities lending. It also assesses the data gaps and discusses the role of regulators in the United States and internationally in bridging those gaps. In the near future, the OFR will release a reference guide on U.​S. repo and securities lending markets. The guide will examine more closely how dealers and their clients use these markets, building on the ongoing research on the sources and uses of short-​term funding."

Finally, it adds, "High-​quality data covering repo and securities lending are needed for regulators to conduct in-​depth analysis of the pros and cons of policy options and to monitor current market developments. Comprehensive data coverage is still lacking. For example, the potential migration of repo activities from primary dealers to other firms is difficult to track. In 2014, the OFR and the Federal Reserve launched a joint pilot project to collect data to improve our understanding of bilateral repo and securities lending.... The pilot task force identified data elements essential for analyzing risks related to repo and securities lending. Data are needed to capture the dependence on short-​term funding of individual repo market participants, counterparty exposures, and interconnections among participants."

J.​P. Morgan Securities also sheds some light on the securities lending sector in its latest "Short-​Term Fixed Income weekly. A section entitled, "Revisiting Securities Lenders," says, "For better or worse, money market funds have been the subject of many people'​s attention recently. With $​1.​4tn of assets under management, prime money market funds have the ability to influence many parts of the short-​term markets. Other investors, like securities lenders (​sec lenders), who also play a large role in the money markets, tend to get lost in the shuffle. While sec lending reinvestment portfolio balances have declined significantly since mid-​2007, data from the Risk Management Association (​RMA) reveal that they still have approximately $​700bn of assets under management."

It continues, "In fact, over the past two years USD balances of sec lender portfolios have grown, to the tune of $​114bn or 19% according to RMA.... This scale of growth is consistent with other data sources. When we looked at the amount of global collateral held by four large sec lenders in support of sec lending indemnification agreements, over the past two years balances have increased by $​155bn (​or 19%) to $​974bn as of 4Q2014.... Similarly, Fed data on primary dealer financing activity shows that sec lending activity has also grown. In particular, total securities borrowed by primary dealers increased by $​60bn over the past two years, driven primarily by an increase in equities borrowed.... An increase in securities borrowed activity by dealers typically results in higher sec lender portfolio balances as securities lent are usually collateralized by cash."

JPM'​s Alex Roever, Teresa Ho and John Iborg write, "That cash is then reinvested in the short-​term markets. To that end, sec lenders' asset profile is very similar to prime MMFs. They invest in CP, CDs, repo and time deposits. But unlike MMFs, they are not regulated by the SEC and hence can invest in highly-​rated securities outside of 2a-​7 (​e.​g., 1-​3y corporate bonds). Indeed, according to RMA, WAMs to final maturity on sec lending portfolios are 88 days long. Even so, yields on sec lenders' cash reinvestment portfolios are modest, returning only 0.​22% as of 4Q2014. This is likely attributed to the fact that 56% of their portfolio are invested in repos, time deposits and MMFs.... Similar to other short-​term investors, sec lenders have increased their liquidity positions over the past two years, impacting returns."

Finally, JPM, which lists the four largest sec lenders in a table -- State Street, Bank of NY Mellon, J.​P. Morgan and Northern Trust -- tells us, "Overall, sec lending balances have stabilized after falling by a significant amount in 2008. The deleveraging among market participants that took place immediately after the crisis is largely behind us, as evident by the recent boost in assets under management. That said, it'​s unclear whether this trend could be sustained going forward. One challenge could be regulatory related as balance sheet constraints related to capital, liquidity and leverage could limit the amount of sec lending activity taken by dealers (​though so far, the regulations do not appear to have had a significant impact on activity)."

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The Securities & Exchange Commission posted a document entitled, "2014 Money Market Fund Reform Frequently Asked Questions," we learned from Joan Swirsky of Stradley Ronon. The SEC also posted a "Valuation Guidance Frequently Asked Questions." The FAQ explains, "The staff of the Division of Investment Management has prepared the following responses to questions related to the money market fund reforms adopted in July 2014 and expects to update this document from time to time to include responses to additional questions. Any updates will include appropriate references to dates of new or modified questions and answers. These responses represent the views of the staff of the Division of Investment Management. They are not a rule, regulation, or statement of the Commission, and the Commission has neither approved nor disapproved these FAQs or the interpretive answers to these FAQs. The 2014 money market fund reform Adopting Release is available at: http://​www.​sec.​gov/​rules/​final/​2014/​33-​9616.​pdf." The 53 questions represent mostly minor technical and legal issues, and the only interesting sections (​according to Crane Data) appear to be those addressing 60 day maturity funds (​saying they can'​t say they seek to maintain a stable NAV) and FDIC insured deposits (​saying these are not "​government securities").

The FAQ includes: one question on Form N-​MFP," two questions on "Form N-​CR," and three questions on "Form N-​1A." Regarding "Website Disclosure," one of the two questions says, "7. Q. Is a tax-​exempt fund required to calculate and disclose daily liquid assets percentages on the fund’​s website each day? A. No. Under rule 2a-​7(​d)(​4)(​ii), tax-​exempt money market funds are not required to maintain daily liquid assets. Therefore, notwithstanding the requirement that money market funds disclose the percentage of daily liquid assets on its website pursuant to rule 2a-​7(​h)(​10)(​ii)(​A), in the staff'​s view, a tax-​exempt money market fund may omit such disclosure."

Regarding "Funds that Invest only in Securities that Mature in 60 Days or Less," the SEC staff writes, "9. Q. Can a money market fund that is subject to a floating NAV state in its advertising, sales literature or prospectus that it will seek to maintain a stable NAV by limiting its portfolio securities to only those securities with a remaining maturity of 60 days or less and valuing those securities using amortized cost? A. No. The staff believes that a floating NAV money market fund may not state in its advertising, sales literature, or prospectus that it will seek to maintain a stable NAV by limiting its portfolio securities to only those securities with a remaining maturity of 60 days or less and valuing those securities using amortized cost, as such a statement would be misleading to investors. The staff expects that there will be market circumstances that may require a floating NAV money market fund'​s share price to fluctuate, regardless of how it limits its investment duration or its use of amortized cost for certain portfolio securities. For example, if a MMF is holding a security that experiences credit deterioration, that security'​s amortized cost may not be approximately the same as fair market value, even where the remaining maturity of that security is 60 days or less. Accordingly, as discussed in the Adopting Release, all floating NAV money market funds must state in their advertisements, sales materials, and prospectus, that the funds' share price will fluctuate. However, if a floating NAV money market fund states that it will seek to maintain a stable NAV, the staff is concerned that such potential contradictions could be confusing or misleading to investors."

It explains, "​A floating NAV money market fund may use amortized cost to value individual portfolio securities under certain circumstances pursuant to the guidance the Commission has provided in the Adopting Release and previously. However, as discussed in question 8 above, if a disparity were to arise between the amortized price of a security that matures in 60 days or less and the fair value of such a security that was large enough that it would affect the fund'​s NAV, then the staff believes that the use of amortized cost in that situation would not be compatible with the guidance provided in the Adopting Release as the amortized cost value of the portfolio security would not be "​approximately the same" as the fair value of the security determined without the use of amortized cost valuation. Associated issues are also discussed in question 8 above and in the FAQs provided on the valuation guidance."

On "Amortized Cost Guidance," the SEC'​s FAQ tells us, "10. Q. Is the guidance on the use of amortized cost valuation for securities with a remaining maturity of 60 days or less contained in the Adopting Release applicable to stable value government or retail money market funds? A. The guidance on the amortized cost method contained in the Adopting Release applies to funds' use of the amortized cost valuation method for certain individual securities. Under rule 2a-​7, stable value money market funds may value their entire portfolio using the amortized cost method of valuation, and accordingly in the staff'​s view, the guidance would generally not be relevant to those funds operations. Additionally, as noted in footnote 873 of the Adopting Release, under rule 2a-​7(​h)(​10)(​iii), stable value money market funds may not use the amortized cost method for individual securities or for their portfolio when they shadow price their shares."

They write on "Compliance Dates," "11. Q. Do the compliance dates for revised Form N-​MFP occur in two stages -- e.​g., report shareholder flows by April 14, 2016 but report NAV per shares to the fourth decimal place by October 14, 2016? A. The compliance date for amendments to all questions in revised Form N-​MFP is April 14, 2016. However, for those funds that have not determined whether they are retail or institutional before April 14, 2016, the fields in Form N-​MFP that pertain to NAV reporting may be marked as not applicable prior to October 16, 2014.... 13. Q. The compliance date for stress testing and certain other amendments is April 14, 2016; however, at least some of the amendments are not effective on that date if "​specifically related to either floating NAV or liquidity fees and gates." Since certain of the changes to stress testing modify the tests so they are appropriate to floating NAV money market funds, is the compliance date for stress testing amendments October 14, 2016? A. The compliance date for the amended stress testing requirements is April 14, 2016. However, for any stress testing requirements that are specifically related to a floating NAV fund (​such as the requirement to test principal volatility) the compliance date is October 14, 2016, although a fund may comply earlier. 14. Q. What is the compliance date for the new definition of government money market fund? A. The compliance date for the amendments related to the fundamental reforms (​floating NAV and liquidity fees and gates, which includes the definitions of government money market fund) is October 14, 2016. Accordingly, a fund must meet the new definition of government money market fund by October 14, 2016 in order to use amortized cost or the penny rounding method thereafter, although the fund may begin to comply earlier."

The SEC also answers six questions on "Retail Money Market Funds," three questions on "Insurance Separate Accounts," five questions on "Fees and Gates," one question on "Treasury Money Market Funds," and six questions on "Government Money Market Funds." One interesting response among this last group is: "34. Q. Are bank certificates of deposit, which are insured up to the $​250,​000 FDIC insurance limit, "​government securities" for purposes of the definition of a government money market fund? A. The staff has previously declined to provide no-​action assurance that FDIC-​insured bank certificates of deposit are "​government securities" within the meaning of Section 2(​a)(​16) of the Act for purposes of determining whether an entity is an investment company under the Act. See Western International Insurance Company (​pub. avail. July 24, 1985). The staff has not altered or rescinded this no-​action position. The staff similarly does not view FDIC-​insured bank certificates of deposit as "​government securities" for purposes of the definition of a government money market fund."

The 16-​page FAQ also addresses issues involving: "Transition and Reorganizations," "Registration Fee Credits," "Cash Items for Purposes of "​Investment Company" Definition," "Diversification," "Performance Record," "Rule 2a-​7 References," "Asset-​Backed Securities," "Rule 22e-​3," and "Maturity."

Finally, the SEC'​s accompanying 2-​page "​Valuation Guidance Frequently Asked Questions" says, "The staff of the Division of Investment Management has prepared the following responses to questions related to the valuation guidance for all mutual funds provided in the release adopting money market fund reforms in July 2014, and expects to update this document from time to time to include responses to additional questions. Any updates will include appropriate references to dates of new or modified questions and answers. These responses represent the views of the staff of the Division of Investment Management. They are not a rule, regulation, or statement of the Commission, and the Commission has neither approved nor disapproved these FAQs or the interpretive answers to these FAQs. The 2014 money market fund reform adopting release ("​adopting release") is available at: http://​www.​sec.​gov/​rules/​final/​2014/​33-​9616.​pdf and the valuation discussion begins at page 47812 of the release."

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The latest issue of our flagship Money Fund Intelligence newsletter features the article, "Wells Fargo'​s Weaver Says Clients Still Want Yield Too," which profiles Wells Capital Management'​s new head of money market funds, Jeff Weaver. We reprint our Q&​A below... When Dave Sylvester, the long-​time head of money market funds at Wells Fargo, announced his retirement at the end of 2014, the reins were handed over to Jeff Weaver, who now wears two hats. Weaver, the head of Wells Capital Management'​s short-​duration team, also become head of the money market fund team effective January 1, 2015. We sat down with him to get his thoughts on not just money funds, but on separate accounts and the short‐​duration bond fund space. He also discussed how Wells is evaluating its money fund lineup to prepare for the upcoming rule changes.

MFI: How long have you been involved in the money fund space? Weaver: Wells Fargo has been offering money market funds for 30 years. The oldest fund is the Wells Fargo Advantage Treasury Plus Money Market Fund, which has an inception date of Oct. 1, 1985. Our funds and our talent are really the result of various mergers and acquisitions. Currently, we'​re the 9th largest money fund provider with more than $​112 billion. As for me, I joined the firm in 1994. I started my career at Bankers Trust in 1991. For the majority of my career I have been involved in the short duration and money market space. Since 2002, I'​ve overseen the short-​duration fixed-​income team at Wells Capital Management. My team specializes in managing separate accounts for corporations, municipalities, and other institutional accounts. Our clients typically have large exposures to money market funds and deposits, but they also look to separate accounts and short‐​term bond funds to add diversification, customization, and yield.

There'​s a lot of cooperation and coordination that goes on between the short duration fixed-​income team and the money market team. Matt Grimes and his group of analysts are the primary taxable credit research resource for both of these teams. In the past when Dave [​Sylvester] headed up money funds, our teams were very much aligned, much like they are today. Over the years, he'​s been a great advisor and mentor. Today, I'​m working very closely with a tremendous core of senior fund managers that includes Laurie White, Mike Bird, Jim Randazzo, Vlad Stavitskiy, and our head of short‐​duration municipal credit research, Ken Anderson.

MFI: What is your biggest priority now? Weaver: Our biggest priority is -- and has always been -- our clients. We want to ensure that we are providing them with the best solutions for their liquidity management needs. We aim to offer liquidity and preservation of capital while maintaining a stable NAV. But certainly, we do all of this against the backdrop of money market reform, as the new rules are officially coming into place in October 2016. Here at Wells Fargo, we have a large team dedicated to complying with these new rules with members from operations, fund administration, IT, portfolio management, legal, compliance, and sales. From the operation side, these new rules will take a tremendous effort to implement. When looking at money fund reform through a portfolio management lens, however, the news rules won'​t prompt a dramatic change from what we'​ve done before. For example, consider our government funds -- we'​ve always complied with them being at least 99.​5% invested in government securities.

MFI: Can you tell us about supply? Weaver: We are seeing a consistent lack of supply. Money fund reform is practically at odds with the increased bank regulations we have seen put into effect since the financial crisis in 2008. Money funds rely on extremely short-​term funding. Yet, banks are being pressed to move away from short-​term debt and to issue longer-​term funding. This lack of supply is consistent when you look across each type of money fund (​prime, municipal, government). For example, much of the issuance that is available to prime funds is bank originated, creating an endless supply and demand struggle. [​We see this], too, in government funds. Bank funding via repurchase agreements comprises a major asset class in government money funds. Also impacting supply is the increase in demand of bills. Banks now are required to hold more high quality liquid assets (​HQLA) so bank demand for bills is increasing. This all adds up to a big challenge when managing money funds today.

MFI: Will you make any lineup changes? Weaver: We remain committed to offering retail and institutional prime, government, and municipal funds -- particularly if that'​s what our clients want -- and we believe they do. Many of our clients are in a wait-​and-​see mode until that October 2016 deadline approaches. Right now, we'​re evaluating our product lineup. We'​re speaking with clients with the goal of developing product solutions that best meet their needs. Our client base is largely institutional -- 90% institutional versus 10% retail -- so that is always front of mind as we'​re making these changes. Once we finalize a plan of action, we will present it to our Funds' board. We will not make any announcements until the board has seen and approved those changes.

MFI: What concerns are you hearing? Weaver: When the rule changes were first announced, clients initially were quite concerned about the floating NAV. There'​s still some concern about how that'​s going to work for same day settlement and sweep type mechanisms, but not as much as before. Clients remain concerned about the capital preservation portion of a variable NAV, although we believe that they will find the NAV changes to be negligible. Lastly, our clients are now having more of a concern around fees and gates. We continue to keep them apprised of our portfolios and regulatory matters through our monthly commentary and education primers.

MFI: How have you handled fee waivers? Weaver: Fee waivers are definitely impacting us, our competitors as well, in this low interest rate environment. We'​ve been waiving fees now for some time, yet we remain convinced that money market funds are an important investment option for our clients. We believe fee waivers to be a temporary factor which will be best solved by an increase in interest rates. Generally speaking, institutional fund yields will react more quickly to increased rates because there are a lot less waivers involved.

MFI: Are you seeing interest in "​enhanced cash"? Weaver: We always advise our client to tier their liquidity management strategy. Many of our clients in the money fund space are already customers of our enhanced cash and short-​term bond offerings. It certainly is a compelling time to consider other options other than money funds, and that'​s one of the reasons we have aligned our money market fund and short duration capabilities. In short duration fixed-​income funds and separate accounts we have over $​60B in assets -- about $​40B of that is in separate accounts while the remainder is in ultrashort and short‐​term bond funds.

In the ultra‐​short space, we have four differentiated offerings -- the Adjustable Rate Government Fund, the Ultra Short-​Term Income Fund, the Ultra Short-​Term Municipal Income Fund, and the one we get really excited about is our Conservative Income Fund. We feel like it is a natural extension for money fund customers. We launched the Conservative Income Fund in 2013, and utilized the separate account team'​s track record. The fund has a one-​year maximum average duration, and a limit of 3 1/​2 years' duration for any one security. Securities purchased are limited to an A-​rating or better and are diversified between money market securities, governments, corporate bonds, and asset-​backed securities. The fund was designed to look a lot like the institutional investment policies that we'​ve become quite accustomed to seeing over the past three decades. We think that the Conservative Income Fund is a low volatility NAV option, and an extension beyond the money market fund universe that allows clients to pick up additional yield. It can perhaps be a solution for the next step beyond money market funds.

MFI: Tell us about separate accounts. Weaver: The benefits of using separate accounts are that you can get beyond the money market universe and pick up additional yield, but also you have the ability to customize to your preferences and cash flows. We can customize a separate account to reflect each customer'​s unique return objectives, risk tolerance, biases, and cash flow needs. We manage separate accounts that range from money market fund-​like accounts out to benchmarks that are in the one-​to-​five-​year range ... to pick up the additional yield.

We refer to separate accounts just beyond money market funds as "​enhanced cash." They tend to have portfolio durations less than one year and keep their maturities at three years or less. They tend to be invested in single-​A or better credits although increasingly we'​ve seen clients willing to go lower in credit quality. That'​s why we created the Conservative Income Fund; it'​s representative of those enhanced cash separate accounts. We also offer products in the limited duration space. These tend to have durations right around the two‐​year mark. We have many variations of these in the separate account side, in addition to our short‐​term fund offerings, the Short‐​Duration Government Bond, Short‐​Term Bond, and Short‐​Term Municipal Bond funds.

MFI: Are you launching any new products? Weaver: We'​re certainly aware of the 60‐​day [​maximum maturity] money fund option. We have not ruled out anything. We'​ll certainly consider it. If we feel like that is what is going to help our clients the most, then we will look to pursue it. However, we do get concerned about supply, and wonder if the 60-​day fund is going to offer the yield that clients want given the supply/​demand dynamics we just discussed. In the end, clients want liquidity, they want capital preservation, but they want yield as well. That'​s why you haven'​t seen a shift away from prime funds yet, because for the time being they can continue to earn the additional yield in institutional prime funds.

MFI: What is your outlook for rates? Weaver: We expect the Fed to raise rates this year albeit at a slower pace than we'​ve been accustomed to seeing in previous tightening cycles. The March FOMC meeting, despite the removal of "​patient," had a very dovish tone to the comments and perhaps that pushes off the first increase to later in the year. Now, the increased demand for government securities -- not only from a shift from prime to government, but also from banks with their increased HQLA holdings -- could cause the spread between prime and government to increase. Where we are today with government vs. prime, it'​s only a modest pickup in yield. But it'​s quite possible that in the future we could see spreads of 25, 40, or even 50 basis points. All of a sudden, it becomes a much different decision for our clients and, at that point, prime funds could be quite attractive.

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The Investment Company Institute released its latest "Money Market Fund Holdings" report (​with data as of March 31, 2015), which tracks the aggregate daily and weekly liquid assets, regional exposure, and maturities (​WAM and WAL) for Prime and Government money market funds. ICI'​s "​Prime and Government Money Market Funds' Daily and Weekly Liquid Assets" table shows Prime Money Market Funds' Daily liquid assets at 24.​9% as of March 31, 2015, down from 25.​6% on Feb. 28. Daily liquid assets were made up of: "​All securities maturing within 1 day," which totaled 19.​2% (​vs. 21.​1% last month) and "​Other treasury securities," which added 5.​8% (​up from 4.​5% last month). Prime funds' Weekly liquid assets totaled 37.​9% (​vs. 37.​9% last month), which was made up of "​All securities maturing within 5 days" (​30.​8% vs. 32.​3% in February), Other treasury securities (​5.​8% vs. 4.​9% in February), and Other agency securities (​1.​3% vs. 1.​1% a month ago). ICI Economist Chris Plantier also commented on the latest data in a blog post, "Federal Reserve Reverse Repo Facility Helps Stabilize Short-​Term Money Markets." (​See also our previous Money Fund Portfolio Holdings story, Crane Data'​s April 13 News, "April MF Portfolio Holdings Show Spike in Fed Repo,​Treasury Jump.")

Government Money Market Funds' Daily liquid assets totaled 56.​0% as of March 31 vs. 56.​4% in February. All securities maturing within 1 day totaled 18.​4% vs. 24.​6% last month. Other treasury securities added 37.​6% (​vs. 31.​8% in February). Weekly liquid assets totaled 82.​6% (​vs. 80.​9%), which was comprised of All securities maturing within 5 days (​38.​2% vs. 40.​3%), Other treasury securities (​35.​6% vs. 29.​4%), and Other agency securities (​8.​8% vs. 11.​2%).

ICI'​s "​Prime and Government Money Market Funds' Holdings, by Region of Issuer" table shows Prime Money Market Funds with 50.​4% in the Americas (​vs. 40.​5% last month), 19.​9% in Asia Pacific (​vs. 20.​2%), 29.​4% in Europe (​vs. 39.​0%), and 0.​3% in Other and Supranational (​same as last month). Government Money Market Funds held 91.​9% in the Americas (​vs. 85.​7% last month), 0.​2% in Asia Pacific (​vs. 0.​4%), 7.​9% in Europe (​vs. 13.​9%), and 0.​1% in Supranational (​vs. 0.​1%).

The table, "​Prime and Government Money Market Funds' WAMs and WALs" shows Prime MMFs WAMs at 42 days as of March 31, down from 44 days last month. WALs were at 79 days, same as last month. Government MMFs' WAMs was at 44 days, up from 42 days last month, while WALs was at 81 days, up from 80 days. ICI'​s release explains, "​Each month, ICI reports numbers based on the Securities and Exchange Commission'​s Form N-​MFP data, which many fund sponsors provide directly to the Institute. ICI'​s data report for December covers funds holding 94 percent of taxable money market fund assets." Note: ICI publishes aggregates but doesn'​t publish individual fund holdings.

ICI'​s Plantier writes, "Following a pattern observed at the end of recent quarters, money market fund holdings of European issuers dropped at the end of March, although the decline was not as large as the previous quarter, ending December 2014. As we have noted before, for regulatory reasons European banks have been paring their balance sheets at the end of each quarter, resulting in a temporary decline in their desire to borrow from money market funds. Consequently, money market funds have temporarily parked some assets with the Federal Reserve through the Fed'​s reverse repurchase (​RRP) facility. This increase in "​lending" to the Federal Reserve helps prevent a buildup of excess liquidity in the financial system at the end of each quarter that would otherwise cause short-​term interest rates to fall temporarily."

He adds, "According to ICI'​s analysis of data collected by the U.​S. Securities and Exchange Commission on SEC Form N-​MFP, prime and government money market funds held at least $​307 billion combined in overnight and term RRP agreements on March 31, 2015. For government money market funds, 50.​5 percent of repo agreements were attributable to the Federal Reserve as a counterparty in March. For prime money market funds, 51.​8 percent of repo agreements were executed with the Fed in March. March 2015 marked the second time the Federal Reserve was a repo counterparty for more than half of the repurchase agreements entered into by taxable money market funds, the first being December 2014. If not for the Federal Reserve'​s RRP facility, short-​term money market interest rates likely would have fallen significantly at the end of March."

In their latest "Prime Money Market Fund Holdings Update," JP Morgan Securities', Alex Roever, Teresa Ho, and John Iborg report that, "Prime money market funds experienced $​20bn in outflows during March. Assets invested in prime institutional funds decreased by $​18bn, while prime retail balances fell by $​2bn. Separately, government fund assets decreased by $​17bn during the month. Taxable MMF assets decreased by $​64bn during the first quarter of 2015. The decline was split almost evenly between prime and government MMFs: government fund AuM decreased by $​37bn, while prime fund AuM decreased by $​28bn. First quarter net outflows from taxable funds are typical as cash built up around year-​end begins to dissipate, and this year'​s decline showed to be in line with recent history."

They continue, "Prime funds shortened their maturity profiles over the course of March, likely as a means to meet anticipated investor redemptions at the end of the month. Composite weighted average maturities of prime MMFs dropped by 3 days mostly during the last days of March. At 39 days, prime fund WAMs currently stand near their multi-​year low. Additionally, holdings of US Treasury securities increased by $​17bn or 25% month-​over-​month, which could be another sign of fund managers attempting to bolster liquidity. Looking forward, we expect prime funds to become increasingly conscientious of building liquidity as SEC money market fund reform continues to reshape the industry. The combination of investors shifting their cash out of prime funds and large fund families modifying their product offerings is likely to put emphasis on ensuring that ample liquidity is maintained for prime MMFs. Indeed, to date, six major complexes representing almost half of the MMF business in terms of AuM have made some form of formal announcement to address their respective strategy for dealing with money fund reform rules. Whether it be converting prime funds into government fund status, or instituting short maturity funds, higher liquidity levels will be needed."

They add, "Prime money market funds decreased exposures to banks by $​141bn month-​over-​month. The sharp pullback in bank outstandings was driven primarily by time deposits balances, which fell $​117bn.... In addition to time deposit shedding, many banks also reduced outstandings in the repo market at the end of March. Although almost all of this activity was with government MMF counterparties, it further illustrates the temporary shedding of short-​term wholesale funding that occurs around quarter-​ends.... Away from time deposits, bank balances of CP and CD fell by $​19bn and $​22bn respectively, concentrated in the United Kingdom and France. Allocations to ABCP/​CCP, repo, and other bank paper went practically unchanged across most regions."

Further, "Money market funds represented $​310bn, or 82% of aggregate Fed RRP usage at quarter-​end. MMFs took down $​144bn of the $​176bn in total usage for the two term operations conducted prior to the end of the March. During the overnight operation conducted on March 31st, money funds took down $​167bn of the $​202bn in total overnight RRP usage. Similar to what transpired at the end of the year, prime funds used the RRP increasingly towards the end of the quarter, whereas government fund demand was more consistent. While government MMFs were the largest users of the first term operation conducted on March 19th, prime funds came in more for the last term offering on March 30th, and overnight offering on the 31st. Higher yielding market rates likely lured prime funds away from the RRP and into alternative product until the end of the month when a source of temporary backstop supply was needed."

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Invesco released a brief letter to clients, updating them on its plans for the company'​s money market funds in response to SEC reforms. The main point of the message is to announce that Invesco does not plan to implement fees and gates on its government money market funds. They also state their intention to "provide our investors with a full suite of liquidity management solutions to meet their investing needs with the least amount of disruption." Also, Federated Investors announced that it has finalized its deal to acquire the assets of Reich & Tang'​s money market funds. Reich & Tang, the 25th largest money fund manager, declared in March that it was getting out of the money fund business due to the "​challenging landscape for money funds," the company said in a news release, which we covered in our March 13 "Link of the Day," "Reich & Tang Announces Liquidation of Money Market Mutual Funds." A few days later, Federated announced that it was in negotiations with Reich & Tang to acquire its MMF assets. (​See our March 17 "News," "Federated In Talks with Reich & Tang Over MMF Assets.")

Invesco'​s "Money Market Regulatory Reform," letter says, "​Invesco has been thoughtfully evaluating the impact of money market fund reform in order to provide our money market investors with the best possible outcome. We have been listening to your questions, and working through the concerns that you have articulated. As part of this process we want to make you aware of our intentions regarding two key elements relating to government money market funds in the new regulations. The latest reform also strengthened the definition of government funds requiring government funds hold at least 99.​5% of their assets in cash, US government securities, and/​or repurchase agreements collateralized by US government securities. Invesco'​s government funds have historically invested 100% of their assets in cash, US government securities, and/​or repurchase agreements collateralized by US government securities and are therefore already in compliance with that heightened standard. Our government money market funds will continue to remain in compliance with this rule in advance of its effective date."

It continues, "​We have reviewed our intentions with the funds' Board of Trustees. Accordingly, each of Invesco'​s Treasury Portfolio, Government & Agency Portfolio, Government TaxAdvantage Portfolio, and Premier US Government Money Portfolio (​collectively "​Invesco'​s government funds") are announcing today that they have no current intention of adopting liquidity fees or redemption gates and will continue to comply with the new definition of a government fund when money market reform is implemented on October 14, 2016."

Finally, Invesco explains, "​For more than 30 years, the Invesco Global Liquidity team has worked to gain and keep the trust of our investors through our deep industry knowledge and investment expertise. Our primary goal through the money market fund reform process is to provide our investors with a full suite of liquidity management solutions to meet their investing needs with the least amount of disruption while remaining focused on our disciplined investment process. For Invesco Global Liquidity, safety is of paramount importance in the investment process for all of our money market funds. Our conservative investment philosophy has always focused on providing safety, liquidity, and yield -- in that order -- to our money market fund investors."

Another release, entitled, "Federated Investors, Inc. Finalizes Arrangement with Reich & Tang Asset Management, LLC to Transition Approximately $​7 Billion in Money Market Fund Shareholder Assets, says, "In connection with the transition, approximately $​7 billion in shareholder accounts from six Reich & Tang money market funds will be transitioned into Federated strategies. The transaction is designed to assist with the orderly liquidation of Reich & Tang'​s domestic and offshore money market funds. The agreement provides for Federated, Reich & Tang, financial intermediaries and shareholders to work together on a coordinated and cooperative basis to transition the assets in shareholder accounts from the Reich & Tang money market funds to comparable Federated money market funds. Federated is now working with Reich & Tang customers on the transition, which is expected to take place in stages beginning in June and running through July 2015."

Solon A. "​Bud" Person, National Director for the Wealth Management & Cash Division at Federated, says, "As a leading provider of liquidity management services, Federated regularly works with organizations of many types and sizes as they evaluate their liquidity businesses. We are currently reaching out to clients of Reich & Tang funds to introduce them to the range of cash-​management solutions that we offer and work to achieve a seamless transition of their business to Federated."

President & CEO Michael Lydon, adds, "Reich & Tang made a strategic decision to exit the money market fund business and focus on our leading FDIC-​insured sweep programs in the bank and brokerage spaces.... The agreement with Federated establishes a framework to accomplish this goal and provides us with the peace of mind that the Reich & Tang money market shareholders will have the option to move forward with a premier money market fund provider." The release adds, "​The transaction and related transition of assets are subject to certain customary approvals and contingencies, such as shareholder consents."

In recent weeks, Federated also announced plans to acquire the Touchstone Ohio Tax Free Money Market Fund. The fund, with about $​91 million in assets, will be rolled into the Federated Ohio Municipal Cash Trust. Touchstone is another firm that recently announced its exit from the money fund space. In March, the company announced that its $​1.​1 billion in money market funds would be acquired and run by Dreyfus, as we reported on March 5 in the story, "Touchstone Rescinds Liquidations, Moves to Dreyfus; MFS Goes Govt."

Given the changing landscape for money funds, these two mergers could be just the beginning of a period of consolidation in the space. As BlackRock President Rob Kapito said in the company'​s first quarter earnings call, "​We'​re also seeing some of the smaller money market groups approaching us, as well, because scale and size is going to be very important to be able to satisfy clients' needs."

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BlackRock hosted its first quarter earnings call yesterday, and President Rob Kapito discussed the company'​s recent money market fund lineup change announcement. (​See our April 7 News, "BlackRock Announces Changes, Keeps Options Open; TempFund Floats.") Also, CEO Laurence Fink talked about the "​dangerous imbalance" created by the low interest rate environment. In its latest earnings release, BlackRock reported assets under management of $​4.​774 trillion, an increase of 3% in the first quarter and 8% over the last 12 months. `​Cash Management assets, which include money market funds, stood at $​292.​5 billion as of March 31, down 1% from Dec. 31, 2014, but up $​29.​0 billion over the last 12 months.

In the Q&​A portion of the earnings call, Kapito was asked whether the conversion of prime to government funds will impact yields of T-​bills, and accordingly, government money market funds. He said regulatory changes and the path of interest rates are going to "have a pretty big impact on where we'​re going to see flows in the money market arena. Right now, we'​re seeing more flows internationally than domestically, we'​re seeing more in prime than in government, and if rates [​and regs] change, that will reverse."

Kapito continued, "We have gone out to our clients and are talking to them about the future regulations and preparing products for them that will make sense. Some of those [​products] will be constant NAV government money market funds, without redemption gates or liquidity fees. We'​ll have the floating NAV institutional prime money market fund and we plan to maintain our largest prime fund, which has about $​66.​5 billion ... that'​s the TempFund. That will be our prime institutional fund. Then we have others that we'​re preparing -- a floating, short maturity institutional prime money market fund, constant NAV government funds, and short maturity national and state-​specific muni funds. We'​re also prepared to do separate accounts."

He added, "​Of course, the implementation date of all of these new products is around October of 2016. So, we'​re working together with our clients to make sure that we'​re prepared no matter where rates go."

Kapito commented, "Year-​over-​year, about $​39B has been added into the cash funds and that'​s about 15% year-​over-​year growth. There'​s still a lot of demand for money market type products; it will just change some of the nuances to be able to comply with the regulatory issues. But this is a big business for us. We'​re also seeing some of the smaller money market groups approaching us, as well, because scale and size is going to be very important to be able to satisfy clients' needs."

Fink added, "​Divergent economic conditions and central bank actions have sent currency markets into one of the most volatile periods on record, affecting both developed economics, such as Japan and the Eurozone, as well as the emerging markets. Historic low rates have been having a tremendous impact on how investors save for the future. The pool of funds in search in returns to meet future liabilities is growing larger every day. This mix of growing assets, of shrinking supply, of low rates, is creating a dangerous imbalance and the increasingly desperate search for yield is now the great single source of prudential risk in the financial system."

In other news, NY Federal Reserve Executive Vice President Simon Potter spoke Wednesday on "Money Markets and Monetary Policy Normalization." On the Fed'​s Overnight Reverse Repo Program (​ON RRP), Potter said, "Extensive testing of ON RRPs and other supplementary tools have provided policymakers with confidence that they will be able to maintain control over interest rates -- that is, that rates will move up with increases in the IOER rate -- during the normalization process. An important determinant of the effectiveness of an ON RRP facility is whether a sufficiently wide set of nonbank counterparties has access to it. The New York Fed currently executes RRPs with 163 counterparties comprising many of the major cash lenders in secured and unsecured money markets -- including money market funds that manage about 70 percent of the total U.​S. money market fund assets under management and account for more than a quarter of total tri-​party repo lending against government collateral."

He explained, "​This provides a high degree of confidence that we are transacting with an adequate set of counterparties to achieve our policy execution objectives. Throughout the testing regime, the Desk has varied the settings and design of the reverse repo operations, with operational results informing subsequent changes. We'​ve operated at different times of the day, increased the maximum bid limit per counterparty, and introduced an aggregate cap of $​300 billion and a single-​price auction mechanism to allocate awards should the sum of submitted bids exceed the cap. We'​ve also adjusted the offering rates and tested ON RRPs in conjunction with term RRPs at quarter-​ends. These adjustments have allowed us to learn how ON RRPs might be used to support the monetary policy objectives of the FOMC."

Potter added, "Overall, observations from testing and reports from market participants suggest that ON RRP operations generally work the way we have expected, with market participants evaluating the attractiveness of ON RRP investments relative to other opportunities available to them in the market. Indeed, take-​up in the operations generally increases as the spread between alternative market rates and the ON RRP offering rate narrows, and aggregated usage patterns differ across counterparty types."

He concluded, "Although the Federal Reserve will be removing its policy accommodation in a much-​changed money market environment, the Desk is ready to implement policy firming when the FOMC determines that economic and financial conditions warrant it. The minutes of the March FOMC meeting outline the Federal Reserve'​s intended operational approach, and our testing program gives us confidence that we have the necessary tools to enable a smooth liftoff. The minutes highlight that policymakers will be particularly careful at the start because demonstrating appropriate control over the federal funds rate and other short-​term rates is a priority. This may entail elevated aggregate capacity in an ON RRP facility at liftoff because we don'​t know how much support we are currently getting from the zero lower bound, which creates some uncertainty about the demand for ON RRPs. However, the ON RRP will be used only to the extent necessary for monetary policy control because it has some potential financial stability and footprint costs associated with it."

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On Capitol Hill yesterday, SEC Chair Mary Jo White told lawmakers that the SEC was seeking 12 new positions in its Division of Investment Management to, among other things, monitor money market funds' compliance with the new requirements. White was providing "Testimony on the Fiscal Year 2016 Budget Request of the U.​S. Securities and Exchange Commission" to the House Subcommittee on Financial Services and General Government Committee on Appropriations. It'​s one of several news briefs we'​re following today. We also report on a speech delivered yesterday by the Office of Financial Research'​s Richard Berner at the SIFMA Ops Conference, where he talks about a new repo data gathering initiative. In addition, we report on SEC Commissioner Daniel Gallagher'​s recent speech, as well as commentary from the Investment Company Institute regarding a recent study by the International Monetary Fund.

White told the Congressional subcommittee, "[​T]​he SEC is seeking 12 new positions for its Division of Investment Management to operationalize new rulemaking requirements, offer enhanced guidance to registrants, expand the disclosure review program'​s ongoing analysis of industry trends, and provide additional oversight of private fund advisers. The new positions would also monitor money market funds' compliance with the new requirements adopted in FY 2014 by the Commission, as well as assist in adopting -- and ultimately operationalizing -- the package of measures for enhancing the asset management industry'​s risk monitoring and regulatory safeguards."

She also discussed significant achievements over the past year, including money fund reforms. "​The Commission completed reforms designed to enhance the structure and operation of the $​3.​7 trillion money market fund market to enhance the protection of investors and to support financial stability."

At the Securities Industry and Financial Management Association Ops Conference on Tuesday in San Diego, OFR Director Richard Berner talked about a new initiative. He said, "​Through bilateral data-​sharing agreements among FSOC member agencies, all participants can be assured that shared data will be protected, secured, and treated consistently. We are already sharing data under such agreements. Examples include our access to the Securities and Exchange Commission'​s detailed data about hedge funds and other private funds in Form PF, and their detailed money market fund data in Form N-​MFP."

Berner continued, "​To form a complete picture of the financial system, we must also fill gaps by collecting new data from firms and markets. Our partnership with the Federal Reserve to fill gaps in data describing repurchase agreements, or repo, is a good example of such initiatives. In October, we announced a pilot project to understand how to fill these gaps, and today, we are well underway.... Repos are an important source of short-​term funding for the financial system. The U.​S. repo market provides an estimated $​3.​8 trillion in funding daily. However, the repo market can also contribute to risks to financial stability. The repo market is comprised of two parts: the triparty repo market, in which transactions are centrally settled by two large clearing banks, and the bilateral market, where repo transactions are cleared and settled privately between two firms.... Information and data on the triparty market are published regularly, but information about bilateral repos is scant."

Berner added, "The project is designed to fill the gaps in bilateral repo data, and it marks the first time the OFR is going directly to industry to collect financial market information. Participation in the pilot project is voluntary, and participating companies have provided input on what data should be gathered and what templates should be used for data collection. This pilot is intended to inform future collection efforts, which we hope to initiate quickly. Aggregated data from the pilot will be published to provide greater transparency into the bilateral repo market for participants and policymakers. This repo pilot project is one example of how the OFR looks across the financial system to fill gaps in analysis and financial data. We have also begun a related initiative -- a first cousin to the repo project -- to fill gaps in securities lending data. Working with the Fed and the SEC, we are reaching out to lenders and borrowers to understand where the gaps are."

White'​s colleague, SEC Commissioner Daniel Gallagher, discussed "Bank Regulators at the Gates: The Misguided Quest for Prudential Regulation of Asset Managers" at the Virginia Law and Business Review Symposium on April 10. Gallagher talked about misguided efforts by FSOC to regulate asset managers, citing initial efforts to regulate money market funds, saying, "​In November 2012, the members of FSOC voted unanimously to approve a proposal that, if adopted, would allow FSOC to issue a formal "​recommendation" on money fund regulation to the SEC.... Fortunately, FSOC'​s proposal never advanced to the adoption stage, but FSOC had proven its willingness to cross the Rubicon of imposing its will on an ostensibly independent regulator if its threats were not heeded."

He continued, "Possibly fueled by money market fund adrenaline, in 2013 FSOC commenced a review to determine whether certain asset management firms should be designated as systemically important financial institutions, or "​SIFIs," and therefore be subject to enhanced prudential standards and supervision." He also commented on how FSOC has typically followed FSB recommendations. "​For example, in November 2012, the FSB endorsed a recommendation to subject money market mutual funds to capital requirements unless they adopted a floating net asset value. The very next day, the FSOC issued a public report in which it pressured the SEC to adopt either floating NAV or capital buffer rules."

Also, ICI'​s Sean Collins, senior director, and Chris Plantier, senior economist for industry and financial analysis, posted commentary on a report released by the IMF last week on Global Financial Stability. In their commentary, entitled "The IMF Is Entitled to Its Opinion, But Not to Its Own Facts," Collins and Plantier take issue with some of the "​facts" in the report. They write, "​On Wednesday, the International Monetary Fund (​IMF) released its latest Global Financial Stability Report (​GFSR), including a chapter on the asset management industry and financial stability. The IMF argues that regulated funds domiciled in developed countries may amplify shocks to emerging markets, thus destabilizing those markets.... As the late senator Daniel Patrick Moynihan said, "​You are entitled to your opinion. But you are not entitled to your own facts." In reality, the IMF'​s figures overstate by a wide margin both the level and growth in the emerging market bonds held by regulated funds domiciled outside of emerging market economies. And the overall message of risk posed by emerging market funds is also inflated."

Finally, the New York Fed'​s Liberty Street Economics blog had a post called "The FR 2420 Data Collection: A New Base for the Fed Funds Rate." It says, "​On April 1, 2014, the Federal Reserve began collecting transaction-​level data on federal funds, Eurodollars, and certificates of deposits from a large set of domestic banks and agencies of foreign banks operating in the United States. Previously, the Fed had only received fed funds and Eurodollar data from major brokers, and not directly from the banks borrowing in these markets. These new data, collected on form FR 2420, have helped the Fed better understand activity in the fed funds and Eurodollar markets. In this post, we focus on the new data on fed funds, in light of the Federal Reserve Bank of New York'​s Trading Desk announcement that it plans to use these data to calculate and publish the fed funds effective rate."

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In his latest "Money Markets Monthly Update," Barclays Joseph Abate comments on the "​future of repo" and examines the moves that money market fund complexes have made to date in response to the SEC'​s money market fund reform. Also, Citi Research Strategist Vikram Rai talks about how too much cash chasing too few assets in the short duration space has reached a tipping point and he analyzes the impacts of BlackRock'​s recently announced MMF changes.

On the future of repo, Abate writes, "Regulators hope to see a smaller, less systemically risky repo market emerge in the coming year. But it is not clear whether they have a specific size "​target" in mind." What happens next? Abate writes, "We expect repo activity to decline as banks adapt to a new world of leverage limits, net stable funding, and liquidity requirements. Repo volumes could fall by an additional 20% from here. The timing of the adjustment is unclear. Regionally, banks are at different stages in the adjustment process. A smaller repo market in which balance sheet reporting dates are less significant (​because of daily averaging) might be less volatile and more predictable."

He also discussed rising demand created by "​money fund reform and a conversion of (​some) prime funds to government-​only. Government only funds invest 35% of their balances in repo, and there is $​1.​4trn in prime funds potentially facing either floating NAVs or liquidity fees and redemption gates." Also, he adds, "Large banks may decide to push non-​operating deposits off their balance sheet, given deposit insurance and balance sheet costs. How quickly will banks raise their deposit rates once the Fed lifts off? Lingering secular bill supply scarcity might push more investors toward repo, especially if investor demand for government-​only funds rises."

On money market reforms, Abate looks at the range of strategies that have been announced by money fund complexes thus far. "Managers responsible for roughly 40% of prime institutional fund balances have already announced their post-​reform plans," he writes. They have announced a variety of strategies, which Abate enumerated: "​1. Consolidate funds with similar investment objectives; 2. convert prime institutional funds to government-​only funds; 3. Shorten the maximum maturity of prime funds to less than 60d; 4. Do nothing -- let the (​institutional prime) NAV float and adopt fees and gates; 5. Establish separate accounts for some large cash investors."

Of what has been announced so far in the $​1 trillion Institutional Prime space, $​262 billion will float the NAV, with gates and fees. In addition, $​2.​5 billion will float the NAV with maximum maturities of 7 days or less, while an undetermined amount of assets will float the NAV with maturities of 60 days or less. Also, $​130 billion will convert to government funds. He writes, "​Prime institutional funds adopting the govt-​only change of status strategy could significantly change interest rate dynamics in the front-​end by boosting the demand for bills and repo, which are already in short supply, and reducing the demand for short-​term bank paper like CP, AB-​CP and time deposits. Banks -- particularly non-​US institutions -- may need to replace their short-​term unsecured funding and pay higher rates. All things equal, we expect this shift -- depending on how widely adopted by prime institutional money funds -- will widen LOIS, pushing bill and repo rates lower and Libor potentially higher. So far, however, most funds appear to be avoiding this post-​reform strategy."

Strategist Vikram Rai from Citi Research issued his latest commentary, "Are We Moving Closer to Benchmark Tipping?" He writes, "`​While too much cash chasing too few assets is a phenomenon which is plaguing the entire fixed income industry, in the short duration space, this crisis has reached, well, a tipping point, in our view. The supply of investable short-​term paper has mostly declined since 2004 (​we estimate that total investible supply is down by about $​1.​2 TR since late 2010) though the demand has increased dramatically given the surfeit of cash which needs to be invested in short-​term assets only due to the regulatory changes affecting banks (​LCR, SLR, NSFR etc.). Economic theory teaches us that supply will (​typically) meet demand but this is unlikely to be true for T-​bills where growing demand is expected to far outstrip supply, which could remain static or even shrink."

He continues, "​A paper on "​benchmark tipping" (​authored by Robert McCauley, BIS, March 2001) discusses the development where private instruments eclipsed government paper as a benchmark. Specifically, in the 1980s, trading volumes in Eurodollar futures contracts (​introduced in 1982) surpassed trading in T-​bill contracts. The catalyst for this development was a series of traumatic episodes in which either a flight to safety bid or a supply demand imbalance caused a rapid widening of the TED spread. This acted as a double edged sword for investors with positions in short term credit instruments that were hedged with T-​bills. So what is the common thread between the developments in the money markets of the 1980s vs. money markets today? The common thread appears to be trauma. The trauma of having to invest in govt. paper with yields, which if not negative, are far less than comparable maturity high grade credit instruments and also the trauma of having to deal with divergent benchmarks. Front end rates are likely to exhibit divergent behavior and the short-​term Treasury yields could breach the O/​N RRP floor." Rai expects that investors will respond to the supply demand challenge by searching for investment alternatives, citing separate accounts, ultrashort and short duration funds, hybrid products which emulate CNAV and FNAV funds, and private money funds.

Rai also talked about BlackRock'​s recent MMF lineup changes, which we reported in our April 7 News, "BlackRock Announces Changes, Keeps Options Open; TempFund Floats." He writes, "BlackRock'​s steps are pragmatic though slightly different from the steps taken by other industry leaders in this space...." Rai says these steps should result in a number of impacts, including wider front end spreads. "The conversion of its prime retail funds to CNAV/​govt. funds is in line with the steps taken by Fidelity and the implementation of this step should impart further downward pressure on T-​bill, TSY repo and Fed fund rates. And, assuming that these proposals are implemented, the demand for govt. securities will come at the expense of credit products like CP, ABCP, and other short-​term bank obligations, which will lead to wider CP-​T-​bill spreads, Libor-​OIS spreads etc."

Another impact is, "Marginally steeper money market curves: The decision to offer institutional prime funds with a lower WAM appears motivated by the ability for these funds to evaluate their securities using amortized value. And, by limiting maturities to inside of 7 days, the resulting fund NAV is unlikely to exhibit much volatility. Federated has employed a similar change to its strategy though it stated that some of their institutional prime and municipal money market funds will limit their investments to securities maturing in 60 days or less. The move to limit WAM to less than 60 days is unlikely to steepen the 1m3m curve or the 2m3m curve despite the fact that issuance in the 30-​60d sector has been dwindling as banks are trying to extend their short term financings to beyond 3 months. This is because a very large percentage of MMFs (​we estimate about 75% by AUM) have WAM inside of 60 days. BlackRock'​s WAM limit of 7 days does seem a little more drastic but in our view, we could see increased issuance in shorter maturity sectors as issuers tap into the increased demand for higher grade, shorter maturity paper which could mute the steepening of the money market curve."

Finally, Rai writes, "Counterbalance institutional prime fund outflows: We strongly agree with BlackRock'​s attempt to provide intra-​day liquidity to its institutional prime fund clients through at least three NAV calculations a day, with a morning, mid-​day and afternoon fund wire. This could serve to counter balance to the potential immediate reaction among clients who will be forced to switch to FNAV funds and thus stanch outflows from institutional prime funds."

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Fidelity Investments released an "Operational Update" to shareholders on April 7, which detailed some of the specifics related to their money market fund changes that were announced in February. (​See our Feb. 2 News, "Fidelity Announces Major Changes to MMFs; Staying Stable, Going Govt.") The big news then was the planned conversion of three Prime Retail funds, including the largest money fund in the world, Fidelity Cash Reserves, into government funds. But Fidelity also announced several fund conversions and other changes. Fidelity'​s newest Update adds more detail to these changes, and announces, among other things, new share classes of some existing funds.

Its new announcement says, "​You may have received a communication from us dated March 5, 2015, advising you that the Board of Trustees has approved a change in the investment policy of certain money market mutual funds in order to meet new regulatory requirements. Several Fidelity money market funds are included in these changes. These funds will continue to be managed in the same manner they have always been, and the shareholders do not need to take any action. Fidelity has updated the funds' prospectuses to reflect the investment policy changes, and has communicated this information to shareholders. We also announced that Fidelity is proposing numerous money market fund mergers across our prime, government, U.​S. Treasury and municipal product lines." It adds, "Further, Fidelity will be launching six (​6) new classes of existing Fidelity money market funds."

It continues, "On April 14, 2015, the following six (​6) new classes of existing Fidelity money market funds will be available: Fidelity Tax-​Exempt Fund Premium Class (​FZEXX); Fidelity Government Money Market Fund Capital Reserves Class (​FZAXX); Fidelity Government Money Market Fund Daily Money Class (​FZBXX); Fidelity Government Money Market Fund Premium Class (​FZCXX); Fidelity Treasury Fund (​FZFXX); and Fidelity Money Market Fund Premium Class (​FZDXX)."

On the mergers it adds, "Fidelity is proposing money market fund mergers across our prime, government, U.​S. Treasury and municipal product lines. The proposed mergers will strengthen and simplify our money market fund product lineup, and make it easier for investors to select a fund or class that meets their need. The following mergers require shareholder approval: Select Money Market, CMF Prime Fund, and U.​S. Government Reserves. Shareholders of the funds received a proxy solicitation to approve the proposed merger on or about March 20, 2015. If approved, impacts will include name change, CUSIP/​symbol change, and new investment objective."

Specifically, Select Money Market (​FSLXX) would be merged into Fidelity Money Market Premium Class (​FZDXX); CMF Prime Fund Daily Money Class (​FDAXX) would be merged into Fidelity Government Money Market Daily Money Class (​FZBXX); CMF Prime Fund Capital Reserves Class (​FPRXX) would be merged into Fidelity Government Money Market Capital Reserves Class (​FZAXX); and US Government Reserves (​FGRXX) would be merged into Fidelity Government Money Market Premium Class (​FZCXX).

Further, "The following mergers do not require shareholder approval: AMT Tax-​Free Money Fund, CMF Government Fund, and Treasury Money Market Fund.... Shareholders of the funds have received letters informing them of the changes and merger timeline, as indicated below." Specifically, CMF Government Daily Money Class (​FLFXX) will be merged into Fidelity Government Money Market Daily Money Class (​FZBXX) effective May 15, 2015; CMF Government Capital Reserves Class (​FTBXX) will be merged into Fidelity Government Money Market Capital Reserves Class (​FZAXX) effective May 15, 2015; AMT Tax-​Free Money (​FIMXX) will be merged into CMF Tax-​Exempt Premium Class (​FZEXX) effective May 15, 2015; and Fidelity Treasury Money Market (​FLTXX) will be merged into CMF Treasury Retail Class (​FZFXX) effective June 19, 2015.

As a result of the mergers, AMT Tax-​Free Money Fund, CMF Government Fund, and Treasury Money Market Fund, the merging funds will be closed to new accounts on the following dates: AMT Tax Free, April 24, 2015; CMF Government Fund: Daily Money Class, April 24, 2015; CMF Government Fund: Capital Reserves Class, April 24, 2015; Fidelity Treasury Fund, May 22, 2015."

Fidelity also announced an "​Investment Policy Change for Fidelity Government and U.​S. Treasury Money Market Funds." It continues, "​In July 2014, the U.​S. Securities and Exchange Commission (​SEC) approved regulatory changes for money market mutual funds. Under the new rules, government money market mutual funds are defined as those investing 99.​5% of their total assets in cash, U.​S. government securities, and/​or repurchase agreements that are collateralized fully. Although Fidelity'​s U.​S. government and Treasury money market funds have historically met this new requirement, the Board of Trustees for these funds has approved updates to their investment policies to reflect the SEC'​s new definition. The investment policy change will take effect on or about May 31, 2015."

In other news, Alpine Funds filed papers with the SEC to liquidate the Alpine Municipal Money Market Fund. It says, "On March 19, 2015, the Board of Trustees (​the "​Board") of the Alpine Municipal Money Market Fund (​the "​Fund"), a series of the Alpine Income Trust (​the "​Trust") determined that it is in the best interests of the Fund and its respective shareholders to liquidate the Fund (​the "​Liquidation") on or about April 28, 2015 (​the "​Liquidation Date"). The Liquidation Date may be changed without notice at the discretion of the Trust'​s officers." As of April 10, the fund had $​90 million in assets, according to Crane Data.

Finally, PIMCO filed with the SEC to convert the B shares of several of its funds, including the PIMCO Money Market Fund, into the A shares of those same portfolios. It says, "At a meeting held on February 23-​24, 2015, the Board of Trustees of PIMCO Funds approved the early conversion of each Fund'​s Class B Shares into Class A Shares. Accordingly, effective at the close of business on March 25, 2015 (​the "​Conversion Date"), all Class B Shares of each Fund will automatically convert to Class A Shares of the same Fund, notwithstanding the conversion schedule set forth in each Prospectus." The funds listed include: PIMCO Money Market Fund.

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Crane Data released its April Money Fund Portfolio Holdings Friday, and our latest collection of taxable money market securities, with data as of March 31, 2015, shows a jump in Repo (​primarily Fed repo) and Treasuries, and drops in Other (​Time Deposits), CP, CDs, Agencies, and VRDNs. Money market securities held by Taxable U.​S. money funds overall (​those tracked by Crane Data) decreased by $​19.​2 billion in March to $​2.​453 trillion, after decreasing $​52.​1 billion in February, increasing $​5.​6 billion in January, $​68.​3 billion in December, and $​11.​5 billion in November. In the seesaw battle between the two, Repos shot back ahead of CDs as the largest portfolio segment among taxable money market funds. Treasuries moved into third place, jumping back ahead of CP. Agencies were fifth, followed by Other (​Time Deposits) and VRDNs. Money funds' European-​affiliated securities represented 21.​4% of holdings, down sharply from 29.​1% the previous month, while the Americas' market share increased to 66.​9% from 58.​5% due to the latest quarter-​end spike in Fed repo. Below, we review our latest Money Fund Portfolio Holdings statistics.

Among all taxable money funds, Repurchase agreements (​repo) increased $​98.​7 billion (​18.​6%) to $​630.​4 billion, or 25.​7% of assets, after increasing $​10.​8 billion in February and dropping $​141.​5 billion in January. Certificates of Deposit (​CDs) were down $​37.​4 billion (​6.​8%) to $​511.​6 billion, or 20.​9% of assets, after falling $​7.​4 billion (​1.​3%) in February and increasing $​28.​0 billion in January. Treasury holdings, the third largest segment, increased $​63.​2 billion (​16%) to $​458.​7 billion, or 16% of assets, while Commercial Paper (​CP) fell to fourth, dropping $​27.​7 billion (​7.​0%) to $​369.​7 billion, or 15.​1% of assets. Government Agency Debt remained in fifth, decreasing $​9.​9 billion (​2.​9%) to $​332.​5 billion, or 13.​6% of assets. Other holdings, which include primarily Time Deposits, dropped $​105.​7 billion to $​131.​0 billion, or 5.​3% of assets. VRDNs held by taxable funds decreased by $​0.​4 billion to $​19.​6 billion (​0.​8% of assets).

Among Prime money funds, CDs still represent over one-​third of holdings with 34.​1% (​down from 35.​6% a month ago), followed by Commercial Paper (​24.​7%). The CP totals are primarily Financial Company CP (​14.​2% of holdings) with Asset-​Backed CP making up 6.​0% and Other CP (​non-​financial) making up 4.​5%. Prime funds also hold 5.​6% in Agencies (​up from 5.​1%), 5.​7% in Treasury Debt (​up from 4.​4%), 3.​2% in Other Instruments, and 5.​4% in Other Notes. Prime money fund holdings tracked by Crane Data total $​1.​502 trillion (​down from $​1.​540 trillion last month), or 61.​2% of taxable money fund holdings' total of $​2.​453 trillion.

Government fund portfolio assets totaled $​458 billion in March, down from $​468 billion in February, while Treasury money fund assets totaled $​494 billion in March, up from $​465 billion at the end of February. Government money fund portfolios were made up of 53.​7% Agency Debt, 21.​0% Government Agency Repo, 4.​6% Treasury debt, and 20.​4% in Treasury Repo. Treasury money funds were comprised of 71.​5% Treasury debt, 27.​6% Treasury Repo, and 0.​9% in Government agency, repo and investment company shares.

European-​affiliated holdings fell $​193.​7 billion in March to $​525.​3 billion (​among all taxable funds and including repos); their share of holdings fell to 21.​4% from 29.​1% the previous month. Eurozone-​affiliated holdings fell $​92.​9 billion to $​306.​4 billion in March; they now account for 12.​5% of overall taxable money fund holdings. Asia & Pacific related holdings decreased by $​22.​4 billion to $​283.​4 billion (​11.​6% of the total). Americas related holdings jumped $​197.​0 billion to $​1.​642 trillion, and now represent 66.​9% of holdings.

The overall taxable fund Repo totals were made up of: Treasury Repurchase Agreements (​up $​105.​8 billion to $​392.​6 billion, or 16.​0% of assets), Government Agency Repurchase Agreements (​down $​10.​4 billion to $​147.​4 billion, or 6.​0% of total holdings), and Other Repurchase Agreements (​up $​3.​3 billion to $​90.​4 billion, or 3.​7% of holdings). The Commercial Paper totals were comprised of Financial Company Commercial Paper (​down $​28.​2 billion to $​213.​0 billion, or 8.​7% of assets), Asset Backed Commercial Paper (​up $​4.​1 billion to $​89.​5 billion, or 3.​6%), and Other Commercial Paper (​down $​3.​6 billion to $​67.​2 billion, or 2.​7%).

The 20 largest Issuers to taxable money market funds as of March 31, 2015, include: the US Treasury ($​458.​7 billion, or 18.​7%), Federal Reserve Bank of New York ($​316.​9B, 12.​9%), Federal Home Loan Bank ($​192.​4B, 7.​8%), Wells Fargo ($​63.​6B, 2.​6%), BNP Paribas ($​62.​8B, 2.​6%), JP Morgan ($​62.​2B, 2.​5%), Federal Home Loan Mortgage Co ($​56.​4B, 2.​3%), Bank of Tokyo-​Mitsubishi UFJ Ltd ($​56.​3B, 2.​3%), RBC ($​55.​9B, 2.​2%), Bank of Nova Scotia ($​52.​7B, 2.​1%), Bank of America ($​48.​2B, 2.​0%), Toronto-​Dominion Bank ($​44.​2B, 1.​8%), Sumitomo Mitsui Banking Co ($​43.​5B, 1.​8%), Federal Farm Credit Bank ($​42.​0B, 1.​7%), Credit Suisse ($​40.​1B, 1.​6%), Federal National Mortgage Association ($​39.​0B, 1.​6%), Mizuho Corporate Bank Ltd. ($​36.​8B, 1.​5%), Bank of Montreal ($​34.​9B, 1.​4%), Natixis ($​30.​7B, 1.​2%), and Citi ($​30.​5B, 1.​2%).

In the repo space, Federal Reserve Bank of New York'​s RPP program issuance (​held by MMFs) remained the largest program with $​316.​9B, or 50.​3% of the repo market, up sharply from 30.​3% a month ago. Of the $​316.​9B, $​168.​4 billion, or 53.​1%, was in Overnight Repo, while $​148.​5 billion, or 46.​9%, was in Term Repo. The 10 largest Fed Repo positions among MMFs on 3/​31 include: JP Morgan Prime MM ($​13.​5B), Fidelity Institutional MM Prime ($​11.​7B), Fidelity Cash Reserves ($​9.​7B), Fidelity Inst MM MMkt ($​8.​9B), JP Morgan US Govt ($​7.​0B), BlackRock Lq TempFund ($​6.​0B), Goldman Sachs FS Trs Ob ($​5.​5B), BlackRock Lq T-​Fund ($​5.​1B), Wells Fargo Adv Gvt MM ($​4.​3B), and State Street Inst Lq Res ($​4.​2B). The 10 largest Repo issuers (​dealers) (​with the amount of repo outstanding and market share among the money funds we track) include: Federal Reserve Bank of New York ($​316.​9B, 50.​3%), Bank of America ($​38.​4B, 6.​1%), BNP Paribas ($​33.​1B, 5.​2%), Wells Fargo ($​29.​9B, 4.​7%), JP Morgan ($​29.​7B, 4.​7%), Credit Suisse ($​19.​7B, 3.​1%), Citi ($​19.​1B, 3.​0%), RBC ($​17.​3B, 2.​8%), Bank of Nova Scotia ($​15.​5B, 2.​5%), and Societe Generale ($​15.​2B, 2.​4%).

The 10 largest issuers of CDs, CP and Other securities (​including Time Deposits and Notes) combined include: Bank of Tokyo-​Mitsubishi UFJ Ltd ($​51.​1B, 5.​7%), Sumitomo Mitsui Banking Co ($​43.​5B, 4.​9%), RBC ($​38.​6B, 4.​3%), Toronto Dominion Bank ($​38.​5B, 4.​3%), Bank of Nova Scotia ($​37.​2B, 4.​2%), Wells Fargo ($​33.​7B, 3.​8%), Mizuho Corporate Bank Ltd. ($​32.​6B, 3.​7%), JP Morgan ($​32.​2B, 3.​6%), Bank of Montreal ($​31.​1B, 3.​5%), and BNP Paribas ($​29.​7B, 3.​3%).

The 10 largest CD issuers include: Bank of Tokyo-​Mitsubishi UFJ Ltd ($​37.​3B, 7.​3%), Toronto-​Dominion Bank ($​35.​7B, 7.​0%), Sumitomo Mitsui Banking Co ($​35.​2B, 6.​9%), Mizuho Corporate Bank Ltd ($​31.​0B, 6.​1%), Bank of Montreal ($​28.​3B, 5.​6%), Bank of Nova Scotia ($​27.​6B, 5.​4%), Wells Fargo ($​25.​0B, 4.​9%), Rabobank ($​23.​8B, 4.​7%), RBC ($​18.​3B, 3.​6%), and Natixis ($​17.​9B, 3.​5%).

The 10 largest CP issuers (​we include affiliated ABCP programs) include: JP Morgan ($​23.​3B, 7.​6%), Commonwealth Bank of Australia ($​17.​2B, 5.​6%), RBC ($​17.​1B, 5.​5%), Westpac Banking Co ($​16.​8B, 5.​4%), National Australia Bank Ltd ($​11.​4B, 3.​7%), BNP Paribas ($​10.​9B, 3.​5%), Australia & New Zealand Banking Group Ltd ($​9.​9B, 3.​2%), FMS Wertmanagement ($​9.​3B, 3.​0%), DnB NOR Bank ASA ($​8.​9B, 2.​9%), and bank of Tokyo-​Mitsubishi UFJ Ltd. ($​8.​8B, 2.​9%).

The largest increases among Issuers include: Federal Reserve Bank of New York (​up $​156.​0B to $​316.​9B), US Treasury (​up $​62.​5B to $​458.​7B), JP Morgan (​up $​4.​4B to $​62.​2B), Bank of Montreal (​up $​2.​8B to $​34.​9B), Federal Home Loan Mortgage Co. (​up $​2.​2B to $​56.​4B), ABN Amro Bank (​up $​1.​7B to $​13.​9B), Canadian Imperial Bank of Commerce (​up $​1.​6B to $​19.​9B), Credit Suisse (​up $​1.​2B to $​40.​1B), Toronto Dominion Bank (​up $​1.​0B to $​44.​2B), and Svenska Handelsbanken (​up $​0.​9B to $​24.​4B).

The largest decreases among Issuers of money market securities (​including Repo) in March were shown by: Credit Agricole (​down $​44.​2B to $​24.​8B), DnB NOR Bank ASA (​down $​25.​5B to $​13.​3B), Barclays PLC (​down $​21.​4B to $​20.​5B), Credit Mutuel (​down $​16.​6B to $​7.​1B), Natixis (​down $​14.​9B to $​30.​7B), Societe Generale (​down $​13.​9B to $​23.​8B), Swedbank AB (​down $​13.​4B to $​16.​1B), Skandinavaska Ensklida Banken AB (​down $​11.​8B to $​19.​6B), Federal Home Loan Bank (​down $​11.​2B to $​192.​4B), and ING Bank (​down $​7.​0B to $​22.​0B).

The United States remained the largest segment of country-​affiliations; it represents 57.​6% of holdings, or $​1.​413 trillion (​up $​192B). Canada (​9.​2%, $​226.​1B) moved up to second, while Japan (​7.​4%, $​181.​7B) leapfrogged into third. France (​6.​5%, $​160.​4B) fell to fourth, while Australia (​3.​6%, $​87.​5B) jumped to fifth. The U.​K. (​3.​1%, $​75.​7B) dropped to sixth, followed by Sweden (​3.​0%, $​74.​6B), The Netherlands (​2.​9%, $​72.​2B), Switzerland (​2.​3%, $​55.​2B), and Germany (​2.​1%, $​51.​7B) round out the top 10 among country affiliations. (​Note: Crane Data attributes Treasury and Government repo to the dealer'​s parent country of origin, though money funds themselves "​look-​through" and consider these U.​S. government securities. All money market securities must be U.​S. dollar-​denominated.)

As of March 31, 2015, Taxable money funds held 21.​7% of their assets in securities maturing Overnight, and another 16.​4% maturing in 2-​7 days (​38.​1% total matures in 1-​7 days). Another 22.​3% matures in 8-​30 days, while 12.​1% matures in 31-​60 days. Note that almost three-​quarters, or 72.​5% of securities, mature in 60 days or less, the dividing line for use of amortized cost accounting under the new pending SEC regulations. The next bucket, 61-​90 days, holds 11.​4% of taxable securities, while 12.​6% matures in 91-​180 days and just 3.​5% matures beyond 180 days.

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

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The next 12 to 14 months will be a very critical period for the money market fund industry -- a period of preparation and implementation for the changes that are due to be implemented in October 2016, said Ben Campbell, CEO, Capital Advisors, speaking during a webinar this week entitled, "Recent Money Fund Developments and Key Issues for Corporate Cash Investors." Campbell and Lance Pan, Director of Investment Research at Capital Advisors, shared their thoughts on how the recent reforms in both the banking and money market fund sectors will impact fund sponsors, investors, and fund flows.

Pan started by reviewing some of the statements that 5 major MMF companies have already made this year. He started with Fidelity'​s announcement, saying, "The main focal point of their announcement was that they were going to convert Fidelity Cash Reserves from a prime fund to a government fund." It is significant in a couple of different ways: number 1, it is the largest fund in the country, and two, it is a prime retail fund. Up until that point, much of the discussion around possible outflows had centered on Prime Institutional. Then he discussed JP Morgan'​s press release, which said it intends to keep the largest Prime Institutional fund in the country, JP Morgan Prime Money Market Fund, as a Prime Institutional fund, which means, going forward, it will be subject to the floating NAV and emergency gates and fees. "So the largest retail fund and the largest institutional prime fund will both undergo some pretty dramatic structural changes," he said.

Then he discussed Federated'​s announcement, which said it was looking at converting some prime institutional funds to 60-​day maximum maturity funds, which are technically floating NAV funds, but will act more like a Stable NAV fund because of the short maturities. After that, Dreyfus also announced that it is looking at the 60-​day maximum maturity funds, but, like Federated, is committed to having a range of options, including floating NAV MMFs. Then BlackRock made its own announcement just this week. "​The two things that caught our eyes is their largest institutional prime fund, the TempFund will be a floating NAV prime fund, and with their other prime fund, the TempCash Fund, they are going to explore the opportunity to have a 7-​day maximum maturity," said Pan.

Pan segued into a discussion on potential MMF flows, given some of the moves that have been made by fund sponsors to date. In what he called their "​middle of the road forecast," Pan said that of the approximately $​1 trillion in Prime Institutional funds, "​we assume about one third of that money is leaving, and that'​s conservative," he said. Of Prime Retail, he said, "​before the Fidelity announcement, there wasn'​t a significant assumption of any money leaving the retail prime space. Right now, Moody'​s is saying in addition to Fidelity'​s $​115 billion, maybe another $​100 to $​200 billion will be leaving, so we assume about $​230 billion coming out of retail." When you add their assumption that about one-​third of the Tax Exempt market will leave, overall, he estimates a potential migration of about $​615 billion from prime and muni funds.

Next, Campbell talked about bank deposits and the regulations that sector is facing. "What sort of flows may occur out of the banking world because of the new Basel 3 Liquidity Coverage Ratios?" he asked. "​There is a potential outflow over time of about $​450 billion." Campbell continued, "​On the money fund side we have identified roughly $​615 billion that may transition out of prime money market funds, potentially into Government Funds. If you look at the $​450 billion in deposit outflows that I talked about, this is over $​1 trillion that potentially will have to find a new home."

"​Now, in as much as the prime money market funds, as well as the deposits, are considered to be liquidity vehicles, and the objectives of most of the investors in both of these vehicles is that of liquidity, it would certainly make sense that these same investors would look for those same characteristics in their new choices," said Campbell. "​If you consider that Government money market funds will be one of the primary choices, we wanted to take a look at the potential impact of those flows on that market.... Currently, there is approximately $​500 billion in Government MMFs. Add to that the potential of roughly $​1 trillion of assets flows from deposits and prime funds and that almost triples the size of the market. That supply/​demand imbalance could in turn lead to a change in the spreads between the government and corporate securities. Historically, there'​s about a 12 basis point difference between those two investment categories, he said. [​Excluding] times of stress [​like] 2007-​2009, that was compressed to about 6 basis points. But shifting about $​1 trillion in new demand to the government space is likely to widen that spread significantly," he added.

"The message here is that it'​s a good idea to explore diversity in any of the solutions that you are looking for," said Campbell. "​Government money market funds should certainly not be the only place to park cash." He concluded, "This is one of the largest table resets I'​ve seen in my 30 years in the industry. The changes will impact the utility of the investments that you'​re currently in, investment policy considerations, the supply and demand of existing products, and the risk/​reward of various securities. The industry will get through this; it'​s just a matter of a reset as to the types of investment vehicles that you use. Everyone is going to have to look at changing the mix that they have had in the past."

Fitch Ratings released a report, "U.​S. Banks to Weather Money Fund Reform," which says, "​The largest U.​S. banks will likely be only marginally impacted by asset shifts resulting from money fund reform, given the banks' low reliance on money fund financing, according to a Fitch Ratings report. Fitch Ratings expects new U.​S. money market fund (​MMF) regulations to gradually result in outflows from institutional prime money funds and a shift to alternative investments during the two-​year reform implementation period ending in October 2016."

It continues, "Estimates of the magnitude of `​potential outflows range from 10% to more than 60% of the $​1 trillion institutional prime money fund assets. Retail prime money funds are also expected to shift some of their $​0.​5 trillion of assets. Institutional prime money funds historically have invested primarily in the banking sector. As of June 30, 2014, 76% of the $​939 billion of total institutional prime fund assets were securities issued by banks or bank-​related entities. Reform-​induced outflows will reduce prime fund investments in banks, along with other assets. However, a portion of the outflows may migrate to products with similar investment mandates or bank deposits, reducing the likely impact on the banks."

The reports adds, "Based on a review of funding for the eight largest U.​S. banks, the impact of any decrease in funding from money funds will likely be manageable for the large U.​S. banks. These banks have ample deposits and rely to a small extent on funding from money funds as a percentage of total liabilities. As of June 30, 2014, money fund financing accounted for only 4.​9% of the eight largest U.​S. banks' wholesale funding, and only about 1.​1% of their total liabilities. For U.​S. banks, reliance on wholesale funding has declined in the wake of the financial crisis, falling from 26% of total liabilities in 2007 to 18% in 2014. This trend is expected to continue due to regulatory considerations."

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Crane Data'​s latest Money Fund Intelligence Family & Global Rankings, which rank the asset totals (​and break out by type of fund) and market share of managers of money market mutual funds in the U.​S. and globally, were sent out to subscribers this morning. The April edition, with data as of March 31, 2015, shows asset decreases for a majority of money fund complexes in the latest month. Most managers also show losses over the past three months. Assets declined by $​21.​1 billion overall, or 0.​8%, in March; over the last 3 months, assets are down $​73.​9 billion, or 2.​8%. For the past 12 months through March 31, total assets are up $​27.​6 billion, or 1.​1%. Below, we review the latest market share changes and figures. (​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.)

Goldman, Morgan Stanley, Franklin, and Northern were among the few gainers in March, rising by $​6.​2 billion, $​5.​8 billion, $​2.​6 billion, and $​2.​5 billion, respectively. With the gains, Morgan Stanley moved ahead of Wells Fargo into 9th place, while Northern jumped back ahead of SSgA into 11th place among U.​S. money fund managers. Northern, Franklin, and Morgan Stanley led the increases over the 3 months through March 31, 2015, rising by $​5.​3B, $​3.​4B, and $​2.​6B, respectively.

Our latest domestic U.​S. money fund Family Rankings show that Fidelity Investments remained the largest money fund manager with $​403.​4 billion, or 15.​7% of all assets (​down $​958 million in March, down $​10.​4 billion over 3 mos., and down $​11.​9B over 12 months), followed by JPMorgan'​s $​247.​9 billion, or 9.​6% (​down $​6.​2B, down $​10.​4B, and down $​11.​9B for the past 1-​month, 3-​months and 12-​months, respectively). BlackRock remained in third with $​215.​6 billion, or 8.​4% of assets (​down $​1.​9B, down $​6.​3B, and down $​18.​4B). Federated Investors was fourth with $​205.​7 billion, or 8.​0% of assets (​down $​1.​4B, down $​10.​2B, and down $​10.​7B), and Vanguard ranked fifth with $​173.​7 billion, or 6.​7% (​up $​765M, up $​66M, and down $​258M).

The sixth through tenth largest U.​S. managers include: Dreyfus ($​169.​8B, or 6.​6%), Schwab ($​160.​7B, 6.​2%), Goldman Sachs ($​151.​7B, or 5.​9%), Morgan Stanley ($​115.​9B, or 4.​5%), and Wells Fargo ($​110.​4B, or 4.​3%). The eleventh through twentieth largest U.​S. money fund managers (​in order) include: Northern ($​85.​8B, or 3.​3%), SSgA ($​80.​1B, or 3.​1%), Invesco ($​55.​2B, or 2.​1%), BofA ($​47.​5B, or 1.​8%), Western Asset ($​44.​0B, or 1.​7%), First American ($​41.​0B, or 1.​6%), UBS ($​36.​0B, or 1.​4%), Deutsche ($​32.​7B, or 1.​3%), Franklin ($​24.​9B, or 1.​0%), and RBC ($​16.​2B, or 0.​6%). Crane Data currently tracks 72 managers, up one from last month. SunAmerica, with $​692 million in assets, was added to our database.

Over the past year through March 31, 2015, BlackRock showed the largest asset increase (​up $​18.​4B, or 9.​3%), followed by Goldman Sachs (​up $​16.​1B, or 11.​8%), Morgan Stanley (​up $​15.​8B, or 15.​7%), Northern (​up $​9.​0B, or 11.​7%), Franklin (​up $​6.​4B, or 37.​8%), and Dreyfus (​up $​6.​0B, or 3.​7%). Other asset gainers for the year include: JP Morgan (​up $​4.​2B, or 1.​7%), HSBC (​up $​3.​4B, or 32.​1%), First American (​up $​3.​2B, or 8.​3%), Western (​up $​1.​9B, 4.​6%), and SEI (​up $​1.​4B, or 11.​4%). The biggest decliners over 12 months include: Fidelity (​down $​11.​9B, or -​2.​9%), Federated (​down $​10.​7B, or -​4.​9%), UBS (​down $​5.​6B, or -​13.​5%), Invesco (​down $​4.​7B, or -​7.​8%), Reich & Tang (​down $​4.​3B, or -​36.​3%, Schwab (​down $​4.​0B, or -​2.​4%), RBC (​down $​3.​8B, or -​19.​0%), SSgA (​down $​2.​6B, or -​3.​2%), and Deutsche (​down $​2.​4B, or -​6.​8%). (​Note that money fund assets are very volatile month to month.)

When European and "​offshore" money fund assets -- those domiciled in places like Dublin, Luxembourg, and the Cayman Islands -- are included, the top 10 managers match the U.​S. list, except for Goldman moving up to No. 4, and Western Asset appearing on the list at No. 10 (​displacing Wells Fargo from the Top 10). Looking at the largest Global Money Fund Manager Rankings, the combined market share assets of our MFI XLS (​domestic U.​S.) and our MFI International ("​offshore"), the largest money market fund families are: Fidelity ($​410.​2 billion), JPMorgan ($​376.​4 billion), BlackRock ($​332.​9 billion), Goldman Sachs ($​234.​3 billion), and Federated ($​214.​1 billion). Dreyfus/​BNY Mellon ($​198.​0B), Vanguard ($​173.​7B), Schwab ($​160.​7B), Morgan Stanley ($​134.​3B), and Western ($​122.​0B), and round out the top 10. These totals include offshore US Dollar funds, as well as Euro and Pound Sterling (​GBP) funds converted into US dollar totals. (​Note that big moves in the dollar caused volatility in Euro and Sterling balances, which are converted back into USD.)

Also, our March 2015 Money Fund Intelligence and MFI XLS show that yields remained largely unchanged in March. Our Crane Money Fund Average, which includes all taxable funds covered by Crane Data (​currently 858), remained at 0.​02% for both the 7-​Day Yield and the 30-​Day Yield (​annualized, net) Average. The Gross 7-​Day Yield remained at 0.​14%. Our Crane 100 Money Fund Index shows an average 7-​Day Yield and 30-​Day Yield of 0.​03%, the same as last month. The Gross 7- and 30-​Day Yields for the Crane 100 ticked up to 0.​18% from 0.​17%. For the 12 month return through 3/​31/​15, our Crane MF Average returned 0.​02% and our Crane 100 returned 0.​02% (​both unchanged).

Our Prime Institutional MF Index (​7-​day) yielded 0.​04% (​up from 0.​03%), while the Crane Govt Inst Index moved up to 0.​02% (​from 0.​01%). The Crane Treasury Inst, Treasury Retail, Govt Retail and Prime Retail Indexes all yielded 0.​01%. The Crane Tax Exempt MF Index also yielded 0.​01%. (The Gross Yields for these indexes were: Prime Inst 0.​21%, Govt Inst 0.​12% (​up from 0.​11%), Treasury 0.​07%, and Tax Exempt 0.​09% (​down from 0.​10%) in March. The Crane 100 MF Index returned on average 0.​00% for 1-​month, 0.​01% for 3-​month, 0.​01% for YTD, 0.​02% for 1-​year, 0.​03% for 3-​years (​annualized), 0.​05% for 5-​year, and 1.​50% for 10-​years. (Contact us if you'​d like to see our latest MFI XLS or Crane Indexes file.)

In other news, the Wall Street Journal reported on a new trend in the repo market in the story, "Repo Market Sees a Lending Shift as Rules Bite." It says, "Investors and small firms are entering the $​2.​6 trillion U.​S. repo market, taking advantage of banks' retreat from a key corner of the credit markets. A handful of real-​estate investment trusts and other borrowers are getting these short-​term repurchase loans from firms other than banks, which have dominated the market."

The Journal adds, "​Lately, many big banks have retreated from the repo market following the adoption of costly new regulations. That has prompted many borrowers such as mortgage REITs, which borrow at low rates to amplify returns on their investments, to use new brokers that aren'​t affected by the new rules or to borrow without a broker.... The shift by REITs and others is driven in part by the retreat of large banks. Outstanding repo loans at the largest U.​S. banks have declined by 28% over the past four years, according to Barclays PLC. The bank predicts an additional 20% decline. This opens up a potential new revenue opportunity for nonbank brokers and others who aren'​t subject to the same regulations."

The article continues, "​Money-​market funds and other lenders who need access to the safest short-​term securities are increasingly offering incentives to get the bonds they need for their portfolios. "It'​s been pretty much a downward grind in terms of repo supply overall," said Laurie Brignac, head of repo and government funds at Invesco Ltd., overseeing $​77.​3 billion in money-​market fund assets. Ms. Brignac said she has been in discussions to use AVM LP, a nonbank broker in Boca Raton, Fla., that seeks to connect buyers and sellers in repos for a fee.... Deborah Cunningham [​of] Federated Investors Inc. ... said she has been discussing new trading relationships with large securities holders such as insurance companies but that she hasn'​t yet completed any such trades."

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The April issue of Crane Data'​s Money Fund Intelligence was sent out to subscribers Wednesday morning. The latest edition of our flagship monthly newsletter features the articles: "BlackRock Latest to Telegraph Changes; 7-​Day Max Maturity," which reviews big changes from the country'​s third largest money fund manager, BlackRock; "Wells Fargo'​s Weaver Says Clients Still Want Yield Too," which profiles Wells Capital Management'​s new head of money market funds, Jeff Weaver; and "Deposits, FDIC '​Amalgamators' Growing; Going Inst," which examines the increasing availability of FDIC insurance far above the $​250K limit. We have also updated our Money Fund Wisdom database query system with March 31, 2015, performance statistics, and have sent out our MFI XLS spreadsheet. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our April Money Fund Portfolio Holdings are scheduled to go out on Friday, April 10, and our March Bond Fund Intelligence is scheduled to ship next Wednesday, April 15.

The lead article in MFI on BlackRock and Western'​s Changes says, "Another month, another major announcement in the money market fund world. This time it’​s from the second largest money fund manager, BlackRock, which informed clients of significant changes to its MMF lineup, including fund conversions, liquidations, and the addition of innovative new 7-​day maximum maturity funds. Also notable: the fourth largest MMF, BlackRock TempFund -- a Prime Institutional fund -- will remain as is. BlackRock writes in its April 6 letter, "​A number of clients have indicated they are interested in continuing to invest in prime funds. We plan to maintain our largest prime fund, the $​66.​5 billion TempFund as a prime institutional fund. Our historical analysis shows that in normal market conditions, TempFund has demonstrated minimal per share net asset value volatility. Given the anticipated forward environment, we believe that institutional prime funds are likely to offer investors a compelling yield premium relative to CNAV government funds."

On the proposed 7-​day maximum maturity funds the article comments, "The $​2.​4 billion BlackRock TempCash Fund, however, will be converted to a 7-​day maximum maturity fund, essentially eliminating the floating NAV and the concerns over emergency gates and fees. The letter explains, "​Some clients have indicated interest in a cash investment product that fits between a CNAV government fund and a FNAV institutional prime fund.... BlackRock will offer an institutional prime fund that limits holdings to those with a maturity of seven days or less."

In our middle column, we feature an interview with Wells Fargo'​s new head of MMFs, Jeff Weaver. It reads, "​When Dave Sylvester, the long-​time head of money market funds at Wells Fargo, announced his retirement at the end of 2014, the reins were handed over to Jeff Weaver, who now wears two hats. Weaver, the head of Wells Capital Management'​s short-​duration team, also become head of the money market fund team effective January 1, 2015. We sat down with him to get his thoughts on not just money funds, but on separate accounts and the short-​duration bond fund space. He also discussed how Wells is evaluating its money fund lineup to prepare for the upcoming rule changes."

We asked him, "Will you make any lineup changes? Weaver: We remain committed to offering retail and institutional prime, government, and municipal funds -- particularly if that'​s what our clients want -- and we believe they do. Many of our clients are in a wait-​and-​see mode until that October 2016 deadline approaches. Right now, we'​re evaluating our product lineup. We'​re speaking with clients with the goal of developing product solutions that best meet their needs. Our client base is largely institutional -- 90% institutional versus 10% retail -- so that is always front of mind as we'​re making these changes. Once we finalize a plan of action, we will present it to our Funds' board. We will not make any announcements until the board has seen and approved those changes."

The article on "Deposits and FDIC '​Amalgamators'" says, "Zero yields and the expiration of unlimited FDIC insurance haven'​t stopped the growth of bank deposits over the past year or two. Deposits have increased by almost $​500 billion in the year through Jan. 31, 2015, and they'​ve increased by almost $​1.​6 trillion the past 3 years. Bank and thrift deposits combined have almost doubled since the financial crisis hit hardest in late 2008; they now total a massive $​7.​65 trillion." It adds, "We also discuss the continued rapid growth of FDIC insurance "​amalgamators," who are in the business of breaking too-​big-​for-​insurance deposits into smaller FDIC insured pieces (​spreading them among a network of banks). This segment continues to grow via brokerage sweeps, and is starting to see growth from the institutional and corporate cash segment."

Crane Data'​s April MFI XLS, with March 31, 2015, data shows total assets decreasing in March, the third month in a row, down $​20.​9 billion to $​2.​576 trillion after falling $​1.​6 billion in February and $​44.​6 billion in January. Our broad Crane Money Fund Average 7-​Day Yield and 30-​Day Yield remained at 0.​02%, while our Crane 100 Money Fund Index (​the 100 largest taxable funds) stayed at 0.​03% (​7-​day and 30-​day). On a Gross Yield Basis (​before expenses were taken out), funds averaged 0.​14% (​Crane MFA, same as last month) and 0.​18% (​Crane 100, up from 0.​17%) on an annualized basis for both the 7-​day and 30-​day yield averages. Charged Expenses averaged 0.​13% (​unchanged) and 0.​15% (​up from 0.​14%) for the two main taxable averages. The average WAMs for the Crane MFA and the Crane 100 were 41 and 43 days, respectively. The Crane MFA WAM was the same as last month while the Crane 100 WAM is down 1 day from the prior month. (​See our Crane Index or craneindexes.​xlsx history file for more on our averages.)

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In a letter addressed to its money market fund clients, entitled, "New Product Line Up Plans," BlackRock announced Monday changes to its money market fund lineup in response to last summer'​s sweeping SEC reforms. Among the proposed changes are the introduction of 7-​day maximum maturity funds and the possible conversion of prime retail and sweep funds to government funds. BlackRock'​s letter to clients, says, "The amendments to Rule 2a-​7 under the Investment Company Act of 1940 announced by the U.​S. Securities and Exchange Commission last year will result in fundamental changes to U.​S. money market mutual funds. Although many of these changes are not effective until October 2016, we at BlackRock are working to ensure our products, systems and processes will be fully compliant with the new rules -- and meet the funds' objectives of safety, liquidity and yield." (​See also the release, "Western Asset Announces Preliminary Plan For Money Market Fund Offerings," which we'​ll cover in tomorrow'​s News and in the pending issue of Money Fund Intelligence.)

It explains, "Through comprehensive dialogue with our clients, we have learned that these new regulations present many of you with substantial challenges and that different clients have particular sensitivity to various elements -- be it redemption gates, liquidity fees, floating net asset value, or "​all of the above". A large portion of our institutional client base will be further challenged in the management of their cash by the impact of Basel III regulation on banks' willingness to accept deposits. Based on feedback from both institutional and retail clients, we have designed a spectrum of choices that we reviewed with the funds' Board of Directors. These products are intended to offer the highest value and broadest utility for our clients."

BlackRock explains, "No later than October 2016, BlackRock expects to offer the following investment solutions for cash investors: 1) Constant Net Asset Value ("​CNAV") Government Money Market Funds: BlackRock will offer a wide range of CNAV government money market funds -- without redemption gates or liquidity fees (​collectively, "​gates and fees"). We expect the combination of money fund reform and other market factors such as the impact of Basel III on the banking industry to cause a substantial shift of assets into CNAV government funds. Given the limited supply of short-​dated government securities and the substantial contraction of the repurchase agreement markets, we are concerned about the potential for shortages in CNAV government funds. To seek to maximize the liquidity available to our clients in CNAV products, BlackRock plans to offer our clients four institutional CNAV Government and Treasury funds, each of which is an approved counterparty for the Federal Reserve'​s Reverse Repurchase Agreement Program."

It continues, "2) Floating Net Asset Value ("​FNAV") Institutional Prime Money Market Funds: A number of clients have indicated they are interested in continuing to invest in prime funds. We plan to maintain our largest prime fund, the $​66.​5 billion TempFund as a prime institutional fund. Our historical analysis shows that in normal market conditions, TempFund has demonstrated minimal per share net asset value ("​NAV") volatility. Given the anticipated forward environment, we believe that institutional prime funds are likely to offer investors a compelling yield premium relative to CNAV government funds. We expect that TempFund will offer intraday liquidity through at least three NAV calculations a day, with a morning, mid-​day and afternoon fund wire. We understand that for some TempFund investors the notion of gates and fees presents challenges, and we will work with those clients to explain how these mechanisms (​which were intended by regulators to safeguard client assets in extraordinary market conditions) would work both in ordinary and stressed environments. Suitable alternatives will be identified as needed along with a transition plan for these client assets."

BlackRock'​s letter also says, "3) FNAV Short Maturity Institutional Prime Money Market Funds: Some clients have indicated interest in a cash investment product that fits between a CNAV government fund and a FNAV institutional prime fund. Subject to the approval of the Funds' Board of Directors, BlackRock will offer an institutional prime fund that limits holdings to those with a maturity of seven days or less. We expect that TempCash, our $​2.​4 billion fund will be converted to this new strategy. This fund is expected to appeal to clients who require some incremental yield premium to CNAV government funds, but with minimal expected NAV volatility due to both the very short maturity of the portfolio investments and the ability to use amortized cost accounting. In addition, our expectation is that this type of strategy would be unlikely to trigger redemption gates and liquidity fees. In the event that the Federal Reserve is more aggressive than market expectations in their path towards interest rate normalization, this type of fund is expected to perform well compared to other institutional prime funds."

It adds, "4) Retail and Sweep Accounts: Conversations with our retail distribution partners highlighted significant concern regarding funds that are subject to gates and fees for retail clients. Feedback from many of our retail partners currently using various BlackRock money funds for daily cash sweeps indicate it is uncertain that anything other than CNAV government funds will be offered for sweep accounts. The feedback stems from the cost of modifying systems to operate sweeps and the associated operational risk from implementing gates and fees. In response, as needed we will convert certain prime retail funds to CNAV government funds, and clients may transition from prime funds into CNAV government funds. In addition, we will convert a number of our national municipal money market funds to short maturity strategies holding 100% 7-​day or shorter Variable Rate Demand Notes (​VRDNs). These ultra-​short assets typically price at par and should minimize NAV volatility, and significantly reduce the probability of the implementation of gates and fees."

The letter also states, "5) Separate Accounts: Conversations with various clients in the marketplace indicate that for clients of a certain size, separate accounts are an increasingly appealing alternative given the challenges presented by money fund reform, bank regulation and continued low interest rates. BlackRock has already seen substantial growth in its separate account business, with an approximately 25% increase in cash separate account assets in 2014. The flexibility of customized portfolios tailored to an investor'​s desired levels of risk and liquidity is becoming increasingly attractive. We anticipate continued growth with customized strategies based upon specific client objectives, and are adding to our resources to ensure BlackRock remains the industry leader in bespoke separate account solutions."

BlackRock comments, "​There has been discussion in the market regarding the appropriate role of private money market funds in the post-​reform world. BlackRock currently operates a number of private funds. Though not part of our core strategy, going forward we expect to offer private funds to meet specific client needs selectively and on a limited basis as private funds are not suitable investment vehicles for the majority of our institutional clients. In addition to the investment solutions outlined above, we expect money fund reform to create client demand for new, innovative products. We are excited to continue our dialogue with you about your investment needs. BlackRock has a continuing focus on evolving our platform to meet our clients' changing needs, including products that may be smaller in scale and appeal to a niche segment of our client base."

They conclude, "These changes to the BlackRock Cash Management business are fundamental and the work is substantial. We are streamlining our product range to ensure we provide the best range of investment alternatives. We will introduce new tools and analytics based on BlackRock'​s industry leading Aladdin platform that will allow our clients to better manage risk in the new world of cash management. By October 2016 BlackRock will have an industry leading product suite supported by cutting-​edge technology, all designed with our clients' needs in mind. We are committed to keeping you apprised as we make progress and will communicate frequently over the coming months as we pass important milestones."

The Wall Street Journal initially reported the news and writes, "BlackRock to Shift Funds to Comply With New Rules." The article says, "BlackRock Inc. said it will close or consolidate some money-​market funds and add new features to others -- the latest reflection of how new rules are roiling the $​2.​7 trillion U.​S. money-​fund universe. The giant New York money manager in a letter to clients on Monday announced a series of tweaks to its lineup. The changes will reduce BlackRock'​s money-​market funds from about 50 to more than 30, according to the company."

The Journal piece quotes Tom Callahan, co-​head of global cash management, "After October 2016, there is really not going to be a one-​size-​fits-​all product anymore.... There is some fund consolidation, funds changing, funds being repurposed and some closing." They also quote our Peter Crane, "[​This latest move] reaffirms that fund companies are keeping all their options open."

See also, Bloomberg'​s "​BlackRock Plans Money Fund Changes to Meet New SEC Regulations"," which says, "BlackRock Inc., the world'​s largest asset manager, said it would change its lineup of money-​market mutual funds to make them comply with new federal regulations. BlackRock, in an April 6 letter to investors, said it would offer funds that invest solely in government securities and others with floating net asset values that would invest in corporate debt. The company said it would have funds that limit holdings to securities with maturities of seven days or less. The firm also said it will offer separately managed accounts and private funds on a "​limited basis."" Bloomberg quotes our Peter Crane, "The big companies are offering a range of choices, because no one knows exactly what customers will want."

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The Investment Company Institute, the mutual fund industry'​s trade association, released its latest "Worldwide Mutual Fund Assets and Flows" data collection, which shows that global money market mutual fund assets increased sharply in the Fourth Quarter of 2014. The latest report says total worldwide money fund assets jumped $​101.​7 billion to $​4.​531 trillion (​or $​4.​853 trillion including Australia, which was missing from the report), led by large increases in the U.​S. and China. Chinese MMFs continued their explosive growth, moving into fourth place among all money fund countries ahead of Australia and Luxembourg. Ireland, which jumped ahead of France as the second largest money market fund country last quarter, solidified its No. 2 position as France continued a steep asset slide. Globally, MMF assets increased by $​93.​3 billion, or 2.​0%, over the past year (​through 12/​31/​14). Note that the totals are in USD, so strength in the dollar caused most foreign asset totals to look weak.

ICI'​s latest quarterly "​Worldwide Mutual Fund Assets" release says, "Mutual fund assets worldwide increased 0.​2 percent to $​31.​38 trillion at the end of the fourth quarter of 2014. Worldwide net sales to all funds was $​364 billion in the fourth quarter.... Inflows into bond funds totaled $​79 billion in the fourth quarter, down from $​106 billion of net inflows in the third quarter. Money market funds experienced inflows of $​144 billion in the fourth quarter of 2014 compared to $​89 billion net inflows recorded in the third quarter of 2014."

It continues, "Money market funds worldwide experienced a net inflow of $​144 billion in the fourth quarter of 2014 after registering a net inflow of $​89 billion in the third quarter of 2014. The global inflow to money market funds in the fourth quarter was driven by inflows of $​121 billion in the Americas and $​36 billion in the Asia Pacific region."

According to Crane Data'​s analysis of ICI'​s worldwide funds data, the U.​S. maintained its position as the largest money fund market in Q4'​14 with $​2.​725 trillion (​56.​2% of all worldwide MMF assets). Assets increased by $​121.​2 billion in Q4'​14 and were up by $​6.​9B in the 12 months through Dec. 31, 2014. As previously mentioned, Ireland remained the second largest money market fund country. Ireland ended Q4 with $​379.​0 billion (​7.​8% of worldwide assets), down $​10.​0B for the quarter but up $​11.​5B over the last 12 months. France stayed in third place among countries overall with $​349.​2 billion (​7.​2% of worldwide assets), down $​31.​3 billion in Q4 and down $​87.​3 billion over 1 year.

China continued its dramatic money fund growth in Q4; it now reports $​336.​2B in money fund assets (​6.​9% of the worldwide total), up $​48.​4B (​16.​8%) in Q4 and up a massive $​212.​9 billion (​272.​2%) over the last 12 months. Much of its growth comes from Yu'​e Bao, the USD $​93 billion money market fund from Ant Financial, an arm of tech giant Alibaba. See our March 30 Link of the Day, "Yu'​e Bao and Chinese Money Funds," which says, "​Tech in Asia writes, "​Alibaba-​affiliated money market fund Yu'​ebao users hit 185 million for 2014 ... up more than four times the previous year'​s count of 43 million. The fund'​s worth in assets reached RMB 578 (​about US$​93 billion) by the year'​s end, marking a 200 percent annual increase.""

Australia dropped to 5th place worldwide, down $​16.​5B over the past year to $​322.​1B (​6.​6%). But note that ICI'​s data didn'​t include money fund figures for Australia again this quarter. So we continue to estimate these at $​322 billion, the same amount as two quarters again. (​Australia'​s MMF assets were shifted into the "​Other" category two quarters ago; we'​re still seeking an explanation from Australia'​s fund association.) Luxembourg fell to 6th place with $​304.​3B, or 6.​3% of the total (​down $​1.​8 billion in Q4 and down $​16.​4B for 1 year).

ICI'​s latest Worldwide statistics also show Korea ($​76.​3B, down $​5.​3B and up $​12.​4B on the quarter and year, respectively), Mexico ($​49.​0B, down $​6.​1B and down $​3.​9B), and Brazil ($​44.​8B, down $​7.​5B and up $​1.​8B), in the 7th through 9th largest money fund market spots. India remained in 10th place with $​28.​3B, down $​1.​6B for the quarter and down $​1.​0B for the year. Taiwan, Canada, South Africa, Sweden, and Chile ranked 11 through 15th respectively, with Chile jumping ahead of Switzerland and Japan. Finland, Norway, and Italy round out the 20 largest countries that have money market mutual funds.

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

In 2015, Crane Data'​s Money Fund Intelligence International, which tracks the "​offshore" or international money fund market (​mainly domiciled in Dublin and Luxembourg), shows assets down $​21.​1 billion year-​to-​date through March 31, 2015, to $​733.​6 billion. USD-​denominated money funds are down $​6.​1 billion YTD to $​377.​6B. GBP-​denominated MMFs are up L12.​9 billion to L165.​3, while Euro-​denominated money funds are up E2.​4 billion to E93.​1.

In other international MMF news, Canadian fund company Smart Investment Ltd terminated three of its funds, including a money market fund, according to a press release." The release says, "Smart Investments Ltd. announced today that it plans to terminate the operation of the Pro Money Market Fund.... On or about June 1, 2015 these funds will be terminated."

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Note: Money market mutual funds and Crane Data are closed for the Good Friday Holiday. Happy Easter and Passover! Our daily News and Money Fund Intelligence Daily will resume publication on Monday.... Online money market fund trading "​portal" Institutional Cash Distributors will distribute StoneCastle Partner'​s Federally Insured Cash Account (​FICA), a structured or "​amalgamated" FDIC-​insured bank deposit product, the two companies announced today. The ICD/​StoneCastle press release, entitled, "ICD Enters Agreement for Exclusive Cash Management Portal Distribution of StoneCastle'​s FICA Product," states, "Institutional Cash Distributors (​ICD) announced it has reached an agreement with StoneCastle Cash Management, LLC ("​StoneCastle") to distribute its Federally Insured Cash Account ("​FICA") product through ICD'​s global SaaS trading platform, ICD Portal. FICA, a leading non-​term FDIC insured vehicle for institutions, meets the needs of institutional investors by striving to achieve competitive yields among FDIC insurance products and providing twice-​weekly liquidity." FICA and other amalgamated FDIC insured deposit programs take deposits larger than the $​250,​000 insurance limit and break them into smaller insured blocks spread out across a network of banks.

Jeff Jellison, ICD'​s CEO Americas, comments, "Basel III regulations and future MMF reform are pushing corporate treasury to broaden their asset allocation strategies. StoneCastle'​s FICA product is an excellent product addition as it enables institutions to have the ability to enhance their overall portfolio return while reducing risk and providing twice-​weekly liquidity. The integrated solution will provide ICD'​s Fortune 500 clients the opportunity to efficiently access the FICA product and have the client FICA positions included in ICD Portal'​s comprehensive analytics."

StoneCastle Cash Management President Eric Lansky adds, "We are excited to have StoneCastle'​s FICA product available on the ICD Portal. Bringing the leading FDIC insured cash solution to one of the world'​s largest portals ensures all treasurers have the opportunity to safely enhance the yield of their cash without liquidity restrictions associated with a term product." The release also says, "​StoneCastle'​s FICA product enables corporations to strengthen their portfolio'​s capital preservation through non-​term government insured deposits while also offering a competitive yield compared to traditional cash vehicles."

While this announcement is one of the first indications that "​amalgamated" FDIC products are spreading to the institutional marketplace, FDIC-​insured brokerage "​sweep" accounts have also been in the news in recent weeks. Reich & Tang announced that it was liquidating its money market funds and focusing on its suite of FDIC-​insured products. (​See our March 13 "​Link of the Day," "Reich & Tang Announces Liquidation of Money Market Mutual Funds," where R&​T CEO Michael Lydon commented, "The streamlining of our operations to focus on our FDIC deposit programs enables Reich & Tang to invest all of its resources into these programs and carve deeper into its niche as an expert in the deposit, liquidity, and short-​term capital markets.") Note: Crane Data will take a closer look at this segment of the cash management business in the pending April issue of our Money Fund Intelligence newsletter, which will ship April 8.

In other news, the Fed'​s Stanley Fischer spoke earlier this week on "Nonbank Financial Intermediation, Financial Stability, and the Road Forward," and mentioned money market funds several times. He stated, "It is well known that solvency and liquidity can be difficult to separate during stress periods because fears about solvency, even if unfounded, can prompt a run. Thus, one could also imagine promoting both solvency and liquidity at some nonbanks by imposing restrictions on their structure or activities in ways that reduce the likelihood of runs. An example of this is recent changes by the Securities and Exchange Commission (​SEC) in regulations for prime money market mutual funds."

Fischer explained, "​Starting in 2016, prime institutional money funds will be required to publish a floating net asset value rather than a stable value of $​1 per unit. Stable-​value funds, as we saw during the crisis, can be vulnerable to an unexpected "​break the buck" event that leads to a run. Under the new rules, funds can also impose limitations on withdrawals of liabilities and can impose liability redemption fees. The SEC considered requiring money market funds to hold some capital but chose not to do so. Only time will tell whether the adopted reforms have the intended run-​damping effects, but if they do, capital will be much less necessary."

He continued, "Besides the new money market mutual fund rules that I have already mentioned, a fourth example is additional data collection on specific holdings of money funds, which has enhanced stability by providing investors with more information to better evaluate risks. In addition, the Dodd-​Frank Act mandated the establishment of the Office of Financial Research in order to help promote financial stability through the measurement and analysis of risks, the conduct of essential research, and the collection and standardization of financial data. Data collection has begun for hedge funds and progress is being made in collecting data on repurchase agreements and securities lending. Nevertheless, some nonbank firms and activities--​including concerning the volume and uses of derivatives--​are still opaque."

Finally, SEC Commissioner Luis Aguilar also recently addressed disclosure and "​transparency" on March 20. He said, "Finally, another example of the benefits of collecting real-​time data information can be found with respect to money market funds. The financial crisis made clear that the information being received by the Commission was too stale to be of regulatory use. When a prominent money market fund "​broke the buck," and other funds came under pressure, we simply did not have the data at hand to determine what other funds could "​break the buck"."

Aguilar explained, "Accordingly, the Commission promulgated a rule to require money market funds to provide monthly disclosures of their investment portfolios. This new data has proven invaluable, as it allows the Commission to put its finger on the pulse of these funds, and better monitor their activities. For example, this new data allowed the SEC staff to monitor closely whether and how money market funds were adjusting their holdings during the Eurozone crisis in 2011. In particular, this data allowed the staff to determine that money market funds were not -- as had been widely speculated -- overexposed to Irish banks and other European securities during the Eurozone crisis."

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First American Funds is the latest firm to comment on how it will operate in the post reform world. In a press release entitled, "First American Government Money Market Funds Announce Intention Not To Opt-​In To Fees and Gates," First American, the 16th largest US money market fund manager with $​41.​7 billion in MMF assets, said it won'​t have fees and gates on its government funds. Also, First American'​s Jeffrey Plotnik, Director of Money Market Fund Management, released commentary on "The Changing Dynamics of Quarter-​End Investing for Money Market Funds," while Lisa Isaacson, Managing Director, posted commentary on "What to Know About Prime Funds." We review their latest communications below, and also cite an S&​P "​Request for Comment: Principal Stability Fund Rating Methodology."

The press release," says, "The First American Government Obligations Fund, Treasury Obligations Fund and U.​S. Treasury Money Market Fund announced today that the Funds currently have no intention to rely on the ability to impose redemption gates and liquidity fees, which beginning October 14, 2016 will be elective provisions for government money market funds under the SEC'​s money market fund reforms adopted in July 2014. The Funds already have been operating in compliance with the SEC requirement that, effective October 14, 2016, government money market funds hold at least 99.​5% of their total assets in cash, U.​S. government securities, and/​or repurchase agreements collateralized fully by U.​S. government securities."

In his commentary, Plotnik writes, "If you are a frequent investor in money market funds, you may have noticed that making large deposits over quarter-​end periods can be a challenge. That challenge is a result of decreased supply from broker/​dealers and issuers of overnight investment products, combined with increased demand from money market fund managers and short-​term investors for those same investments.... Quarter-​end continues to be a key financial reporting date for broker/​dealers and issuers of overnight investment products. Reported financial statements represent an overview of a company'​s financial health at quarter-​end. Firms reduce their balance sheets to enhance certain capital/​leverage ratios or other key financial metrics the regulators and general public analyze to determine their financial strength. Ultimately, the exercise of balance sheet reduction/​management limits the short-​term investment options that money market fund managers utilize on a day-​to-​day basis. The quarter-​ends that are significant for money market fund investing are the last business days of March, June, September and December, with June and December being the most challenging."

The Fed'​s Reverse Repo Program has a big impact on quarter-​end dynamics, he adds. "The most recent revision to the Fed'​s Reverse Repo Program added $​200 billion in term repo maturing on either April 2nd or April 6th, 2015.... This $​200 billion in additional supply will provide welcome relief to the typical quarter-​end product shortage. The $​200 billion in term Fed repo being offered is in addition to the daily $​300 billion auction.... If a fund manager'​s conditional bid rate is too high, it is possible they could end up with a much lower allocation than expected, or even no allocation. This presents the fund manager with the risk of large amounts of un-​invested cash on the last day of the quarter when there are very little in the way of investment options."

He continues, "​Quarter-​end supply across all asset classes diminishes in the face of stringent and increasing financial industry regulation. In the face of reduced supply we expect that the market'​s dependency on the Fed Reverse Repo Program will rise, which will then increase the probability that a fund manager could be allocated less than was requested during the Fed Reverse Repo auction."

Plotnik adds, "It is important to remember that un-​invested cash in money market funds ultimately means undesirable short-​term deposits for custodial banks. Money market fund custodians are now required to comply with more stringent and costly regulatory requirements and are hesitant to house un-​invested cash. In some instances, money market funds may be charged penalty fees for un-​invested balances ending up on the balance sheets of their custodial banks. At best in the current environment, money market funds will earn a 0.​0% yield on the un-​invested balances. Ultimately, un-​invested cash balances in a money market fund are detrimental to the fund'​s existing shareholders and this can make money market fund managers apprehensive about accepting large late-​day deposits they are not certain can be fully invested."

He concludes, "In summary, even though the Fed has supplied the market with additional supply, traditional quarter-​end supply pressures still exist and a more stringent regulatory environment has non-​government investment options largely non-​existent over key reporting periods. With the Fed auction ending at 9:​00 a.​m. CT, any unexpected large inflows or an unexpected low allocation at the Fed auction could put fund managers in the difficult position of trying to invest the remaining cash with little or no available supply. With the cooperation of fund investors and early notification, fund managers will do their best to accommodate every purchase request. However, the new market supply dynamics increase the possibility that late and/​or large deposits may not get invested. It is still important to understand that each money market fund is impacted differently by large quarter-​end deposits based on size, type, prospectus guidelines, rating agency requirements and eligible investments."

Isaacson'​s commentary updates investors on the changes to, and ramifications for, prime funds. She writes, "​Many fund families will have separate prime funds for their retail and institutional shareholders. The retail funds will offer shares at a stable NAV and the institutional funds will have floating NAVs. Both retail and institutional prime funds will be subject to liquidity fees and redemption gates.... Under the new rules that become effective in October 2016, prime funds that are not limited to retail investors will need to price portfolio holdings at a current market price and shareholders will transact at a NAV that is expressed out to four decimal places, or rounded to the nearest basis point."

Isaacson explains, "Several prime funds, including First American Prime Obligations, currently publish a daily market NAV so interested shareholders can already monitor this data point. Beginning in April 2016, all money market funds will need to have available on their websites six months of rolling fund data, including the daily market NAV.... Money market portfolio managers are -- and historically have been -- very focused on limiting NAV variability. The credit research process is built around assessing issuer credit worthiness. Portfolio construction is carefully considered with the goal of maintaining a stable NAV and preserving principal. It is our expectation that shareholders will see very little change in funds' market NAVs." On liquidity fees, she says, "To reduce the likelihood of triggering a fee at the 10% weekly liquid assets threshold, our portfolio management team plans to carry significant front-​end liquidity in the portfolios."

In summary, she adds, "The primary features shareholders want in their money market fund investments -- safety of principal, liquidity and yield commensurate with risk -- will remain intact after all of the money market reforms are implemented. Investment managers understand that shareholder access to their fund shares at a known value is paramount. It is because of this that portfolio management teams will work hard to maintain fund NAVs and structure portfolios to avoid emergency fee and gate triggers."

In other news, Standard & Poor'​s Ratings Services sent out a "Request for Comment: Principal Stability Fund Rating Methodology," which says, "Standard & Poor'​s Ratings Services is requesting comments on its proposed changes to its regional and global methodologies for assigning principal stability fund ratings (​PSFRs) to fixed-​income funds that strive to maintain a stable or accumulating net asset value (​NAV) per share. We have two main objectives for our proposed changes to the existing criteria: to broaden the scope of our global methodology to include Australian and New Zealand PSFRs and to update the global methodology for PSFRs. Our updates to the global PSFR criteria include new portfolio diversification metrics for investment in banks rated in our highest short-​term category ('​A-​1+'), changes to cure periods for withdrawn and downgraded securities, and further differentiation of the methodology at each PSFR level. If the proposed changes are adopted, in addition to updating and fully superseding our existing global PSFR criteria "​Methodology: Principal Stability Fund Ratings" (​PSFR criteria), published June 8, 2011, the proposed criteria would fully supersede the regionally specific criteria applied to the ratings on funds in Australia and New Zealand, to which we would apply the global criteria."

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