News Archives: June, 2015

Crane's 7th Annual Money Fund Symposium in Minneapolis is now in the books. We had a record number of attendees (501) come to Minneapolis, where the host city earned praise, and we also had what many have called our best program ever. Over the next several days, we will summarize highlights from each of the three days. Today, we cover the first half Day 1, which began with a welcome address and Q&A featuring Karla Rabusch, the President of Wells Fargo Advantage Funds and also featured a session on the "State of the Money Fund Industry." (Conference Attendees and Crane Data Subscribers may access the full Binder, Powerpoints and Recordings via the "Money Fund Symposium 2015 Download Center" or our "Content Center.")

In the opening address, Rabusch discussed some of the changes that Wells Fargo has gone through. She says, "When the companies merged in 1998 (Wells Fargo and Norwest), our portfolio management team for our money funds was led by Dave Sylvester out of the Norwest business and he was a phenomenal industry presence. He just recently retired and we took that opportunity to pull the funds together under Jeff weaver and put our short duration and money funds together with the changes in the institutional prime business."

On the changes the company has made following money market reform she said, "Last month we announced our changes, designating which are institutional and which are retail. We've designated 4 of our funds as retail, 3 as institutional, and 3 as government funds. The biggest challenge is, for the funds we designate retail, figuring out how to move out the institutional clients that are in there." In terms of adding new products, Rabusch added, "We already have short duration, conservative income type products and separate accounts. We still need to get more clarity and need to understand a little bit more what our clients' plans are. I think a lot of our clients aren't really ready to think about it too much so we're in the process of talking about it with clients and figuring out what to do."

She continued, "We are focused on clients first, that's why we are all here. Sometimes it feels like we're focused on regulators first because we're responding so much to regulators, but we need to make sure that we're fitting our clients' needs into the regulatory framework. There's always going to be a place for money funds. We'll see how they transition -- how much transitions to government funds, how much stays in prime, how it all works. There's obviously going to be opportunities and we're all going to find ways to meet the needs of our clients."

"The State of the Money Fund Industry," featured Crane Data President Peter Crane; Federated Investors' Global Money Markets CIO Deborah Cunningham; and JP Morgan Securities' Head of US Interest Rate Strategy Alex Roever. "The last 6 months or so, people keep asking me over and over is how much money is going to move, and of course nobody knows. But we're going to be up here speculating over the next few days," said Crane, providing an overview of the industry. "Money market funds are still $2.6 trillion in assets, and it's amazing that the base is still there. So while people predict where the money might flow in 2016, I take the 'under' on this. I think assets will be pretty much where they are today because they have been flat for the last 4 years. If the money hasn't gone elsewhere by now, what in God's name is it waiting for?"

One of the subjects that Cunningham discussed was fee waivers. "On fee waivers, we've been in this environment for the better part of five years now," she said. "The number has continued to grow and has kind of peaked over the course of the last year and in our own case has started to go down ever so slightly -- a reflection of a little bit of the yield uptick in anticipation of a rate increase later this year. As far as recapturing what's been lost, some people think about waivers as a loss in a product type and that's not at all the case here. It's a lower margin, it's less of an income that's earned on that that particular product, but it's not a loss. So trying to recapture something that just was lower from a margin perspective for a period of time is something that we, from Federated's perspective, don't have as part of our thinking at this time."

She added that it doesn't take a major yield increase to return the fee levels to normal. "Generally speaking ... for every ten basis points in yield increase, the waivers decrease by 25%." By the time by the time you get to 75 basis points in the market ... you get you back to zero from a waiver perspective." Crane concurred, saying, "One or two Fed hikes are going to return the vast majority of these waivers to money fund and that $3.5 billion in revenue rate is going to be $7 billion after 2 Fed hikes. Of that first hike my wild guess is that 80% is going to go back to fund companies. The big dog is going to eat first, and net yields may barely budge." Cunningham also talked about consolidation. "The discussions around consolidation have heated up, multiples beyond where they have been over the course of the last several years. [Though] they're still small in nature."

Roever provided insights on rates and supply. "What strikes me about this cycle as we're moving closer towards the Fed actually raising interest rates is that it's very different than the previous cycles. I think it's different because we've changed so much from a regulatory perspective ... not just in the money fund business but also on the banks." He continued, "We've got fund sponsors like Federated, Fidelity Blackrock, etc., who are who are making all sorts of plans about what to do as reform approaches. We've got banks who are obviously big issuers into the space trying to make plans about where they're going to be able to issue on the curve, how much they're going to be able to issue. The missing piece in all this is the shareholders and actually that's the most important piece. Where do they move their money and are they going to have the ability to actually move? I think entropy is a pretty powerful force."

Predicting fund flows out of prime or bank deposits and potentially into government funds is "the biggest parlor game in the room." He says, "You get you get estimates ranging from a few hundred billion to a trillion. `Our best guess is something in the $400 to $500 billion dollar range, although the certainty that we would put around that is not especially high. Realistically between the two, we're talking about something on the order of $700 billion to $1 trillion of total flows potentially shifting into government funds space."

Cunningham added, "I believe we will see some money in motion certainly occurring in the second half and especially in 2016. Probably the easy choice for investors to make initially in the prime institutional world is to go into the government funds because they're structurally the same. They look and feel and operate in a similar manner to what they're used to today." But as assets go into government funds, spread will widen. "Ten to 12 basis points has been about the norm between a prime and govie fund historically, but if that goes to 20, 30, 40 -- at some at some point, those investors that made the choice to go easily into the government fund initially without much of a give up are going to recognize that spread is now wider."

One of the products that Federated is looking to develop is the 60 day and under maximum maturity floating NAV fund. Such a fund, according to modeling data Federated has done, would produce about half the spread differential, she said. "Those might be the logical vehicle at least initially for customers that are looking to kind of come back and tiptoe into that floating NAV fund, because of not no volatility, but lower volatility expected for those products."

On rate hikes Roever added, "It's less than a coin flip probability that we wind up with a September hike. Our economists have two hikes penciled in for this year and perhaps getting up as high as two percent by the end of next year. Laying on this timeline are some key regulatory points. October 2016 is obviously the big thing we're all focused on here -- money fund reform. But I would also point you to January 2018, which is when most of the large regulations on the largest banks have to be in place."

He explained, "I feel it's very likely we're going to see a portfolio managers in prime funds have to build their liquidity in the event that they do start to see money that wants to start flowing from the prime space and into the government funds space. Under the new regulations, it's not impossible for banks to issue a lot of short term debt. But it just gets very costly for them to do that, so we'll probably see some contraction in terms of bank paper. I think the bigger challenge probably isn't the sheer availability of bank credit so much as it is maintaining the diversification among the names."

Also, he added, "We have seen a pretty significant decline in terms of Bill issuance as a percentage of the overall Treasury supply over the past two years. There's not a lot of Bill supply in the marketplace now. One of the challenges we face with money trying to move into the government money fund space is, 'What are you going to put in those funds?'" A lot is going to depend on the Fed's willingness to use the Reverse Repo Program -- whether it's Overnight or Term -- to fill that gap, he said. "Their willingness to do that is going to have a lot of impact on what happens with short term rates in the government space."

Thank you to all who attended and supported Crane's Money Fund Symposium last week in Minneapolis! (We had a record 502 attendees.) The conference binder, recordings and Powerpoints are now available to attendees and to Crane Data Subscribers at the bottom of our "Content" page. Watch for excerpts and coverage of the sessions in coming days on www.cranedata.com and in the July issue of our Money Fund Intelligence newsletter. Our next event is European Money Fund Symposium, Sept 17-18 in Dublin, our next "basic training" Money Fund University is Jan. 19-20 in Boston. Next year's Money Fund Symposium will be in Philadelphia, June 22-24, 2016. Also, in today's "News," we excerpt from our latest Bond Fund Intelligence, Crane Data's new publication focusing on the bond fund and conservative ultra-short bond fund marketplace. (Contact us to see the latest issue and our BFI XLS "complement" or to subscribe. BFI is $500 a year, or $1K including BFI XLS.)

The June issue of our new Bond Fund Intelligence newsletter features a profile of Gregory Nassour, Senior Portfolio Manager at Vanguard Investments. Nassour manages the new Vanguard Ultra Short Term Bond Fund, which launched earlier this year. Nassour tells us about the important gap that this new fund fills in the Vanguard lineup and why the space between money market funds and short term bond funds is so critical for investors in this market. As Nassour says, it's all about giving investors choices. Below, we reprint our latest BFI interview.

BFI: How long have you managed funds? Nassour: I've been with Vanguard since 1992 and I've been within the fixed income group since 1994. I'm principal and senior portfolio manager within the group. I co-head all of our actively managed investment grade corporate bond portfolios. I'm portfolio manager on the Ultra Short Term Bond Fund (along with David Van Ommeren), the Short Term Investment Grade Portfolio, the Intermediate Term Investment Grade Portfolio, and the Long Term Investment Grade Portfolio.

BFI: How have Vanguard's short term products evolved? Nassour: The oldest one we have is our Short Term Tax Exempt Portfolio which started back in 1977. On the taxable side, the Short Term Investment Grade portfolio started in October of 1982. When you look at the whole gamut, Vanguard runs a lot of short term bond portfolios. We have a Short Treasury, a Short TIPs, a Short Term Federal Portfolio, Short Term Investment Grade, a Short Term Government Bond Index Fund, a Short Index Fund, a Short Corporate Index Portfolio, and a Limited Tax Exempt Fund.

BFI: So the new Ultra Short Term Bond Fund fills a gap in the lineup? Nassour: Exactly. We have an equivalent short term tax exempt portfolio, but we did not have one on the taxable side. So this is basically to fill out our fund lineup. Our Short Term Investment Grade portfolio is right around two and a half years duration. If investors wanted to go shorter, they had to go to our money market portfolios, so we wanted to fill that gap. The Ultra Short Term Bond Fund has a one year duration and that's going to be its home. The biggest challenge right now in this space is yield; hopefully this will be short lived. It's important to point out that it's not a money fund. It has a variable rate NAV, so if rates go up, prices will go down on this particular bond fund. We've made it very clear, not only on all of the PR that we did, but to all of our clients who are considering the product that this is an extension of our bond fund lineup.

BFI: How has the fund been received? Nassour: One of the neat things about this portfolio launch has been its consistency. This fund is just under $230 million in assets right now and the cash flow has been very consistent. Overall, Vanguard is great at keeping hot money out of the portfolios. We have policies in place to make sure that doesn't happen so that we can protect the current fund holders. That's a true benefit of the portfolios here; money tends to be sticky. That's great from the shareholder standpoint and it helps us manage the portfolio much better.

BFI: What is the investment strategy? Nassour: About 25% of the portfolio will look similar to the securities we would hold in a money fund. The rest of the portfolio has around 25% in corporate bonds, 25% to 30% in asset backed securities -- mostly high quality AAA auto loans and credit cards. There will be a small amount of CMBS, mostly the triple-A enhanced tranches. So the portfolio is very conservative. It has 10% Agency bullets and about 10% Treasuries. Yes, it has some money market securities in it, but I look at it as more closely related to the Short Term Investment Grade Portfolio -- just a little bit more conservative. We know that investors want a little more yield than money market funds because money market funds are not yielding anything. At the same time they're not in a longer duration portfolio where they're worried about a rate rise.

BFI: Are there concentration limits or diversification requirements? Nassour: We are going to keep this portfolio right around the one year duration. One of the hallmarks of Vanguard is, we give you exactly what the fund says it is going to be. For example, a long term investment grade fund is never going to become an intermediate fund because rates are going to rise, the inter-mediate funds are not going to shorten up to where it becomes a short term fund, and on down the line. This fund is going to be right around one year duration. It will give shareholders some decent current income. Right now the SEC 30-day yield is 65 basis points yield to maturity. The duration is not going to fluctuate too much up or down from that one year.

We offer enough funds that we give the investors the ability to choose what they want. If you want a Treasury fund, we have short, intermediate, and long Treasury funds. If you want an investment grade fund we have short, intermediate, and long investment grade funds. We give investors choices and we stay exactly within what the portfolio says it's going to be. In terms of concentration limits, all of our investment portfolios are highly diversified. If it is a lower quality security like a triple-B, we wouldn't own more than 25 basis points exposure in the portfolio. If it's single-A, we might hold up to 50 basis points in the security, and at AAA obviously we can hold more.

BFI: Can you invest in any junk or any below investment grade? Nassour: All of our investment grade portfolios have the ability to go up to 5% in high yield securities -- this way, in case securities get downgraded by the rating agencies we're not forced sellers and we can sell when the time is right. But we do not plan on investing in the high yield sector as a strategy in [this fund] at this time. Even in our Short Term Investment Grade Portfolio we're only around 1.25% of high yield exposure. But in this fund it is currently zero.

BFI: What types of investors are using it? Nassour: We've been looking at the behavior of our investors, and we have found a lot of investors moved out of money market funds and into this particular fund. I think that's just a yield play. Yields are so low in the money market space that they wanted to get a little bit more out of their money so they moved into this fund. And that's what we thought would happen. Certainly some investors moved down from short term investment grade into this fund just to get a little bit shorter duration in case rate rises. From a shareholder perspective, if they have a long term investment plan and they're dollar cost averaging into the funds, then yes, when interest rates go up, bond fund prices will go down. But as you continue to buy, you'll be buying at yields that will be higher and higher in the portfolio and you'll be buying the fund at a slightly lower price.

BFI: What is your outlook for rates? Nassour: We believe the Fed is going to move, probably in 2015, in a more gradual pace, so we don't think it's going to be a real shock to the portfolio. We don't think it's going to be a straight line -- they'll probably pause along the way to take a look at how the economy is performing. I think this fund will actually fare pretty well in that sort of environment. As rates slowly begin to rise, we'll be able to invest in product that will have a slightly higher yield and because it will be slow, it'll be able to absorb the rate hike. What investors need right now is yield. They're not making anything on money funds, short term yields are still not exceptional, and everyone can do with a little bit more income.

BFI: Are there any lessons to be learned from past rate hike cycles, like 1994? Nassour: I think the Fed learned a lot during that period. If you get behind the curve, then you wind up with a 1994 scenario where you're just jumping too quickly, in fifty basis point increments. They don't want to do that, but they also don't want to go too slow either. We're in an economy now where inflation is not rearing its ugly head. We're not getting macro-economic data that is fantastic; we're just muddling through. The Fed is very aware of that environment, so I do believe they're keeping that front and center in terms of how they're going to proceed with the rate rise. It will be painful on the way up, but when rates normalize, it's definitely a longer term positive for investors. Investors are really feeling the pain of low yields, especially those who are either nearing retirement or in retirement. From that standpoint, a higher rate environment will certainly be better.

BFI: What is the future of ultra short bond funds in general? Nassour: One of the lessons that a lot of investors learned, especially during the crisis, is the importance of having a balanced portfolio -- money funds, bond funds, equities. So bond funds are going to be very important. In terms of the future of ultra short term bond funds, they're going to have a place because investors have different needs for their allocations.

Below is the second half of our interview with Peter Yi, Head of Short Duration Fixed Income Strategies at Northern Trust Asset Management. We ran part I of our article, "Northern Trust's Peter Yi on Reforms; More Than MMFs," which originally appeared in the June issue of our Money Fund Intelligence newsletter, yesterday. Below Yi talks about developing the next generation of cash products, regulations in Europe, ultrashort bond funds, and the future of money market funds. (Note: Thank you to those who attended our 7th annual Crane's Money Fund Symposium, which concludes this morning, in Minneapolis! See you next year, June 22-24, 2016, in Philadelphia!)

MFI: What changes is Northern making? Yi: Our product strategy continues to evolve and we're aggressively thinking of next generation strategic cash products to round out our liquidity product set. We've assembled a team across all business units to fully address money market reform. We have people dedicated full-time to the effort, addressing all the operational, legal, and business complexities that are associated with the changes. Because we already have separate mutual funds for institutional clients, the changes we announce may not be as dramatic as the news from some money market fund managers recently. In general, we're going to respond to our clients' desires and shape our products accordingly; focusing on what works best for them as we think about innovation and development of new products.

MFI: Will you look at 60-day or 7-day maximum maturity funds? Yi: It's still under observation.... One of the major concerns investors have is the potential to be gated. So if you have a credit fund that is a 60-day max maturity where you can utilize amortized cost accounting, it still doesn't mean you can't get gated. Just that possibility starts to give some of our investors a reason to pause. With regard to a 7-day maximum maturity fund, if you think about the market structure, it's hard to find instruments that are only 7 days long, because regulatory pressures have motivated banks not to have these short dated maturities. I'm not sure market supply is going to be able to support the ability to construct a portfolio in a way where the yield is better than a government fund's.

MFI: What about regulations in Europe? Yi: Our view is the European Commission proposals have been viewed as much more punishing than what's currently being adopted by the SEC. While some of the provisions are concerning, we also think the process is much slower than the U.S. The best thing we can say is we expect a vigorous debate within the multiple Parliaments. We feel prepared though for our offshore funds. Given that the ECB cut their deposit rate to negative 20 bps last year, we have taken a more proactive approach and launched a variable NAV euro-denominated money fund. The results have been good: assets in the variable NAV structure have grown to US$2 billion, from US$1.4B when we launched.... [W]e're approaching $20B in assets across our three offshore funds.

MFI: Have investors shown interest in ultrashort bond funds or other products? Yi: Absolutely. We have a long history managing ultrashort fixed income strategies -- since the late 1980s -- but we have seen incredible growth in this asset class over the last few years. We launched our first two ultrashort funds in 2009 and the assets under management have grown to US$4.7 billion.... Today, Northern Trust manages around $14 billion in total Ultra Short AUM. The success of the ultrashort strategies validates our view that clients are seeking a better risk/return profile, across both our Institutional and Wealth Management channels.

MFI: What's driving ultrashort interest? Yi: We've heard from some investors that just don't understand why they are still earning zero on their cash. We've had more corporate treasurers say, 'We want a high quality customized portfolio, but we think we should be earning something more than zero on our liquidity assets.' So they start moving at least a portion of their cash into more strategic cash buckets, like ultrashort fixed income. Then on the other side of the fixed income investment world, you have investors that are afraid of higher rates because of the downward price pressure when interest rates start to go up It's coming from both directions.

MFI: What about Northern's deposits? Yi: We like to offer a lot of different liquidity products with different options. For some investors, an investment product like a money market fund makes a lot of sense. Historically the yield on money market funds is generally much more competitive than a bank deposit. But we explore the right liquidity solutions for all of our investors and sometimes it ends up being a deposit product and sometimes it ends up being an investment product. Some banks have been very public about trying to aggressively shrink balance sheet deposits and my guess is they are more motivated to push that to asset management products. We don't have that problem. Our goal is to provide the best liquidity solution for each of our unique clients.

MFI: What are your thoughts on the future of money market funds? Yi: Our catch phrase is: "liquidity is valued in every cycle." So we feel very good about the future for liquidity products. We're committed, without a doubt, despite the structural changes, to money market funds. The industry is resilient and we think it will continue to thrive. Investors are always going to have a need for liquidity, so that's why we think the industry is never going to go away. It just might change every so often.

The June issue of our flagship Money Fund Intelligence newsletter features an interview with Peter Yi, Head of Short Duration Fixed Income at Northern Trust Asset Management. Yi discussed a range of topics, including how his firm is responding to money market reforms, the growing interest in ultrashort bond funds, the biggest challenges, the top priorities, and other topics in the money markets. The first half of our article follows. (Note: Yi will also moderated the "Dealer Panel: Supply Update and Outlook" at Day 2 of Crane's Money Fund Symposium, which started yesterday and which runs through Friday in Minneapolis.)

MFI: How long have you managed cash? Yi: We've been managing money market funds since the 1970s, when we created our first cash sweep vehicle in our trust department. We've been doing this for a long time and have demonstrated a commitment to the money market business. We view cash management to be a flagship capability and a product that caters incredibly well to our institutional asset servicing business and our wealth management franchise. Right now we're managing about $235 billion in assets across various money market funds and short duration products and strategies. Of that $235 billion, about $85 billion is in money market funds. The remainder is in STIFs, "sec lending" reinvestment vehicles, ultra short fixed income strategies and separately managed accounts. What resonates most with investors across all these strategies is our conservative investment philosophy that emphasizes credit research and risk management.

MFI: What is your top priority right now? Yi: Both internally and externally, I'm spending an enormous amount of time focusing on money market reform. Without a doubt, our number one priority is to focus on our investors and find the right solutions for them as the reforms take effect. We have the benefit of a reasonably long compliance period for the new structural changes for certain types of money market funds. Our message to investors is that we believe that this is enough time for everyone to thoughtfully assess their options and not react in a disruptive, knee-jerk manner. It's very valuable to engage with our money market investors, observe reactions to these changes, and think about what we can do to address their liquidity needs in this changing industry. It's also especially important to ensure that our investors have a voice in our product evolution.

Aside from the regulatory debates, I'm spending a lot of strategic focus on our ultrashort fixed income product offerings. Investors have been drawn to our ultrashort strategies as some money market investors are seeking more yield, while core fixed income investors are positioning for higher interest rates. Our view is the ultrashort space will continue to be popular and gain traction. With the money market landscape changing, we're ensuring that Northern Trust is nimble enough to quickly adapt to investor needs.

MFI: What is the biggest challenge managing cash today? Yi: In today's environment, we remain sensitive to the pricing of risk in the money market space, especially with historically low interest rates. We're concerned that we're not getting paid enough, through the interest rate, for taking credit risk. Demand for high quality instruments continues to outpace supply. We operate in an environment where high quality issuers can increase their offering by one basis point and that is met with billions of dollars of interest from portfolio managers. We think that's an unhealthy dynamic. So we continue to debate the question -- are we getting paid for this risk? In these situations, relative value assessments become critical within our portfolio positioning.

The biggest challenge we see in the intermediate to longer term is the supply dynamics of the money market sector. Money market PMs are focused on high quality issuers with short maturities. We are now facing an environment inundated with regulatory constraints for issuers and investors.... This dynamic will make it much more difficult to source high quality instruments that traditionally were available to money market funds. The sensitivity to regulatory metrics like capital and leverage ratios will continue to strain issuance. Issuers globally are being driven to be less reliant on the short term wholesale funding markets and are certainly motivated to seek longer term liabilities, so this will continue to be a big challenge for the industry.

MFI: Are you preparing portfolios now for October 2016? Yi: As of right now there aren't a whole lot of changes, but as we get closer to September and October, which is approximately one year from the structural implementation compliances dates, we'll start to see some changes in how Portfolio Managers are repositioning their portfolios to adjust to new market liquidity dynamics and investment demand considerations.

MFI: Are you expecting large flows? Yi: Our investors want to know more about the new rules and are concerned about how some of these changes will impact their traditional use of money market funds. They're concerned with situations where they can't access their cash when they need it. They're concerned with the operational complexities of a floating NAV structure. The new complexities at the very least give them reason to pause and reflect on how they use money funds, and they are willing to see what other liquidity solutions emerge. In terms of flows, we believe that some investors are simply not comfortable with a VNAV structure or any imposition of a redemption gate or liquidity fee.

However, since government money market funds are exempted from these structural changes, there's still going to be a money market product that will preserve the CNAV structure. We think it's reasonable to believe that some investors will simply move to a government fund if they're in a prime or tax-exempt strategy today. But over time, we do think credit spreads will widen because government securities will continue to have incredible demand from these initial investor shifts. When that happens, we expect a new market equilibrium will develop, with a more meaningful difference between yields in credit funds and government funds. Some investors that initially shifted to government funds will move back to prime funds <b:>_. (Look for Part 2 of our interview with Peter Yi in the coming days, or see our latest issue of `Money Fund Intelligence.)

The Investment Company Institute sent a letter recently to William Wilkins, Chief Counsel for the Internal Revenue Service on "Money Market Fund Reform -- Adviser Contributions." The letter, penned by ICI's Karen Lau Gibian, Associate General Counsel – Tax Law, seeks additional guidance on the new rules for money market funds that could help prevent runs. She writes, "The requested guidance is necessary to, among other things, prevent redemptions from money market funds as they are required to transition from a stable net asset value ("NAV") fund to a floating NAV fund. As mentioned in our earlier submission and discussed below, we understand that some investment advisers may decide to make contributions of cash to existing money market funds to bring the shadow NAV of a fund up to $1.0000 before the compliance date for the SEC Rule. Although for book purposes this contribution would be treated as additional paid-in capital, with no resulting gain or income to the fund, the tax treatment by the fund is uncertain. Existing authorities suggest two possible approaches for analyzing these payments. As discussed below, however, neither approach fully resolves the issues raised by a contribution for this purpose." (Note: Welcome to those readers and subscribers attending Crane's Money Fund Symposium, which takes place Wednesday through Friday in Minneapolis. We hope you enjoy the show! Watch for highlights in coming days and in the July issue of our Money Fund Intelligence.)

ICI's Gibian writes, "The first possible approach would treat the contribution as short-term capital gain. If the fund does not have sufficient losses to offset the amount of the contribution, however, the fund would have net capital gain, some or all of which it must either distribute to its shareholders or retain and be subject to corporate-level tax. The amount of the distribution or tax paid would reduce the NAV to below the intended $1.0000 level. This result largely would negate the purpose of the contribution."

She adds, "The second possible approach would treat the payment as a non-shareholder contribution. Although the payment would not result in immediate gain or income to the fund under section 118, it would result in a basis reduction in any assets held by the fund twelve months after the contribution is received under section 362(c). The fund thus would have capital gain equal to the amount of the contribution when those assets are sold. Again, any resulting net gain recognized would require the fund to make a distribution or retain and pay tax on all or part of such gain, negating the purpose of the original contribution."

The letter explains, "As neither of these approaches would allow all of the contributed amount to remain in the fund, which is essential to ensure that the NAV is $1.0000 on the compliance date for the SEC Rule, guidance allowing a third alternative is necessary. Specifically, it is critical that such contributions remain in the fund's NAV, not creating income or gain to the fund or causing a reduction in the basis of the fund's assets."

It adds, "We thus ask the Internal Revenue Service ("IRS") to issue a revenue procedure, pursuant to which the IRS will not challenge a regulated investment company's ("RIC's") treatment of a contribution of cash from an investment adviser as resulting in (1) no capital gain or income to the fund, and (2) no reduction in the basis of the RIC's assets under section 362(c) of the Internal Revenue Code. To avoid any unintended consequences, we suggest that the requested revenue procedure be limited to (i) money market funds that comply with SEC Rule 2a-7, and (ii) contributions made prior to the compliance date for the floating NAV SEC Rule (October 16, 2016)."

Gibian continues, "Transitioning from a stable NAV to a floating NAV presents a number of non-tax challenges. One substantial concern is that shareholders will leave the fund prior to the transition date. As noted above, money market funds will be required to disclose the shadow NAV in early 2016, if they are not doing so already. Thus, shareholders will know the mark-to-market value of a fund's portfolio. If a fund has a shadow NAV of less than $1.0000, investors may be inclined to sell their shares before the transition to avoid experiencing a decline in share value once the NAV begins to float. In other words, if the shadow NAV of the fund is less than $1.0000, investors may choose to sell their shares at $1.00 while the NAV remains stable, rather than wait and experience a loss once the shares begin to trade at their four decimal place-NAV. This could cause a run on institutional money market funds, which is the very situation the floating NAV is intended to prevent. To prevent such behavior, we understand that some money market fund investment advisers may make cash contributions to their funds, to bring the shadow NAV up to $1.0000. This would allow the fund to begin with a floating NAV of $1.0000, rather than something less."

She says, "These contributions may be made for other reasons as well. As the date for compliance with the new SEC Rule approaches, we anticipate that more firms will consider adviser contributions. We note that the SEC already has recognized the need for such contributions. In its recently released Frequently Asked Questions, the SEC provides that an adviser contribution made as part of a one-time reorganization, intended to bring a fund into compliance with the SEC Rule, is not financial support that must be reported on Form NCR.”

She concludes, "The mutual fund industry is working diligently to prepare for compliance with the new SEC Rule. As such, it is considering all options to ensure that the transition goes as smoothly as possible for both shareholders and funds. This type of adviser contribution is one mechanism that can assist in accomplishing this result. We thus ask the IRS to issue a revenue procedure that provides a safe harbor for the treatment of adviser contributions. Under this guidance, the IRS would not challenge a RIC's treatment of an adviser contribution as resulting in (1) no income or gain to the fund, and (2) no reduction in basis of the fund assets under section 362(c). The guidance could be limited in scope to contributions made to funds that comply, or plan to comply, with Rule 2a-7, if such amounts are received prior to the compliance date for the SEC Rule (October 16, 2016). Given the short time-frame before funds must comply with the SEC Rule, we ask the IRS to issue such guidance expeditiously. We believe that such guidance would prevent runs on money market funds and help ease the transition to the new money market fund marketplace."

A trio of researchers from NERA Consulting published a white paper entitled, "Money Market Mutual Funds: Stress Testing and the New Regulatory Requirements," which analyzes how money market funds will react in stress scenarios under the new rules. The authors -- Jeremy Berkowitz, Patrick Conroy, and Jordan Milev -- reveal some interesting results. They write, "In the coming months, as money market funds gear toward meeting these requirements, it is increasingly important to be aware of the types of scenarios that the enhanced, SEC-mandated stress tests include and the appropriate econometric and data simulation framework that these funds would need to adopt -- with board oversight -- in order to meet SEC's requirements.... In this article, we demonstrate this framework and evaluate the results from running prescribed stress scenarios for a stylized money market fund to assist funds, their managers, and boards in preparing to implement the rule. The enhanced stress testing requirements may increase demands on money market fund boards to evaluate the comprehensiveness and implementation of the stress testing methodology."

The 9-page report says, "Perhaps the most significant of the 2014 reforms is the enhanced stress testing requirement. This reflects the SEC's concern that money market funds be prepared to deal with particular events such as interest rate changes, higher redemptions, and changes in credit quality of the portfolio. Since the draft rules in 2010, the SEC has required money market fund managers to examine a fund's ability to maintain a stable net asset value per share in the event of such shocks. However, starting in April 2016, money market funds will be required to conduct substantially different, enhanced stress testing. The new prescriptive stress testing regime is designed to minimize the possibility of a failure by forcing money market funds to regularly ask what would happen to their liquidity position under adverse market conditions."

NERA continues, "In particular, the new regulations require funds to test their ability to maintain weekly liquid assets of at least 10% of total assets in response to several scenarios. The hypothetical stress events include: a. increases in the level of short-term interest rates; b. a downgrade or default of particular portfolio security positions; and c. a widening of spreads compared to the indexes to which portfolio securities are tied. Additionally, these stress scenarios must include increases in shareholder redemptions to various levels, and management is encouraged to add any other combinations of events deemed relevant. Recent litigation -- the case of the SEC vs. Ambassador Capital Management in 2014 for example -- has shown that portfolio managers and board members need to be keenly aware of, and fully understand the complex stress testing requirements described in rule 2a-7 of the Investment Company Act of 1940. Failure to implement even one dimension of the prescribed stress scenarios can result in severe penalties for the firm and its officers."

The researchers provide stress testing examples. "We constructed a stylized balance sheet for a hypothetical money market fund, based on the N-Q filing of a major US money market mutual fund in Q4 of 2014. The filing gives detailed information on the portfolio holdings of the fund, including commercial paper, certificates of deposit (CDs), variable rate notes, fixed rate notes, and repurchase agreements ("repos"). We assume that, prior to each of the stress scenarios, the fund holds 1% of its assets in cash and that 41% of total assets are weekly liquid assets. We then subject the portfolio to three of the stress tests required under the new SEC regulations, and report the required measures: weekly liquid assets and principal volatility."

They continue, "The first stress test scenario addresses an increase in the short-term interest rate. We subject the portfolio to a stress test scenario in which the 1-month and 3-month treasury rates increase simultaneously by 30 basis points. We assume this increase in rates continues to hold throughout the stress period of 10 business days. As required under the new rule, we consider various different assumptions about shareholder redemption rates. We assume they increase by 10%, 20%, or 30%, respectively, and remain at that level over the course of the 10-day stress period."

Further, NERA writes, "The second stress test scenario addresses a widening of spreads. In particular, the scenario assumes that credit spreads increase by 1.5%." The paper includes a table which explains the results. "The left side of the table, under the heading "increase in interest rates," shows the stressed levels of weekly liquid assets after the 10-day shock has run its course. The liquidity level declines several percentage points to about 34.7% under the 10% increase in redemption rates and down to 34.4% under the more severe 30% increase. This stress test reveals an important insight about this particular hypothetical money market fund: the interest rate shock and the spread shock scenarios have a profound effect on weekly liquid assets, even for a mild increase in redemption rates of 10%. Additionally, an increase in redemption rates that is three times higher, at 30%, does not change the results substantially. In other words, for this kind of money market portfolio, redemptions have less of an effect on existing shareholders than changes in interest rates. This illustrates the ways in which stress testing allows funds to glean valuable business insight into the dynamics of their portfolio."

They also tell us, "The results indicate that the volatility of NAV would be about 0.8% in response to the interest rate shock and about 1% under the spread shock. Since there is little historical experience with floating NAV funds to put these numbers in context, it is useful to plot the NAV over the course of the 10-day stress event, shown below in Figure 1. When the Reserve Primary Reserve Fund "broke the buck" in 2008, despite having a nominally non-floating NAV, it did so by 3%. In our interest rate shock scenario, the NAV does not drop as steeply, but it does experience a significant decline of nearly 2%. While this is a rather severe decrease, it should be kept in mind that the stress scenario envisioned here is an extreme, overnight move in short rates and in spreads."

They add, "Additionally, we note from the graph that the spread shock results in an even larger decrease in NAV. This is likely due to the fact that the spread shock is a 1.5% increase in spreads, occurring in one day, which would be a historically rare event. Of course, the appropriate parameters of the stress test would depend on many factors. A key part of the effort to design an informative stress test would be to use an appropriate stress-testing range for the relevant parameters. Lastly, it is interesting to note that the decline in NAV occurs almost entirely in the first two days of the stress period, even though redemptions continue to occur at an elevated level for the entire 10 days. This again reflects the fact that, for typical money market portfolios, redemptions have much less of an effect on existing shareholders than the initial change in interest rates or spreads."

The third stress deals with downgrade risk. "The third shock, shown in Panel B, is a major counterparty downgrade. We assume that the counterparty comprises either 2% of the commercial paper held in the portfolio, or 5%. For illustration purposes, we assume that the downgrade results in a 20% reduction in the value of the notes. The results indicate that the reductions in weekly liquid assets are on par with the first two stress scenarios, but the increase in principal volatility is more varied and can be higher. For a high redemption-rate scenario, the variation in NAV can reach 2.5%. Again, assessing whether that is large or small requires an objective view as to what would also be reasonable variation during times of stress."

In conclusion, the NERA paper says, "The SEC's money market fund reforms will undoubtedly change the way that many money market funds operate in a substantive way. The reforms will create new challenges, including enhanced data management, new models for valuing positions and contingencies, and additional report generation and submission capabilities. Risk management procedures will need to be augmented to include evaluation of fund liquidity under complex new stress scenarios in order to ensure compliance with the new rules. Economic and quantitative issues arising from this new framework will need to be dealt with promptly. We expect that forthcoming rules on stress testing from the SEC for broker-dealers will present further challenges, and we will provide an update when those draft rules become available."

Finally, they also outline "Seven Stress-Testing Issues to Consider," writing, "Based on our experience with stress testing methodologies, here is a list of seven questions money market fund boards should be asking when they assess the results presented to them. 1. Do the scenarios cover all SEC-mandated stress testing scenarios? 2. Is management making full use of the testing framework by including other relevant scenarios of business interest? 3. Are the parameters chosen for the stress testing scenarios realistic? 4. How often are the parameters of the approach recalibrated to reflect changes in the portfolio? 5. How effective is the internal validation of the methodology used? 6. What is the margin of error (confidence interval) of the results presented? 7. What is the best way to summarize and present the results of a set of stress tests?" For more information go to NERA.com or download the white paper.

Morgan Stanley provided some insight into its views of life after money market reforms in a recent commentary entitled, "Perspective on Recent Money Market Fund Regulatory Change Announcements." The announcement, addressed to clients, says "Recognizing that you are eager for more clarity about the future of MMFs, especially institutional prime funds, we want to provide some perspective on current events and to update you on our product development agenda." The 9th largest money fund manager, with $116.7 billion in MMF assets, discusses recent moves made by other managers, how it views 60-day funds, and its approach to new regulations. In summary, Morgan Stanley anticipates meeting the new requirements for its current MMFs, it won't impose fees and gates on its government funds, and it will be looking to develop new products to meet the needs of clients. Also, following this week's announcement by Vanguard (see our June 17 News, "Vanguard Sticks with Prime, Goes Pure Retail, Reopens Federal MMF), the Independent Adviser for Vanguard Investors had some additional insights on Vanguard's MMF changes.

In its commentary, Morgan Stanley addresses the question: Could the Launch of New "Retail" MMFs Impact Your Institutional Fund Holdings? It says, "To date, much of the conversation around the new regulations has been focused on institutional MMF shareholders' willingness to invest in prime funds that will be subject to a floating net asset value (FNAV) and gates and fees. Prime fund shareholder feedback has been mixed. Many institutional cash managers seem willing to accept FNAV, but less willing to expose themselves to the possibility of gates and fees, however remote. Recent fund company announcements are unlikely to ease shareholder concerns over the changes to institutional prime funds because they are principally focused on efforts to launch new funds that meet the definition of a "retail" MMF. A MMF qualifies as retail if its shareholder base consists of natural persons as opposed to institutional investors such as corporations and municipalities. This distinction is very important as prime and tax-exempt funds that adhere to the retail fund requirements will be able to maintain a constant $1.00 per share NAV."

It continues, "Existing "institutional" funds that have a significant retail client shareholder base -- a situation that does not exist within Morgan Stanley's Institutional prime funds -- are facing a formidable challenge. These "retail" shareholders are likely to move into "retail" prime funds, which, when created, will be able to continue using a constant NAV (CNAV). Although launching new funds is a major undertaking, it is a necessary step that managers are taking in an effort to retain as much of their AUM as possible. This transition of retail clients out of institutional funds is important because it could lead to a significant decline in the asset size of certain institutional prime funds. Moreover, the transition of retail assets from institutional prime funds is likely to happen well in advance of the October 2016 implementation deadline of FNAV. As a result, prime fund shareholders need to begin evaluating the timing and magnitude of these changes to ensure that they are comfortable with their prime fund positions relative to changing fund sizes and shareholder compositions."

Further, "At Morgan Stanley Investment Management, we already have a full suite of retail MMFs separate from our institutional funds, so we do not face the challenge of launching new funds in this area. Additionally, we have very little retail shareholder money in our institutional prime funds and, as a result, do not expect the assets of these funds to decline much, if at all, due to "retail" asset transfers. As a result, our response to the new regulations is focused on the development of products and services for our institutional clients."

The MSIM update also asks: "Is there Value in 60-Day Maximum Maturity Prime Funds?." It adds, "At least one fund company has announced their plans to introduce "60-day maximum maturity" institutional prime and tax-exempt funds. This type of fund will be offered alongside existing funds that adhere to the traditional 397-day limit on individual investments. The logic behind a 60-day maximum maturity fund is that it may reduce the potential for changes to a fund's NAV per share. Although we would not necessarily argue this point, we would highlight that this type of fund will still be subject to FNAV and will not prevent fluctuations in NAV per share. Finally, a 60-day maximum maturity fund does not eliminate the risks of gates and fees. While we question the value and practicality of a 60-day maximum maturity prime fund, we will engage clients further before we make a final decision on this option."

The missive adds that Morgan Stanley won't impose gates and/or fees on its government funds. It explains, "Under the new regulations, government and treasury MMFs are not required but can voluntarily adopt gates and fees. At this time, we have no intention to adopt gates and fees on our government and treasury MMFs and it is unlikely that we would consider such an option. Aside from gates and fees, government MMFs are receiving quite a bit of attention in response to an announcement that one of the largest retail prime funds plans to seek a shareholder vote to convert to a government fund. As government funds are not subject to FNAV and can elect not to opt into the gates and fees requirements, some have suggested that there could be a flood of MMF assets that migrate to government funds."

Morgan Stanley's piece explains, "MMF shareholders are starting to question how a large movement would impact yield and supply. Based on everything we have learned to date, there is a strong possibility of a large migration from prime funds to government funds. This migration may have much more to do with structural and operational considerations of banks and portals than corporate cash managers' aversion to FNAV or gates and fees. It is too early to tell how this will impact supply and yields, but it should be considered in the early phases of your planning process."

It answers the question: "How is Morgan Stanley Investment Management approaching the new regulations?" It says, "It is very likely that more announcements will be forthcoming from investment managers in the near future. It is equally unlikely that anyone will announce a direct substitute for today's CNAV institutional prime funds. The simple fact is that there is no direct prime fund substitute that will eliminate FNAV and gates and fees in a registered mutual fund structure. Satisfying the new regulations in a way that maintains as much of the funds' utility as possible is one of our two primary focuses. Our best estimate is that our funds will implement the FNAV and gates and fees requirements in the summer of 2016 at the earliest."

Finally, the MS update continues, "Our other primary focus is developing a broader suite of cash investment options for our clients. One thing that has become clear is that you will need more flexibility in the future. We firmly believe that trying to protect the status quo is not in our mutual best interest. As a result, we will be engaging you further in the coming months to discuss not only how our prime funds will operate, but also how we intend to deliver a number of viable alternatives."

The Independent Adviser for Vanguard Investors shed some light on Vanguard's recent MMF announcement in a story, "The Individual's Money Fund with the $5 Million Minimum." Editor Daniel Wiener writes, "The press completely missed one of the craziest parts of yesterday's announcement by Vanguard that it's re-naming and re-aligning its money market funds to keep their net asset values at a fixed $1.00 per share by avoiding the "institutional" label."

He explains, "But here's the crazy one. At the end of the year the Institutional shares of the Prime Money Market fund, with $29.5 billion in assets, will be renamed Admiral shares (Prime Money Market Institutional will become Prime Money Market Admiral) which might make you think these shares are going to become lower-cost shares for individual investors like the rest of the Admiral class. And yes, Vanguard says that the fund will "remain available to individual investors." I don't know what kinds of individuals Vanguard is talking about unless they mean Warren Buffet or Bill Gates."

Wiener continues, "You see, the fund is going to maintain its $5 million investment minimum so it's not clear to me what makes this any different from its original incarnation except for the fact that the name won't say institutional, and hence I guess won't be subject to rules requiring floating net asset values. As far as I'm concerned Prime Money Market Admiral is an institutional fund in all aspects except its name." (Note: This likely indicates that the bulk of Vanguard's "Institutional" shareholders are actually 401k or other fiduciaries with retail investors underneath. The SEC's new rules allow for the "look-through" to the underlying investors, so these investors appear to be primarily "retail".)

Finally, Fidelity Treasury MMF was merged into the Fidelity Treasury Fund on Friday (June 19), the company said in an Operational Update. The merger was announced as part of Fidelity's MMF changes, which we wrote about in our April 14 News, "Fidelity Operational Update Details More Changes."

State Street Global Advisors released a white paper called "Strategic Cash: The Case for Short Duration Portfolios," which analyzes the cash investing landscape in light of the new money market reforms. It looks at how money market funds will be impacted and suggests a bucketing approach to cash investing in which short-term bond funds should be considered to capture additional return. (Note: Watch for more on ultra-short bond funds next week when we reprint from our latest Bond Fund Intelligence "profile." Note also that next week's Money Fund Symposium, June 24-26 in Minneapolis, will also feature a session on "MMF Alternatives: Ultra Short, Private, SMAs.")

The SSgA paper says, "Recent regulation in the US has changed the rules of MMFs.... After putting further restrictions on MMFs in 2010, the SEC recently announced plans to have Institutional Prime MMFs float their NAV's, much like any other mutual fund. These rules -- which will be implemented over the next two years -- may also impose fees and potentially redemption gates during times of stressed market liquidity. Regulators in Europe are also in the process of changing regulation on MMFs with an agreement on final regulations not expected until late 2015 at the earliest. It is anticipated that the European regulations will include a portion of the rules enacted in the US. These major changes for Institutional Prime MMFs will likely cause changes in how investors approach their cash strategy."

Further, they discuss the need for a bucketing strategy. "As part of this change institutional investors will likely review their overall cash holdings with a close eye on cash flows and the increased cost of maintaining a high level of liquidity. While investing in a MMF may provide better liquidity, it can also potentially sacrifice return. For many investors, cash returns could be enhanced by a "bucketing" whereby cash needs are segmented into daily operating, core, and strategic buckets. Decisions that investors need to make may include the following: 1. Stay in your existing fund and adjust to the new rules (Floating NAV, Fees and Gates). 2. Move to a Government or Treasury version of a MMF ($1NAV rules apply but likely at a much lower yield). 3. Move to a separately managed fund with guidelines that are consistent with 2a-7 rules. 4. Short Duration strategies. 5. Some combination of the above."

It adds, "The remainder of this paper will explain how SSGA seeks to add consistent excess returns in the strategic bucket by investing in high quality, short duration portfolios. We believe this strategy will be an important component of many corporations' cash efforts. Most investors realize that with increased risk comes the prospect of higher returns. We will explain why we think certain opportunities in the front end of the yield curve are often worth taking. When framing the outlook around this strategy, it may be useful to explain how it differs from those of a typical MMF."

On Liquidity, SSgA explains, "MMFs are built primarily to help with capital preservation, liquidity and lastly yield. Regulations from a European perspective require a full 10% in next day liquidity and 25% of fund assets within 7 days. This obviously impacts a fund's yield and return profile as more assets must be invested in shorter instruments at the expense of longer term, higher yielding instruments. Short-term bond strategies, however, typically allow for a lower degree of liquidity with the advantage of being able to invest in securities with longer maturities and/or durations. Investors in short-duration strategies may not need the level of liquidity that's required of MMFs thus minimizing cash drag on the portfolio with the majority of the assets invested in higher yielding securities."

On Weighted Average Maturity, the paper comments, "Money market funds face a maximum duration or Weighted Average Maturity (WAM) of 60 days. The maximum maturity allowed at the security level is 13 months. Our short duration funds look to take advantage of the additional yield that is often available in maturities in the 1–5 year range. Through the use of floating rate securities, our shortest Short Duration portfolios can take advantage of the yields offered on these longer maturity securities while limiting overall portfolio duration. Typically, our floating rate focused portfolio durations are maintained in a range of 0.25–1.0 years or 90–365 days. Coupons on our floating rate securities reset every 30–90 days to limit interest rate risk. While this strategy works across a range of interest rate environments, its benefits may be most apparent when interest rates are projected to rise."

On Weighted Average Life it states, "MMFs adhere to a maximum Weighted Average Life (WAL) of 120 days. WAL is also referred to as Spread Duration. This is a weighted measurement of every security to its final expected maturity, not its next coupon reset date. For example, a 2-year maturity bond whose coupon floats quarterly would have a duration at issue, of 0.25 years (rate risk until next reset) and a WAL of 2 years. This is an important measure of portfolio risk that should not be overlooked. It would be very easy to build a portfolio with a very low duration figure but a large WAL number by owning a portfolio full of 10 year maturity, 1 month floating rate securities. This fund would show a duration of only 0.08 years, but a WAL of close to 10 years. While insulated against a rate rise, this portfolio may suffer greatly from a move wider in credit spreads because of its longer WAL. For this reason, we closely monitor our funds' WAL figures. We typically maintain this measure in the 1–2 year range in order to manage against a move wider in credit spreads that may negatively impact portfolio pricing and therefore performance."

On Credit Quality SSgA says, "Securities held in MMFs are generally required to be of the highest quality and carry a minimum combination of short term ratings A1/P1/F1 (Moodys, S&P, Fitch). Our short duration funds are generally run with a minimum security rating requirement of Long Term A-/A3/A-. When explaining this difference, it's important to equate short term ratings with long term ratings. Typically, a short term credit rating of A-1/P-1 by Standard & Poor's and Moody's respectively, equate to long term ratings of A/A-2 or higher. SSGA's short duration funds are effectively going one rating notch lower than what is required of a MMF. Our short duration portfolios typically are constructed with average ratings in the A-AA range depending on the types of allowable assets. Therefore, at the portfolio level, there is little difference between the average quality of our short duration funds and prime money market funds.... In many cases, we may own bonds from the same issuer that we own in our prime MMFs. As an added potential benefit, our short duration funds typically will have greater sector diversification than a prime MMF, where banks make up the large majority of portfolio assets."

In conclusion, the paper says, "With regulators in the US and Europe making it more difficult for both issuers (tougher capital & liquidity rules) and investors (lack of short dated investments) in the traditional money market arena, we believe it is an opportune time for institutional cash investors to examine their cash needs and investments. By bucketing their cash into distinct segments -- daily operating, core and strategic -- they may identify more efficient ways to invest their cash. Specifically, investors of strategic cash may benefit from slightly longer duration investments within a Short Term Bond Fund strategy. Historically, investors often realize higher yields when maturity, duration and quality constraints are relaxed only slightly. We believe by focusing on a combination of short and longer term investments, whilst maintaining credit quality in securities such as high quality Corporate bonds and Asset Backed Securities, portfolio quality and liquidity can be maintained at a level that may potentially be more appropriate for strategic cash investors."

A new report by Moody's examines how the impact of money market fund reforms will vary in the US and Europe. Specifically, the report, entitled "Money Market Fund Reform in US, EU: Similar Rules, Different Effects," says reforms in the U.S. will likely spur the growth of government money funds, while the European market will become more heterogeneous post-reforms. Also, the Federal Reserve's Federal Open Market Committee meeting adjourned yesterday with no movement on interest rates, as most expected. However, in a press conference Wednesday, Fed Chair Janet Yellen reaffirmed that the first rate hike will likely come later this year. She also provided new projections for the "dot plot."

A release says, "European policy makers have proposed money market fund (MMF) reforms relatively similar to the US changes slated to take effect next year," says Moody's Investors Service in a new report published today. "As in the US, the goal in Europe is to enhance MMFs' ability to withstand stressed market conditions, reducing systemic risk. However, reforms will have diverging effects in these markets, given their very different starting points," observes Vanessa Robert.

Marina Cremonese, a Moody's analyst, says, "For investors, the new money fund regulations will generally translate to more conservative portfolios, because portfolio managers will want to limit net asset value volatility. Investors can expect more transparency around fund valuation from portfolio managers, but also lower yields." Moody's also expects a proliferation of MMF types, especially in Europe, which could confuse investors.

The release continues, "In the US, Moody's expects government and treasury funds to represent a bigger slice of US MMF assets. Prime MMFs will shrink in size and primarily appeal to retail investors, who can continue to invest in constant net asset value (CNAV) structures. Institutional investors will only find prime MMFs attractive if the yield differential with government MMFs is high enough to compensate for the risk of fees and gates."

Finally, Moody's explains, "The rating agency forecasts that MMF assets both in the US and in Europe will remain fairly stable, despite a reallocation of assets within the different types of MMFs. The US government and treasury MMF segment could grow by as much as 25% in assets. In Europe, Moody's considers that low volatility net asset value (LVNAV) funds have the potential to widely replace prime CNAV MMFs, which currently account for about 60% of the MMF sector. At the asset manager level, Moody's expects the industry to remain concentrated with potential for further, although limited, consolidation both in Europe and in the US. These regulations favour the bigger players who are able to leverage their scale to more easily stomach increasing costs and are in a better position to offer a variety of cash and short term investment solutions to investors."

The Fed's latest FOMC statement says, "The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of earlier declines in energy and import prices dissipate.... To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run."

Chair Yellen did provide some additional insights in her press conference that followed the release of the statement. On the "dot plot," Yellen comments, “Compared with the projections made in March, most FOMC participants lowered somewhat their paths for the Federal Funds Rate consistent with the revisions made to the projections for GDP growth and the unemployment rate. The median projection for the Federal Funds Rate continues to point to a first increase later this year with the rate rising to about 1 3/4 percent in late 2016 and 2 3/4 percent in late 2017. In 2016 and 2017 the median path is about 1/4 percentage point below the projected in March."

She adds, "Waiting too long to begin normalization can risk significantly overshooting our inflation objective given the lags in the operation of monetary policy. On the other hand beginning too early could risk derailing recovery that we have worked for a very long time to try to achieve. I want to emphasize, sometimes too much attention is placed on the timing of the first increase in the Fed Funds Rate. What should matter to market participants is the entire expected trajectory of policy. We have no plan to follow any type of mechanical approach to raising the Fed Funds Rate."

On raising rates this year, Yellen states, "Clearly most participants are anticipating that a rate increase this year will be appropriate -- that assumes that they are expecting a pickup in growth the second half of this year and further improvement in labor market conditions. We will be making decisions however that depend on the actual data that we see in the months ahead. Certainly an increase this year is possible. We could certainly see data that would justify that."

Later in the press conference she adds, "I can't give an ironclad promise but I think it's clear from our summary of economic projections that we anticipate that the economy will grow, that the labor market will improve, and that inflation will move back up to 2%.... As you can see the largest number of participants anticipates that those conditions should be in place later this year."

On the impact to "savers," Yellen continues, "From the point of view of savers, of course this has been a very difficult period. Many retirees, and I hear from some almost every day, are really suffering from low rates that they had anticipated would bolster their retirement income. This obviously has been one of the adverse consequences of a period of low rates.... When the time comes for us to raise rates, I think there will be some benefits that flow through to savers."

Finally, on the Overnight Reverse Repo Program she states, "We communicated in our minutes that the committee has an intention to make sure that RRP is available in large quantities at lift off to ensure that we have a smooth liftoff. However it is our plan to fairly quickly after liftoff reduce the level of the Overnight RRP facility and we have a variety of ways in which we can do that."

Vanguard became the latest money fund manager to announce changes to its fund lineup in response to the new regulations, and the first to decline to offer institutional floating rate Prime or municipal money funds. Vanguard, the fifth largest money market fund manager with $173 billion in assets, issued a press release Tuesday entitled, "Vanguard To Designate Prime And Tax-Exempt Money Market Funds For Individuals." Among the changes, the $133 billion Vanguard Prime MMF will be designated a retail fund with the Institutional Shares of Prime MMF being changed to Admiral Shares. It also reopened the Federal MMF to new investors. The release says, "Vanguard today announced plans for its money market mutual fund lineup that will enable individual and institutional investors to continue to have access to cash management vehicles at a stable $1 net asset value (NAV). The moves are in response to rules adopted by the Securities and Exchange Commission (SEC) in 2014, the last compliance date for which is in October 2016."

It continues, "We are pleased to preserve Vanguard's money market funds as a stable-price cash management option for our individual and institutional clients," says Vanguard CEO Bill McNabb. "Our retail clients will continue to have the choice to invest in our taxable and tax-exempt money market funds, and all investors, including institutional clients, will be able to invest in our newly reopened Federal Money Market Fund."

Further, the release says, "Vanguard plans to designate its $133.4 billion Prime Money Market Fund and its six tax-exempt funds (one national and five state municipal money funds) as "retail funds," meaning that individual investors will continue to have access to these funds at a stable $1NAV. In addition, Vanguard announced two name changes, effective December 2015: Institutional Shares of Vanguard Prime Money Market Fund (ticker symbol: VMRXX) will be renamed Admiral Shares. Vanguard Admiral Treasury Money Market Fund (ticker symbol: VUSXX) will be renamed Vanguard Treasury Money Market Fund.

Also, it explains, "Vanguard is reopening its $2.8 billion Federal Money Market Fund immediately. All investors, including institutional investors, will now have access to a money fund with a stable $1 NAV that will not be subject to new liquidity-fee or redemption-gate requirements. Under the new rules, the SEC has defined U.S. government money funds as those that invest at least 99.5% (formerly 80%) of their total assets in cash, government securities, and/or repurchase agreements that are collateralized solely by government securities or cash. Such funds are excluded from the floating NAV requirements, as well as the new fee and gate requirements."

Vanguard adds, "The Federal Money Market Fund and the $9.6 billion Treasury Money Market Fund currently invest more than 99.5% of their total assets in U.S. government securities or repurchase agreements, and plans to operate in accordance with the new definition of a government money market fund. The Treasury Money Market Fund will remain closed to new investors."

It concludes, "Money funds continue to play an important role for Vanguard clients, providing a high-quality, liquid investment (the funds invest in highly rated short-term investments) in periods of both stability and uncertainty in financial markets. Vanguard has managed money funds for 40 years as an integral part of its product lineup, and currently holds more than $174 billion in both taxable and tax-exempt money market funds."

With this news, all 5 of the largest money market fund managers, and 9 of the top 10, have released statements concerning their future money fund lineups under the pending reforms. Only the 9th largest MMF manager, Morgan Stanley, has yet to release a statement. Among the top 20, only Northern, BofA, Deutsche, Franklin, and American have not made announcements.

JP Morgan Securities US Fixed Income Strategy team released its weekly "Short Term Market Outlook and Strategy" report, which examines the impacts that S&P's ratings reviews of banks could have on money markets, particularly, widening the gap between supply and demand. JP Morgan strategists Alex Roever, Teresa Ho, and John Iborg also look at money market holdings for May, which showed a drop in Treasuries and an increase in Reverse Repo Program usage. On the S&P ratings they write, "Not to be outdone by Moody's, this past Tuesday S&P also concluded its reviews on various global banks and banking groups domiciled in the UK, Germany, Austria, and Switzerland. The reviews were initiated in February as part of its efforts to reflect new resolution regimes put in place in these countries."

It explains, "Rating actions were taken based on S&P's assessment of the amount of extraordinary government support regulators would provide and the amount of bail-in capital banks currently hold or expected to hold. To be sure, not every bank was downgraded as part of the review. Some were affirmed at the current level with a stable outlook in spite of their being on negative watch/outlook previously (e.g., HSBC, CS (Credit Suisse), UBS). Others were affirmed at the current level with a negative outlook (e.g., Santander UK). One was upgraded at the holding company (e.g., Lloyds). Still, there were a handful of banks that were downgraded, including BCLY (Barclays) and DB (Deutsche Bank). In particular, they were downgraded at the operating company level to A-/A-2 and BBB+/A-2 respectively, effectively becoming Tier 2 issuers in the money markets."

They add, "For investors, the step into Tier 2 territory for BCLY and DB matters a great deal. This is true particularly for S&P AAA-rated MMFs whose investment guidelines prohibit them from investing in securities that have a short-term rating of A-2 and below. This would apply to CP, CCP, ABCP, as well as traditional and non-traditional repo. To the extent that they want to engage in trades with an A-2 counterparty, those would be considered "higher-risk investments" which would then put the funds to be BB-rated. As of May month-end, we estimate there were $22bn of exposures to BCLY and DB in S&P rated MMFs, most of which is in repo but all of which would need to be divested in order for the funds to maintain their AAA rating."

JPM explains, "All told, the bank rating downgrades are yet another force that is widening the supply and demand gap in the money markets. Not only are banks issuing less short-term funding due to a variety of regulations, but rating agencies are also shrinking the pool of investible supply in which rated MMFs could invest. In the meantime, the demand for short-term high quality assets continues to grow via money fund reform and banks shedding non-operational deposits, creating capacity issues for MMFs. Anecdotally, we have heard that some MMFs are actively considering removing their S&P rating, perhaps as a way to enlarge their pool of investible supply. Currently, S&P rates about 75% and 45% of the assets under management in government and prime MMFs respectively."

They continue, "From a markets perspective, fund managers will need to find alternatives to replace the investments affected. Based on data this past week, it appears some of it went into the Fed's ON RRP facility as balances grew by $14bn two days following the S&P downgrade, reversing a steady decline that was taking place the prior two weeks. To a lesser extent, we suspect some of it was also replaced with higher-rated counterparties in the repo space, though it's unclear how much additional capacity other dealers absorbed given balance sheet constraints in the overall marketplace. Over the past three years, there has been more shrinkage than growth among dealers in tri-party repo balances with MMFs."

Also, they say, "It is worth noting that given recent bank rating changes at S&P and Moody's, DB is now officially a Tier 2 issuer rated A-2/P-2. BCLY is a split Tier 1 issuer rated A-2/P-1. Even outside of MMFs, most money market investors would likely be averse to investing with DB and to a lesser extent BCLY due to their non-Tier 1 counterparty ratings. Assuming the size of their balance sheets remains unchanged, we suspect the banks will likely rely more on the GCF interdealer repo market for funding, which could bias GCF repo rates higher. That said, given all the focus to shrink balance sheets in light of the high cost of capital, it's unclear how much of the $22bn will actually be moved into the GCF repo market."

In their holdings update, Roever et al write, "Prime MMF assets under management increased by $27bn or 2% during May, recouping a portion of the outflows experienced during tax season and YTD. Prime institutional funds received the majority of inflows with +$25bn, while prime retail funds increased modestly by $2bn. At the end of the month, prime fund assets totaled $1,408bn. Furthermore, government MMFs witnessed a modest $4bn or +0.5% in inflows, and currently stand at $933bn. Most sector allocations remained relatively stable over the course of the month."

JPM explains, Holdings of US Treasuries decreased by $12bn while RRP usage increased by $12bn. While Treasury holdings did drop during May, we suspect that prime fund buying of UST will pick up going into quarter-end. Furthermore, we look for prime funds to become increasingly larger buyers of short-term Treasuries in the months to come as money market fund reform pushes funds to build liquidity. In total, prime funds increased their exposure to bank paper by $18bn month-over-month. CD and time deposit balances were responsible for the increase, going up by $18bn and $19bn respectively mostly across European issuers. Conversely, holdings of dealer repo decreased by $10bn."

They write, "Funds continued to focus on keeping short maturity profiles during May. WAMs and WALs remained near multi-year low levels and finished May at 37 and 64 days respectively. We attribute this enduring maturity-shortening trend to two main drivers: 1) Federal Reserve rate hike expectations and 2) liquidity building meant to meet potential redemptions stemming from seasonal factors and money market fund reform. Notably, throughout the month we noticed a sustained focus on positioning around the September FOMC meeting, with investors preferring fixed product maturing before 9/17 and floaters spanning over 9/17. Furthermore, we have anecdotally heard that investors are beginning to factor in money fund reform while making decisions on longer dated paper."

JPM adds, "Money market funds bought $1.9bn in Treasury floaters during May. MMFs now own $53bn, or 23% of the 2-year Treasury FRN market. Treasury funds have been the largest buyers of Treasury floaters to date, and hold $36bn, while government agency funds hold $2bn and prime funds hold $15bn. Total usage of the Fed RRP at the end of May registered $160bn. Of this amount, MMFs accounted for $138bn in usage or 86%. Prime MMFs took down $36bn of RRP while government funds took down $102bn."

Finally, they tell us, "For the end of Q2, the Fed further indicated that it plans to offer at least $200bn in two term RRP operations to supplement its overnight facility, whose current cap is set at $300bn. The operations will take place on June 25th and 29th, and their respective size and offering rates will be announced later this month. On balance, we think that the continuation of term RRP offerings around quarter-ends is beneficial for the money markets. During the two quarter-ends where the term facility has been offered by the Fed, it has proved to be a viable source of backstop supply to money market funds while also providing them an option to get cash invested earlier. Hence, we anticipate the term operations to draw healthy demand, especially from government funds."

State Street Global Advisors is the latest to update clients on plans to adjust their fund lineup to approaching Money Fund Reforms. Barry Smith, Global Head of Cash, writes in a letter, "Across global markets, changes to the regulatory environment are forcing both investors and managers to take a fresh look at their cash holdings and businesses. It's a new world -- and cash management is changing. With over $400 billion of cash assets globally, cash management is core to State Street Global Advisors' investment franchise and we are focused on helping our clients make the best decisions for their cash portfolios. A significant part of that effort involves helping interpret the operational complexities and investing challenges resulting from these changes, while providing solutions that can help continue to meet your operating, core and strategic cash needs. We believe that a full understanding of the impact of evolving regulations on our clients' portfolios and the resulting operational environment is critical to offering a comprehensive cash management solution for 2016 and beyond."

The letter explains, "As we continue to assess the impact of the regulations, we would like to share with you some of our preliminary plans for our money market mutual funds. Government Money Market Funds: The new regulations require that a government money market fund invests at least 99.5% of its total assets in cash, government securities, and/or repurchase agreements that are "collateralized fully" (i.e., collateralized by cash or government securities). Our government money market funds meet these requirements today; A government money market fund is not required to implement a floating net asset value; State Street Global Advisors has no plans to implement liquidity fees or redemption gates in our government money market funds and has reviewed this intention with the funds' Board of Trustees."

Finally, Smith says about "Prime Funds:," "State Street Global Advisors will continue to offer prime institutional funds; Consistent with the revised regulations, our flagship prime fund, the State Street Institutional Liquid Reserves Fund, will operate with a floating NAV when required in October of 2016; As we look forward, we expect prime funds to offer an attractive yield advantage over government funds and will continue to play an important part in clients' cash management portfolios. We recognize our clients' needs to retain intraday liquidity and are working on operational solutions; and, Liquidity fees and redemption gates were designed by regulators to safeguard clients' assets in extraordinary conditions; however you and your peers have shared concerns about the operational challenges the implementation of these measures could cause. We understand the significance of these issues, and will work to help our clients better understand how these mechanisms might affect them. We will continue to communicate with you as our plans solidify and we collectively approach the implementation deadline. If you have questions or would like additional information, please do not hesitate to contact your SSGA relationship manager."

In other news, the Federal Reserve released its latest Z.1 "Financial Accounts of the United States" statistical survey (formerly the "Flow of Funds"). The four tables it includes on money market mutual funds show that the Household sector remains the largest investor segment, though it declined in the First Quarter of 2015. State and Local Governments, Nonfinancial Noncorporate Businesses, and Funding Corporations each gained slightly. Table L.206 shows the Household sector with $1.031 trillion -- or 39.5% of the $2.610 trillion held in Money Market Mutual Fund Shares as of Q1 2015. Household shares decreased by $71.2 billion in the 1st quarter (after dropping $10 billion in 2014), and these assets remain well below their record level of $1.581 trillion at year-end 2008.

Nonfinancial corporate businesses were the second largest investor segment, according to the Fed's data series, with $548.5 billion, or 21.0% of the total. Nonfinancial corporate business assets in money funds decreased $13.7 billion in the quarter after rising $35 billion in 2014. Funding corporations, which includes securities lending cash, remained the third largest investor segment with $423.5 billion, or 16.2% of money fund shares. They increased by $2.7 billion in the latest quarter and jumped $44 billion in 2014. Funding corporations held over $906 billion in money funds at the end of 2008.

State and local governments held 6.9% of money fund assets ($181.5 billion) -- up $8.3 billion for the quarter. Private pension funds, which held $135.5 billion (5.2%), remained in 5th place. The Rest of the world category was the sixth largest segment in market share among investor segments with 4.2%, or $110.3 billion, while Nonfinancial noncorporate businesses held $88.7 billion (3.4%), State and local government retirement held $46.3 billion (1.8%), Life insurance companies held $26.6 billion (1.0%), and Property-casualty insurance held $18.2 billion (0.7%), according to the Fed's Z.1 breakout.

The Fed's "Flow of Funds" Table L.121 shows "Money Market Mutual Fund Assets" largely invested in Credit market instruments ($1.441 trillion, or 55.2%), which includes: Open market paper ($341.8 billion, or 13.1%; we assume this is CP), Treasury securities ($434.5 billion, or 16.7%), Agency and GSE backed securities ($323.4 billion, or 12.4%), Municipal securities ($273.5 billion, or 10.5%), and Corporate and foreign bonds ($67.5 billion, or 2.6%).

Other large holdings positions in the Fed's series include Security repurchase agreements ($625.9 billion, or 24.0%) and Time and savings deposits ($512.1 billion, or 19.6%). Money funds also hold minor positions in Foreign deposits ($24.4 billion, or 0.9%) and Miscellaneous assets ($16.7 billion, or 0.7%). Checkable deposits and currency went into negative territory with -$9.8 billion.

During Q1, only Open Market Paper (up $8.3 billion), Treasury securities (up $21.8 billion), and Foreign Deposits (up $300 million) showed increases. Security Repos (down $18.7 billion), Time and Savings Deposits (down $3.4 billion), Agency and GSE Backed Securities (down $61.2 billion), Municipal Securities (up $8.2 billion), Corporate and foreign bonds (up $10.8 billion), Misc. Assets (down $600 million), and Checkable Deposits and Currency (down $5.5 billion) all showed declines.

UBS issued a press release yesterday to announce updates to its roster of money market funds, primarily Government ones. The funds will be compliant with new SEC rules effective immediately and they won't impose fees and gates on them. UBS, with $34.7 billion in MMF assets, also said that it will have a full roster of money funds once the new rules take effect, including CNAV Prime, Muni and Government funds; Floating NAV Institutional Funds, Private Fund(s), Separately Managed Accounts, and Ultrashort Bond Fund(s). So stay tuned for more announcements from the 17th largest manager of money market fund assets in the US. Also, we cover a Bloomberg's "Money-Market Funds Finding New Repo Partners as Dealers Retreat"," about how some money fund managers are going to direct to issuers in the repo market.

The release says, "UBS Global Asset Management (Americas) Inc. today announced policies recently adopted by certain of its money market funds and provided additional information regarding other liquidity management products it expects to offer. UBS Global Asset Management and its affiliates/predecessors have managed money market funds for more than 35 years and today offer client focused solutions throughout the world.... Today's announcement relates to policies that allow the funds listed below to qualify as "government money market funds" under the new SEC regulations, permitting them to continue operating with the goal of maintaining a stable net asset value per share without the imposition of liquidity fees and redemption gates: UBS RMA U.S. Government Portfolio, UBS Select Treasury Institutional Fund, UBS Select Treasury Preferred Fund, UBS Select Treasury Capital Fund, and UBS Select Treasury Investor Fund."

It continues, "As described in more detail in prospectus supplements filed with the SEC earlier today, each of these funds has adopted a non-fundamental investment policy -- effective June 10, 2015 -- requiring it to invest 99.5% or more of its total assets in cash, government securities, and/or repurchase agreements that are backed by US government/Treasury securities and/or cash. This new policy -- required under SEC regulations -- is in addition to a fund's other investment policies (e.g., the policy of the Treasury funds to focus investments in Treasury securities and repurchase agreements backed by Treasuries). It should be noted that this new policy does not result in a material change in how the funds have been managed but reflects a further risk-limiting "99.5%" regulatory test."

Further, the release says, "These changes were approved by the appropriate fund boards on the recommendation of UBS Global Asset Management after consultation with investors and distribution partners. As part of adopting this new policy, each fund's board also determined that the fund will continue to use the amortized cost method of valuation to seek to maintain a $1.00 share price and that the fund will not be subject to a liquidity fee and/or a redemption gate on fund redemptions (unless a fund board determines otherwise in the future after providing the requisite advance notice to shareholders as set forth in the SEC's regulations)."

It adds, "UBS Global Asset Management is working to ensure that its products, systems and processes will be compliant with the new SEC regulations governing money market funds before the compliance deadlines and meeting the funds' goals of safety, liquidity and income. UBS Global Asset Management currently expects to offer the following investment solutions to assist clients in managing their liquidity needs, including, but not limited to: Constant net asset value ("CNAV") Treasury and government money market funds; Constant net asset value ("CNAV") retail prime and municipal money market funds; Floating net asset value ("FNAV") institutional prime money market funds; Privately placed, unregistered fund(s); Ultra-short bond fund(s); and Customized separate account solutions.... UBS Global Asset Management expects that it (or the funds it advises) will make further announcements and incorporate additional disclosure upon the finalization of more detailed, specific plans for its prime and municipal SEC registered money market funds."

The Bloomberg story, says "Facing a shrinking pool of dealers in a key part of the $2.6 trillion money-fund industry, Deborah Cunningham did something last month she's never done before in her 34 years at Federated Investors Inc. She arranged one of these trades directly with an insurance company. Cunningham, chief investment officer for global money markets at Pittsburgh-based Federated, is seeking alternatives to traditional counterparties for short-term loans known as repurchase agreements, or repos, as new regulations drive banks from the business. With that market contracting, money funds are finding new ways to get the securities they need, opening a door for other institutions to step into roles once dominated by banks."

"We sort of went down the non-traditional path and used an insurer we deal with on a direct repo basis, which is the first time we went outside the bank or broker-dealer market," Bloomberg quotes Cunningham. "Traditional collateral is in short supply." The article explains, "The new trading relationships are being forged by a confluence of post-crisis regulations that are both driving up demand for low-risk, short-term securities such as repo transactions while at the same time making the trades more costly for banks that act as middlemen. Meanwhile, the supply of short-term Treasury bills that asset managers seek is at multi-decade lows. Many top U.S. asset managers, from Federated to Fidelity Investments to BlackRock Inc., are diverting assets into government debt from money-market funds that invest in company IOUs known a commercial paper. The change comes as Securities and Exchange Commission regulations set to take effect in 2016 will no longer allow funds that invest primarily in commercial paper to report a fixed $1 share value, requiring values to float instead."

Bloomberg continues, "The amount financed daily through the tri-party repo system, where banks lend the securities used as collateral and clearing banks serve as middlemen, is down 17 percent to $1.62 trillion as of May 11 from $1.96 trillion in December 2012, data compiled by the Fed show. JPMorgan Chase & Co. and Bank of New York Mellon Corp. serve as the industry's clearing banks. There may be more change to come. Joe Abate, money-market strategist at Barclays Plc, predicts that part of this market may contract another 20 percent in the next year or two.... "The largest, capital-constrained banks are not providing enough repo to meet market demand from money funds," Abate wrote in a June 5 note. "Balance sheet reporting pressures are intensifying and have reduced liquidity in the market for Treasury collateral."

Wells Fargo's Garret Sloan commented in his "Daily Short Stuff," "Based on Crane's month-end portfolio holdings data, we see that repo counterparties of U.S. money market funds include the more common names such as Barclay's, Wells Fargo, BNP Paribas, Bank of America etc, but there is also one non-bank, non-broker/dealer counterparty that has snuck into the repo counterparty holdings data, albeit in very small amounts. Specifically, Prudential Company of America has two repo pieces outstanding with Federated's Government Obligations and Treasury Obligations Funds, for a total of $499 million. The amounts are comparatively small, but it certainly shows that the need to find repo counterparties is growing, or at least the perception is growing."

Crane Data released its June Money Fund Portfolio Holdings Wednesday, and our latest collection of taxable money market securities, with data as of May 31, 2015, shows jumps in holdings of Other (Time Deposits), CD, Repo, and CP, and drops in holdings of Treasuries and Agencies. Money market securities held by Taxable U.S. money funds overall (those tracked by Crane Data) increased by $31.6 billion in May to $2.436 trillion, after dropping $49.3 billion in April, $19.2 billion in March, and $52.1 billion in February. Repos remained the largest portfolio segment, just ahead of CDs. Treasuries stayed in third place, followed by Commercial Paper. Agencies were fifth, followed by Other (mainly Time Deposits), then VRDNs. Money funds' European-affiliated securities represented 28.8% of holdings, down from 29.3% the previous month. Below, we review our latest Money Fund Portfolio Holdings statistics.

Among all taxable money funds, Repurchase agreements (repo) increased $10.7 billion (2.1%) to $527.5 billion, or 21.7% of assets, after decreasing $113.6 billion in April and increasing $98.7 billion in March. Certificates of Deposit (CDs) were up $10.8 billion (2.1%) to $524.1 billion, or 21.5% of assets, after rising $1.7 billion in April and dropping $37.4 billion in March. Treasury holdings decreased $4.2 billion (1.0%) to $408.8 billion, or 16.8% of assets, while Commercial Paper (CP) jumped $4.1 billion (1.1%) to $390.3 billion, or 16.0% of assets. Government Agency Debt decreased $3.2 billion (1.0%) to $331.6 billion, or 13.6% of assets. Other holdings, primarily Time Deposits, jumped $13.7 billion to $230.1 billion, or 9.4% of assets. VRDNs held by taxable funds decreased by $100 million to $23.5 billion (1.0% of assets).

Among Prime money funds, CDs still represent over one-third of holdings at 34.5% (up from 34.4% a month ago), followed by Commercial Paper at 25.7%. The CP totals are primarily Financial Company CP (15.1% of total holdings), with Asset-Backed CP making up 5.5% and Other CP (non-financial) making up 5.1%. Prime funds also hold 6.7% in Agencies (up from 6.5%), 4.2% in Treasury Debt (down from 5.0%), 4.7% in Other Instruments, and 5.8% in Other Notes. Prime money fund holdings tracked by Crane Data total $1.520 trillion (up from $1.492 trillion last month), or 62.4% of taxable money fund holdings' total of $2.436 trillion.

Government fund portfolio assets totaled $441 billion in May, the same as April, while Treasury money fund assets totaled $475 billion in May, down from $472 billion at the end of April. Government money fund portfolios were made up of 52.0% Agency Debt, 25.1% Government Agency Repo, 3.9% Treasury debt, and 18.1% in Treasury Repo. Treasury money funds were comprised of 69.1% Treasury debt, 30.1% Treasury Repo, and 0.8% in Government agency, repo and investment company shares. Government and Treasury funds combined total $916 billion, or 37.6% of all taxable money fund assets.

European-affiliated holdings rose $4.5 billion in May to $702.2 billion (among all taxable funds and including repos); their share of holdings fell to 28.8% from 29.0% the previous month. Eurozone-affiliated holdings decreased $400 million to $378.3 billion in May; they now account for 15.5% of overall taxable money fund holdings. Asia & Pacific related holdings increased by $5.3 billion to $291.4 billion (12.0% of the total). Americas related holdings increased $23.0 billion to $1.440 trillion, and now represent 59.1% of holdings.

The overall taxable fund Repo totals were made up of: Treasury Repurchase Agreements (up $20.0 billion to $273.6 billion, or 11.2% of assets), Government Agency Repurchase Agreements (down $9.2 billion to $164.8 billion, or 6.8% of total holdings), and Other Repurchase Agreements ($89.1 billion, or 3.7% of holdings, same as last month). The Commercial Paper totals were comprised of Financial Company Commercial Paper (up $2.8 billion to $228.8 billion, or 9.4% of assets), Asset Backed Commercial Paper (down $800 million to $83.8 billion, or 3.4%), and Other Commercial Paper (up $2.0 billion to $75.7 billion, or 3.2%).

The 20 largest Issuers to taxable money market funds as of May 31, 2015, include: the US Treasury ($408.8 billion, or 18.3%), Federal Home Loan Bank ($208.9B, 9.4%), Federal Reserve Bank of New York ($137.6B, 6.2%), Wells Fargo ($71.8B, 3.2%), Credit Agricole ($70.6B, 3.2%), BNP Paribas ($63.9B, 2.9%), JP Morgan ($60.4B, 2.7%), RBC ($58.8B, 2.6%), Bank of Nova Scotia ($57.4B, 2.6%), Bank of Tokyo-Mitsubishi UFJ Ltd ($55.5B, 2.5%), Bank of America ($52.2B, 2.3%), Federal Home Loan Mortgage Co. ($45.1B, 2.0%), Toronto-Dominion Bank ($43.9B, 2.0%), Natixis ($43.2B, 1.9%), Barclays PLC ($42.9B, 1.9%), Sumitomo Mitsui Banking Co ($42.3B, 1.9%), Federal Farm Credit Bank ($42.0B, 1.9%), Credit Suisse ($40.1B, 1.8%), Mizuho Corporate Bank Ltd. ($37.0B, 1.7%), DnB NOR Bank ASA, ($35.4B, 1.6%), and Bank of Montreal ($35.3B, 1.6%).

In the repo space, the Federal Reserve Bank of New York's RPP program issuance (held by MMFs) remained the largest program with $137.6B, or 26.1%, up from $106.2B a month ago. The 10 largest Fed Repo positions among MMFs on 5/31 include: JP Morgan US Govt ($16.1B), State Street Inst Lq Res ($8.5B), Morgan Stanley Inst Lq Govt ($7.7B), BlackRock Lq T-Fund ($6.4B), UBS Select Treas ($6.1B), JP Morgan US Trs Plus ($5.5B), First American Govt Oblg ($5.0B), Wells Fargo Adv Trs Plus ($4.6B), Schwab Govt MMkt ($4.2B), and Fidelity Cash Central Fund ($4.4B). 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 ($137.6B, 26.1%), Bank of America ($40.8B, 7.7%), BNP Paribas ($38.9B, 7.4%), Wells Fargo ($37.7B, 7.1%), Credit Agricole ($30.7B, 5.8%), JP Morgan ($29.5B, 5.6%), Societe Generale ($24.2B, 4.6%), Barclays PLC ($22.7B, 4.3%), Credit Suisse ($22.1B, 4.2%), and Citi ($21.1B, 4.0%).

The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: Bank of Tokyo-Mitsubishi UFJ Ltd ($48.3B, 4.8%), Sumitomo Mitsui Banking Co ($42.3B, 4.2%), RBC ($41.5B, 4.1%), Bank of Nova Scotia ($40.1B, 3.9%), Credit Agricole ($39.9B, 3.9%), Toronto Dominion Bank ($37.2B, 3.7%), DnB NOR Bank ASA ($35.4B, 3.5%), Natixis ($35.3B, 3.5%), Wells Fargo ($34.0B, 3.4%), and Skandinaviska Enskilda Banken AB ($32.5B, 3.2%).

The 10 largest CD issuers include: Bank of Tokyo-Mitsubishi UFJ Ltd ($37.6B, 7.2%), Sumitomo Mitsui Banking Co ($35.2B, 6.7%), Toronto-Dominion Bank ($33.5B, 6.4%), Mizuho Corporate Bank Ltd ($30.6B, 5.9%), Bank of Montreal ($28.8B, 5.5%), Bank of Nova Scotia ($28.3B, 5.4%), Wells Fargo ($25.1B, 4.8%), RBC ($21.5B, 4.1%), Natixis ($19.2B, 3.7%), and Sumitomo Mitsui Trust Bank ($18.5B, 3.5%).

The 10 largest CP issuers (we include affiliated ABCP programs) include: JP Morgan ($22.3B, 6.8%), Commonwealth Bank of Australia ($17.2B, 5.3%), Westpac Banking Co ($17.2B, 5.3%), RBC ($15.7B, 4.8%), National Australia Bank Ltd ($12.0B, 3.7%), Lloyds TSB Bank PLC ($12.0B, 3.7%), BNP Paribas ($11.4B, 3.5%), Bank of Nova Scotia ($10.9B, 3.3%), HSBC ($10.6B, 3.3%), and Australia & New Zealand Banking Group Ltd ($9.4B, 2.9%).

The largest increases among Issuers include: Federal Reserve Bank of New York (up $31.5B to $137.6B), Skandinaviska Enskilda Banken AB (up $6.2B to $32.5B), ING Bank (up $4.1B to $27.8B), Swedbank AB (up $3.9B to $22.4B), Federal Home Loan Bank (up $3.7B to $208.9B), DnB NOR Bank ASA (up $3.4B to $35.4B), Canadian Imperial Bank of Commerce (up $3.4B to $20.6B), Goldman Sachs (up $2.8B to $14.0B), Lloyds TSB Bank PLC (up $2.8B to $25.1B), and RBC (up $2.6B to $58.8B). The largest decreases among Issuers of money market securities (including Repo) in May were shown by: Barclays PLC (down $7.6B to $42.9B), Bank of America (down $4.7B to $52.2B), Federal Home Loan Mortgage Co. (down $4.4B to $45.1B), US Treasury (down $4.2B to $408.8B), BNP Paribas (down $3.4B to $63.9B), Standard Chartered Bank (down $2.3B to $14.6B), Federal National Mortgage Association (down $2.0B to $32.2B), Citi (down $1.9B to $29.5B), Credit Mutuel (down $1.3B to $19.0B), and FMS Wertmanagement (down $900M to $8.4B).

The United States remained the largest segment of country-affiliations; it represents 49.1% of holdings, or $1.199 trillion (up $13B). France (9.9%, $240.7B) remained in second, followed by Canada (9.8%, $238.8B), and Japan (7.4%, $181.3B). The U.K. (5.1%, $124.2B) moved up to fifth, while Sweden (4.3%, $104.2B) was sixth. Australia (3.6%, $86.8B), The Netherlands (3.1%, $74.7B), Switzerland (2.5%, $60.1B), and Germany (2.0%, $49.4B) 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 May 31, 2015, Taxable money funds held 27.3% of their assets in securities maturing Overnight, and another 13.8% maturing in 2-7 days (41.1% total matures in 1-7 days). Another 22.1% matures in 8-30 days, while 12.2% matures in 31-60 days. Note that three-quarters, or 75.4% 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 11.5% of taxable securities, while 10.5% matures in 91-180 days and just 2.7% matures beyond 180 days.

Crane Data's Taxable MF Portfolio Holdings (and Money Fund Portfolio Laboratory) were updated yesterday, and our MFI International "offshore" Portfolio Holdings and Tax Exempt MF Holdings will be released late this week. Visit our Content center to download files or visit our Portfolio Laboratory to access our "transparency" module. Contact us if you'd like to see a sample of our latest Portfolio Holdings Reports or our new "Holdings Reports Funds Module." The new file allows user to choose funds (pick a fund then click its ticker) and show Performance alongside Composition, Country breakout, Largest Holdings and Fund Information.

Crane Data's latest Money Fund Intelligence Family & Global Rankings, which rank the market share of managers of money market mutual funds in the U.S. and globally, were sent out to subscribers yesterday. The June edition, with data as of May 31, 2015, shows asset increases for the majority of money fund complexes in the latest month, led by the largest managers. However, most fund complexes show losses over the past three months due to steep drops in March and April. Assets increased by $26.9 billion overall, or 1.1%, in May; over the last 3 months, assets are down $83.5 billion, or 3.2%. But for the past 12 months through May 31, total assets are up $20.8 billion, or 0.8%. Below, we review the latest market share changes and figures. (Note: Crane Data's June Money Fund Portfolio Holdings were delayed by a day because of technical issues. We'll be sending these out Wednesday.)

The biggest gainers in May were JP Morgan, Goldman Sachs, BlackRock, Fidelity, and Wells Fargo, rising by $9.0 billion, $8.6 billion, $4.9 billion, $3.4 billion, and $2.8 billion, respectively. Morgan Stanley, Goldman Sachs, Franklin, and Vanguard had the only increases over the 3 months through May 31, 2015, rising by $6.5B, $3.2B, $2.1B, and $169M, respectively. (Our domestic U.S. "Family" rankings are available in our MFI XLS product, our global rankings are available in our MFI International product, and the combined "Family & Global Rankings" are available to our Money Fund Wisdom subscribers.)

Our latest domestic U.S. money fund Family Rankings show that Fidelity Investments remained the largest money fund manager with $398.1 billion, or 15.8% of all assets (up $3.4 billion in May, down $6.3 billion over 3 mos., and down $10.3B over 12 months), followed by JPMorgan's $249.5 billion, or 9.9% (up $9.0B, down $4.6B, and up $10.7B for the past 1-month, 3-months and 12-months, respectively). BlackRock remained in third with $204.2 billion, or 8.1% of assets (up $4.9B, down $13.3B, and up $14.4B). Federated Investors was fourth with $193.6 billion, or 7.7% of assets (down $2.5B, down $13.5B, and down $10.6B), and Vanguard ranked fifth with $173.1 billion, or 6.9% (up $798M, up $169M, and up $1.3B).

The sixth through tenth largest U.S. managers include: Dreyfus ($164.8B, or 6.6%), Schwab ($153.8B, 6.1%), Goldman Sachs ($148.8B, or 5.9%), Morgan Stanley ($116.7B, or 4.6%), and Wells Fargo ($108.3B, or 4.3%). The eleventh through twentieth largest U.S. money fund managers (in order) include: Northern ($80.0B, or 3.2%), SSgA ($77.7B, or 3.1%), Invesco ($54.6B, or 2.2%), BofA ($46.4B, or 1.8%), Western Asset ($44.8B, or 1.8%), First American ($41.0B, or 1.6%), UBS ($34.7B, or 1.4%), Deutsche ($31.1B, or 1.2%), Franklin ($24.5B, or 1.0%), and American Funds ($15.3B, or 0.6%), which jumped ahead of RBC. Crane Data currently tracks 71 managers, same as last month.

Over the past year through May 31, 2015, Goldman Sachs showed the largest asset increase (up $15.7B, or 11.8%), followed by Morgan Stanley (up $14.8B, or 14.5%), BlackRock (up $14.4B, or 7.6%), JP Morgan (up $10.7B, or 4.5%), Dreyfus (up $7.8B, or 5.0%), and Franklin (up $6.1B, or 33.1%). Other asset gainers for the year include: Western (up $4.3B, or 10.6%), Northern (up $3.6B, or 4.7%), Vanguard (up $1.3B, or 0.8%), HSBC (up $1.3B, 11.8%), and SEI (up $792M, or 6.8%). The biggest decliners over 12 months include: Federated (down $10.6B, or -5.2%), Fidelity (down $10.3B, or -2.5%), Schwab (down $6.1B, or -3.8%), SSgA (down $4.9B, or -6.0%), Invesco (down $4.7B, or -8.0%), UBS (down $4.2B, or -10.8%), RBC (down $4.0B, or -21.5%), Deutsche (down $3.6B, or -10.3%, and Wells Fargo (down $1.1B, or -1.0%). (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 ($405.1 billion), JPMorgan ($373.3 billion), BlackRock ($311.2 billion), Goldman Sachs ($228.3 billion), and Federated ($201.8 billion).

Dreyfus/BNY Mellon ($188.7B), Vanguard ($173.1B), Schwab ($153.8B), Morgan Stanley ($134.7B), and Western ($123.0B) 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 have recently caused volatility in Euro and Sterling balances, which are converted back into USD.)

Finally, our June 2015 Money Fund Intelligence and MFI XLS show that yields remained largely unchanged in May, though gross yields again inched higher. 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 and 30-Day Yield both remained at 0.15%. Our Crane 100 Money Fund Index shows an average 7-Day Yield and 30-Day Yield of 0.03%, the same as last month. Also, our Crane 100 shows a Gross 7-Day Yield and a Gross 30-Day Yield of 0.19% (both up from 0.18%). For the 12 month return through 5/31/15, our Crane MF Average returned 0.02% (up from 0.01%) and our Crane 100 returned 0.03% (up from 0.02%).

Our Prime Institutional MF Index (7-day) yielded 0.04% (unchanged), while the Crane Govt Inst Index was at 0.02% (unchanged). The Crane Treasury Inst, Treasury Retail, and Prime Retail Indexes all yielded 0.01%, while Crane Govt Retail Index yielded 0.02% (up from 0.01%). The Crane Tax Exempt MF Index also yielded 0.01%. The Gross 7-Day Yields for these indexes were: Prime Inst 0.22% (unchanged), Govt Inst 0.13% (up from 0.12%), Treasury Inst 0.08% (up from 0.07%), and Tax Exempt 0.11% (down from 0.12%) in May. The Crane 100 MF Index returned on average 0.00% for 1-month, 0.01% for 3-month, 0.01% for YTD, 0.03% for 1-year, 0.03% for 3-years (annualized), 0.04% for 5-year, and 1.46% for 10-years. (Contact us if you'd like to see our latest MFI XLS or Crane Indexes file.)

As we make final preparations for our upcoming 7th annual Crane's Money Fund Symposium, which will take place in just over 2 weeks in Minneapolis, June 24-26, we are also prepping for our 3rd Annual European Money Fund Symposium, the largest money market event in Europe. The preliminary agenda is set for this year's show, scheduled for September 17-18 in Dublin, Ireland. Read on for details, but first, if you haven't already registered for Money Fund Symposium, you can still do so via www.moneyfundsymposium.com. (For those attending, safe travels and see you in Minneapolis!)

Looking ahead, the agenda is still being tweaked for Crane's European Money Fund Symposium in Dublin, but registrations are now being accepted. Last year's event in London attracted over 100 attendees, sponsors and speakers, and we expect our return to Dublin to be even bigger and better. "European Money Fund Symposium offers European, Asian and "offshore" money market portfolio managers, investors, issuers, dealers and service providers a concentrated and affordable educational experience, as well as an excellent and informal networking venue," says Peter Crane, President, Crane Data.

"Our mission is to deliver the best possible conference content at an affordable price to money market fund professionals." EMFS will be held at the The Conrad Hilton in Dublin. Book your hotel room before Friday July 17 and receive the discounted room rate of E199 for a single and E209 for a double. Registration for our 2015 Crane's European Money Fund Symposium is $1,000. Visit www.euromfs.com to register or contact us to request the PDF brochure, for Sponsorship pricing and info, and for more details.

The EMFS agenda features sessions led by many of the leading authorities on money funds in Europe and worldwide. The Day One Agenda for Crane's European Money Fund Symposium includes: "Welcome to European Money Fund Symposium" by Peter Crane of Crane Data; a "State of MMFs in Europe & IMMFA Update" with Reyer Kooy and Susan Hindle Barone of IMMFA; "Major Issues in European Money Funds" with Jonathan Curry of HSBC Global AM, Kathleen Hughes of Goldman Sachs , and Marc Pinto of Moody's; "Euro Money Funds and Negative Yields," with David Callahan of Lombard Odier Investment Managers and Jason Granet, of Goldman Sachs; and "Sterling Money Funds & UK Money Market," with Jennifer Gillespie of LGIM and Dennis Gepp of Federated.

Day One also includes: "Senior Portfolio Managers Roundtable" with Joe McConnell of JP Morgan AM, Debbie Cunningham of Federated, and Paul Mueller of Invesco; "Dealer Update & Supply Discussion" with Kieran Davis of Barclays, Jean-Luc Sinniger of Citi Global Markets, and David Hynes of Northcross Capital; "Distribution Panel: New Markets & Concerns" with Jim Fuell, of JP Morgan AM and James Finch of UBS Global AM; and "Regulatory Update: European MMF Reforms" with John Hunt of Nutter McLennen & Fish, Dan Morrissey of William Fry; and Kevin Murphy, of Arthur Cox.

The Day Two Agenda includes: "Money Market Funds in Ireland" with Pat Lardner of Irish Funds Industry Association and Fearghal Woods, of Northern Trust; "French Money Market Funds and VNAV" with Thierry Darmon of Amundi, Charlotte Quiniou of Fitch Ratings, Yann Marhic of CA-CIB and Vanessa Robert of Moody's; "EFAMA MM Working Group on Regulations" with Rudolf Siebel of BVI; and, "Strategist's Update: Rates, Reform, and Supply" with Vikram Rai of Citi.

The afternoon of Day Two features: "Major Issues in US and USD Money Funds" with Charlie Cardona of BNY Mellon CIS, Greg Fayvilevich of Fitch Ratings, and Peter Crane; "Money Market Funds in Asia & Emerging Markets with Andrew Paranthoiene of Standard & Poor's and David Castle of Standard Chartered Bank; "Fund Servicing Issues and Update; and "Monitoring European & Offshore Money Funds" with Peter Rizzo of Standard & Poor's, Alastair Sewell of Fitch Ratings, and Peter Crane.

In other news, Fitch a report on the "China Asset Management Industry." Mutual fund assets have grown sharply in the past year, thanks in large part to the growth in money market funds. It says, "China's asset-management industry is expanding rapidly with the total amount handled, in the form of mutual funds and mandates, having reached CNY6.7trn (USD1.1trn) as of end-2014, 61% higher than a year ago. Fitch Ratings sees growth continuing, given the large amount of domestic savings deposits, rapid accumulation of assets and relatively low asset-management penetration compared with developed markets. Money market funds (MMF) expanded more rapidly than other classes to CNY1.3trn, driven by retail investors buying online; that helped raise China on Investment Company Institute's (ICI) large global fund domicile rankings."

Fitch continues, "Unlike the typical mutual funds' asset mix in other developing countries, equity funds dominated the market until 2012 when strong growth in MMFs changed the mutual fund landscape. MMF assets accounted for roughly 50% of the total mutual funds as of end-March 2015 (CNY2.2trn). MMFs expanded in particular as the CNY1.3trn that flowed into these funds dwarfed the gains of all the other asset classes. The rapid expansion of MMFs had started in 2H13, and has become the largest asset class, mainly driven by retail demand for e-commerce MMFs. MMF AUM increased sixfold within 18 months to CNY2.2trn as of end 2014."

Finally, it adds, "The greatest concentration by asset manager is in QDII (Qualified Domestic Institutional Investor) funds and MMFs, with Yu'E Bao alone accounting for more than 30% of the latter's assets. Yu'e Bao is managed by Tian Hong Asset Management. The top 10 largest MMF asset managers are: Tian Hong Asset Management (CNY580B), ICBC Credit Suisse (CNY184B), China AMC (CNY140B), Bank of China Investment Management (CNY107B), China Southern Fund (CNY106B), E Fund Management Co (CNY102B), Harvest Investment (CNY96B), CGB Principal AM (CNY87B), China Merchants Fund (CNY70B), and China International Fund Management (CNY69B)."

The June issue of Crane Data's Money Fund Intelligence was sent out to subscribers Friday. The latest edition of our flagship monthly newsletter features the articles: "More Change: Federated, FAF, Wells; Private Fund Options," which looks at recent MMF lineup changes from 3 major fund managers and examines "Private" funds; "Northern Trust's Peter Yi on Reforms; More Than MMFs," a profile of Northern's Peter Yi, who talks about responding to reforms and other topics; and "JPM Cuts Back on Triple, 'AAA' Ratings; Rated Funds," which reports on JP Morgan's decision to streamline its AAA rated money market funds. We also updated our Money Fund Wisdom database query system with May 31, 2015, performance statistics, and sent out our MFI XLS spreadsheet late last week. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our May Money Fund Portfolio Holdings are scheduled to go out tomorrow afternoon, June 9, and our May Bond Fund Intelligence is scheduled to ship Friday, June 12.

The lead article on "More Change" says, "Since our last edition of MFI, we've had several more money fund managers announce changes to their lineups, including Federated, Wells Fargo, and U.S. Bank's First American Funds. Fund companies continue to keep their options open by offering all types of funds, they continue to slowly declare funds as retail or institutional, and they also continue to explore alternatives like short maturity funds, private funds, and separate accounts. We briefly review the latest strategies below. Federated's most recent set of fund changes, announced yesterday, categorize a number of funds as "retail" funds and streamline its product line by merging 7 funds. Once these mergers are completed, Federated will offer 6 Prime Retail and National Municipal funds." (See Friday's News, "Federated Announces Retail Money Fund Plan, Streamlines MF Lineup".")

MFI continues, "The 10th largest MMF manager, Wells Fargo, also outlined which funds will be classified as Retail recently. Wells Fargo Advantage MMF ($2.7 billion) will be Prime Retail, and Wells Fargo Advantage California Municipal ($1.0B), Advantage Muni ($1.5 billion), and Advantage National Tax-Free ($2.6 billion) will be classified as Muni Retail funds. It also will designate Wells Fargo Advantage Cash Investment ($11.1B) and Heritage ($41.0B) as Prime Institutional, while Municipal Cash Management ($1.2 billion) will float as a Municipal Institutional fund.... First American Funds also said last month that it won't impose gates or fees on its Government MMFs once SEC reforms go into effect. In an update, Lou Martine, Senior Managing Director, Head of Distribution at US Bancorp Asset Management, (which manages the First American Funds) elaborated further on the firm's post-reform plans, including the possibility of Private and 60-day max maturity funds."

In our middle column, we profile Peter Yi, Head of Short Duration Fixed Income at Northern Trust <b:>`_ who discussed how his firm is responding to money market reforms and the growing interest in ultrashort bond funds. It reads, "MFI: How long have you managed cash? Yi: We've been managing money market funds since the 1970s, when we created our first cash sweep vehicle in our trust department. We've been doing this for a long time and have demonstrated a commitment to the money market business. We view cash management to be a flagship capability and a product that caters incredibly well to our institutional asset servicing business and our wealth management franchise. Right now we're managing about $235 billion in assets across various money market funds and short duration products and strategies. Of that $235 billion, about $85 billion is in money market funds. The remainder is in STIFs, "sec lending" reinvestment vehicles, ultra short fixed income strategies and separately managed accounts. What resonates most with investors across all these strategies is our conservative investment philosophy that emphasizes credit research and risk management."

It continues, "MFI: What is your top priority right now? Yi: Both internally and externally, I'm spending an enormous amount of time focusing on money market reform. Without a doubt, our number one priority is to focus on our investors and find the right solutions for them as the reforms take effect. We have the benefit of a reasonably long compliance period for the new structural changes for certain types of money market funds. Our message to investors is that we believe that this is enough time for everyone to thoughtfully assess their options and not react in a disruptive, knee-jerk manner. It's very valuable to engage with our money market investors, observe reactions to these changes, and think about what we can do to address their liquidity needs in this changing industry. It's also especially important to ensure that our investors have a voice in our product evolution. Aside from the regulatory debates, I'm spending a lot of strategic focus on our ultrashort fixed income product offerings."

The third MFI article says, "JP Morgan Asset Management is streamlining the number of 'AAA' ratings on its money market mutual funds, removing ratings on a number of funds that previously had multiple triple-A's. The ratings removals include funds rated 'AAAm' by S&P and 'Aaamf' by Moody's and involve U.S. money funds, as well as "offshore" Luxembourg-domiciled money funds. (It also recently added a new ultra-short "offshore" money fund and got this triple-A rated.) On the changes, JP Morgan Asset Management's John Donohue, CEO of Investment Management Americas says, "The three major NRSRO's views of credit and risk management have diverged significantly over the past few years and have imposed differing investment requirements on rated money market funds. Our request to remove these ratings follows an ongoing global strategic review of all of our ratings across the J.P. Morgan range of money market funds." (See our May 20 News, "JP Morgan Streamlines AAA Ratings on Money Funds; Lux Current Yield" for more.)

Crane Data's June MFI XLS, with May 31, 2015, data, shows total assets gaining in May by $26.8 billion to $2.514 trillion, the first positive month of 2015. The first four months of the year, assets were down -- by $89.3 billion in April, $20.9 billion in March, $1.6 billion in February, and $44.6 billion in January. Our broad Crane Money Fund Average 7-Day Yield and 30-Day Yield both 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 0.15% (Crane MFA, unchanged) and 0.19% (Crane 100, unchanged) on an annualized basis for both the 7-day and 30-day yield averages. (This is up 2 bps from gross yields of 0.13% and 0.17%, respectively, at the start of the year.) Charged Expenses averaged 0.14% (up from 0.13%) and 0.15% (unchanged) for the two main taxable averages. The average WAMs for the Crane MFA and the Crane 100 were 38 and 40 days, respectively, both down 1 day from last month (and down from 40 and 43 days, respectively, at the start of 2015). (See our Crane Index or craneindexes.xlsx history file for more on our averages.)

Federated Investors announced further changes to its money market fund lineup on Thursday, categorizing its retail funds and streamlining its product lineup. The press release titled, "Federated Investors, Inc. Announces Plans for Retail Money Market Funds," tells us that the company will merge 7 prime retail, government, and muni funds. The release says, "Federated Investors, Inc., one of the nation's largest investment managers, today announced further refinements to its plan to restructure the company's line of money market funds by delineating which money market funds will be classified as retail money market funds under the U.S. Securities and Exchange Commission's 2014 rules. In addition, the company announced a series of planned mergers with the aim of strengthening and streamlining its money market fund offerings. Federated expects to announce its institutional money market fund product line in the future." (Note: The June issue of our Money Fund Intelligence newsletter will be e-mailed later this morning, along with our MFI XLS and May 31, 2015 performance data.)

"While Federated's clients don't need to make any changes to their investments now, the planned adjustments to Federated's product line are the result of an active and ongoing dialogue with our large, diversified client base," said J. Christopher Donahue, president and chief executive officer. "As a leading provider of liquidity management services for 40 years, Federated continues to work with our clients in an effort to meet their liquidity needs today and in the future."

The release continues, "If all of the anticipated fund mergers are completed, Federated expects to offer the six retail prime and national municipal funds." These include: Federated Capital Reserves (currently $11.7 billion), Federated Municipal Obligations Fund ($2.3B), Federated Municipal Trust ($641M), Federated Prime Cash Obligations ($15.3B), Federated Tax-Free Obligations ($6.3B), and Federated Tax-Free MMF ($3.8B). (Note: Crane Data lists Municipal Obligations, Prime Cash Obligations, and Tax Free Obligations with both Institutional and Retail share classes, so these moves will shift dollars into retail.)

Federated explains, "The company also anticipates offering the 13 state-specific money market funds listed below as retail money market funds subject to board approval. Each of the funds named below will continue to permit institutional investors to invest in the funds until Oct. 14, 2016, when the SEC rule changes go into effect." The 13 funds include: Federated California Municipal Cash Trust ($524M), Federated New Jersey Municipal Cash Trust ($184M), Federated Connecticut Municipal Cash Trust ($109M), Federated New York Municipal Cash Trust ($825M), Federated Florida Municipal Cash Trust ($160M), Federated North Carolina Municipal Cash Trust ($189M), Federated Georgia Municipal Cash Trust ($168M), Federated Ohio Municipal Cash Trust ($318M), Federated Massachusetts Municipal Cash Trust ($231M), Federated Pennsylvania Municipal Cash Trust ($244M), Federated Michigan Municipal Cash Trust ($108M), Federated Virginia Municipal Cash Trust ($345M), and Federated Minnesota Municipal Cash Trust ($140M).

Further, they comment, "Each retail money market fund will continue to seek a stable $1.00 per share net asset value (NAV). Retail money market mutual funds are defined by the 2014 money market fund rules as funds that have policies and procedures reasonably designed to limit all beneficial owners of the fund to natural persons. Generally, individuals may continue to invest in retail money market funds through their brokerage account, retirement accounts, education and savings accounts, as well as through ordinary trusts. Federated Automated Cash Management Trust, Federated Prime Cash Series and Federated Municipal Cash Series are expected to be merged into other retail money market funds before the deadline to designate a fund as retail or institutional."

Federated adds, "In an effort to strengthen and streamline its retail money market fund offerings, Federated plans a series of fund mergers for certain prime, municipal and government money market funds. The three retail and four government money market funds listed below are expected to be merged into designated retail and government money market funds with similar investment objectives and principal investment strategies. Federated began notifying its money market fund shareholders of the planned mergers on June 3, 2015. Pending any required approvals, the company expects the mergers to be completed in late 2015."

Specifically, Federated Automated Cash Management Trust ($1.3B) and Federated Prime Cash Series ($2.9B) will be merged into Federated Prime Cash Obligations ($15.3B). Federated Municipal Cash Series ($249M) will be merged into Federated Municipal Obligations ($2.3B). Also, Federated Treasury Cash Series ($1.6B) will be merged into Federated Trust for US Treasury Obligations ($130M), Federated Government Cash Series ($818M) will be merged into Federated Government Obligations ($26.1B), Federated Liberty US Govt ($93M) will be merged into Federated Government Reserves ($11.2B), and Federated Automated Government Cash Reserves ($230M) will be merged into Federated Government Obligations Tax Managed ($5.1B).

Finally, they say, "In addition to the mergers delineated above, in order to institute the SEC's required changes to Rule 2a-7, Federated plans to conduct a proxy of Money Market Obligations Trust, the registrant for the majority of Federated's money market mutual funds, beginning in late June. Refinements to Federated's money market fund product line will continue to evolve as market, client or regulatory changes/guidance occur before the Oct. 14, 2016, final compliance date for the 2014 money market fund rules. Certain refinements, mergers and other changes also remain subject to fund board, shareholder and other reviews or approvals. The company continues to work with institutional clients to create various institutional floating net asset value money market funds, separate accounts and private funds in an effort to better meet their liquidity needs. For additional information and future updates about Federated's liquidity products, visit FederatedInvestors.com/liquidity."

Are money fund yields finally starting to move up? The Independent Adviser for Vanguard Investors reports that the $103 billion Vanguard Prime Retail MMF saw its 7-day yield tick up a basis point Tuesday to 0.02%. We briefly review their story below, which verifies recent signs on both gross and net yields inching higher in 2015. In addition, we report that boutique separate account manager Horizon Cash Management is closing its doors, and we also provide more coverage of the recent New York Cash Exchange conference. (See our June 2 "News," "Money Funds Best Bad Option By Far, Says Crane at NY Cash Exchange.")

Dan Wiener and Jeffrey DeMaso of the Independent Adviser for Vanguard Investors write, "Where can you find double the yield you got yesterday? Look no further than Vanguard Prime Money Market. Ok, ok. Two basis points (0.02%) is still next to nothing, but Vanguard's Prime Money Market is yielding more than 1 basis point for the first time nearly two years -- since July 26, 2013, to be specific."

They explain that Vanguard waived about $24.1 million in fees related to its money market funds over the most recent six month reporting period. "The result of all those waived fees kept yields in the black -- barely. When short-term rates finally do rise, fund companies, including Vanguard, will have to decide whether to let money market fund yields rise or to begin paying themselves back for years of self-imposed fee waivers. For now, the immediate question on investors' minds is will the 0.02% yield last? And does it signal higher yields to come?"

The Independent Adviser adds in its most recent issue, "[D]on't for a minute think that Vanguard is going without. The company collected almost $174 million in fees for advising, administering and marketing the 10 money funds, collectively." Our latest Crane Money Fund Indexes both net and gross have been slowly inching higher this year. The Average Gross 7-Day Yield rose to 0.15% in April from 0.13% at the start of the year, while our Crane Institutional Money Fund Index rose to 0.03% in the latest month from 0.02% on Dec. 31, 2014. (Watch for our June Money Fund Intelligence XLS and our May 31 data tomorrow morning.)

In other news, Pensions & Investments writes "Horizon Cash Management to Close". The article says, "Horizon Cash Management, a cash manager for alternative investment funds, is closing effective Nov. 25, said Diane Mix Birnberg, founder, chairwoman and partner. The Chicago-based firm, which Ms. Birnberg founded in 1991, has about $500 million in assets under management and has specialized in managing the cash portions of managed futures funds. She said the firm's assets under management peaked at about $3.7 billion in 2006 and totaled $1.7 billion at the beginning of 2013."

According to Markets Wiki, "Horizon Cash Management specializes in the managing cash portfolios for managed futures funds, hedge funds, family offices and institutional investors." Birnberg told P&I, "Basically after 20 years of being very profitable, for the last two years we have not been, because our main client base is hedge funds, specifically managed futures funds. They have had terrible performance for going on three or four years."

Also, we report a little more on last week's New York Cash Exchange. Tony Carfang of Treasury Strategies and Greg Fayvilevich of Fitch Ratings, led a session called "Cash Investment Policies Post Money Fund Reform." Fayvilevich discussed the new landscape for cash management, post-reform, while Carfang focused on how the changes will impact corporate investment policies.

Fayvilevich said that since reforms were announced, investors have been taking a wait and see approach before moving money. "The effective dates are more than a year away so there's no real incentive to move now. The other reason is the industry is still developing new products, so investors don't have the full suite of products to choose from. The industry is continuing its outreach to investors and assessing what are best options. Once all these options come out it will be easier for investors to make their choice. We do expect additional flows to start happening towards the end of this year, definitely in the first half of 2016. Fund managers are going to start offering new products in the coming months and that’s when investors will probably start making some moves."

He also discussed private money market funds. "These are going to be structured very similar to hedge funds or private equity funds -- the investor and fund managers are going to work together to come up with a set of guidelines. For example, these funds can have a stable NAV and they don't have to have fees and gates. Other products that are being launched are short term bond funds and separately managed accounts." He added, "Everyone is doing something slightly different. It's interesting to see some of the different and innovative ways that fund managers are going to provide liquidity management services."

In addition, Fayvilevich touched on the use of ratings in an investment policy. "Just like in other areas of the investment policy, it's important to maintain flexibility. Investment policies that rely on only one or two rating agencies are not reflective of market coverage and put cash managers at a competitive disadvantage compared to peers. The markets have evolved significantly over the last several years since the financial crisis and so you want to make sure that you maintain flexibility so you don't lose out on certain sectors of the economy just because of the way your investment guidelines are structured."

Carfang said that investment policies are critically important these days as corporations are holding more cash than ever -- almost $2 trillion, twice as much as they were in 2000 <b:>`_. "That means that the investment policies you're writing are twice as important as they were." He said the best policies are written in fairly broad language. Carfang explained, "A stated objective of "preservation of principal" does not necessarily rule out VNAV funds. Even commercial paper and government securities fluctuate in value daily. Unless held to maturity, all money market instruments fluctuate. However, more restrictive language such as "a constant net asset value" requirement would necessitate a policy change to permit continued investment."

Finally, he added, "A stated objective of "daily liquidity" does not necessarily rule out funds subject to fees or gates. Fees and gates are board options, not requirements. The requirement in the regulation is that the board act in the best interest of the fund shareholders." He also reminded attendees to review their policies to make sure that any new products they may use, like short maturity money funds, ultrashort bond funds, private funds, or separately managed accounts, are covered. "Depending on how your policy is written, these may or may not be covered."

While many predict that as much as $500 billion could flow out of bank deposits due to pending bank reforms, so far that has not been the case. The FDIC's "Quarterly Banking Profile, First Quarter 2015" shows that total deposits increased by $194.4 billion (1.7 percent) in the first quarter of this year. Domestic office deposits rose by $210.2 billion, while deposits in foreign offices declined by $15.8 billion. Deposits in accounts of less than $250,000, which typically experience strong growth in first quarters, increased by $110.4 billion, while balances in larger-denomination accounts, which usually have little or no growth in first quarters, rose by $104.1 billion. The average net interest margin (NIM) fell to 3.02 percent, from 3.16 percent a year earlier. Fewer than half of all banks -- 43.2 percent -- reported year-over-year improvement in their quarterly NIMs. We examine JP Morgan Securities Strategist Alex Roever's take on the report, and look at the growth of "amalgamated" FDIC-insured products below.

In JPM Securities' weekly "Short Term Market Outlook and Strategy," Roever writes, "This past Wednesday, the FDIC released its latest Quarterly Banking Profile (QBP) for 1Q15, providing us with insight into how regulations are impacting banks. As we noted in our 1Q15 Regulatory Update, this past quarter marked the beginning of some key regulations going into effect. Large US banks began complying with certain minimum capital requirements, publically disclosing their Supplementary Leverage Ratios, and maintaining a Liquidity Coverage Ratio of at least 80% of the target. For their part, their balance sheets have steadily evolved over the past couple of years in preparation for this. But more recently, we are starting to see a moderation in their regulatory driven activities. This dynamic was evident in the latest QBP."

Roever adds, "[M]id-sized financial institutions (assets between $50-$250bn) seem to be picking up the slack large banks are leaving behind. By design, they are less impacted by the macroprudential regulations as policymakers view them as less risky, less levered and less systemic. As a result, mid-sized institutions have been able to absorb what has been pushed out of large banks. This was particularly evident in 1Q15 when deposits and loans of mid-sized banks grew by $118bn and $94bn respectively."

As we wrote in the April issue our Money Fund Intelligence newsletter ("Deposits, FDIC 'Amalgamators' Growing; Going Institutional), zero yields and the expiration of unlimited FDIC insurance haven't stopped the growth of bank deposits -- deposits have increased by almost $1.6 trillion the past 3 years. Bank and thrift money market deposit and savings accounts combined have almost doubled since the financial crisis hit hardest in late 2008; they now total a massive $7.65 trillion. One of the factors driving this spectacular increase is the 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 it is also now seeing growth from the institutional and corporate cash segment.

While no hard numbers are available, these two segments combined likely total over $600 billion. Both sides should continue to see gains due to pending money fund and bank regulatory reforms (though higher rates could start siphoning off assets). The sector also made news two months ago with Reich & Tang's exit from the money fund business, as well as from money fund portal ICD's announcement that it will offer a “structured FDIC product, StoneCastle Cash Management’s Federally Insured Cash Account, or FICA. We review these below.

Promontory Interfinancial Network pioneered the concept of breaking large deposits into smaller insured pieces with its CDARS (Certificate of Deposit Account Registry Service) product, and been offering its IND (Insured Network Deposits) solution for brokerages and its ICS (Insured Cash Solutions) for money market deposit accounts. A number of brokerages use IND and other products in order to offer FDIC insurance for accounts of $1 million or more.

As previously mentioned, Reich & Tang announced that it is liquidating its $10.9 billion in money market funds to "focus on growing its successful FDIC-insured deposit programs." CEO Michael Lydon commented at the time, "The company was built on its expertise in cash management and this fine-tuning of our product line is a direct result of our ability to adapt our business to meet the needs of our customer base. This foundation of more than 40 years' experience has helped us to uncover further opportunities to grow relationships through our leading FDIC-insured sweep and funding programs, areas that will be our focus going forward."

Among the major players in the brokerage sweep market for FDIC insured products are the aforementioned Reich & Tang, as well as Promontory Interfinancial Network, Deutsche Bank, and Total Bank Solutions. (Dreyfus' Pershing clearing platform offers a number of different programs too.) How do these "amalgamated" FDIC-insured offerings work? They invest in a series of electronically linked bank deposit accounts, which allows the investor to enhance the amount of FDIC insurance that one can obtain. Each bank can offer $250K in FDIC insurance at one bank, but through some of these offerings an investor can get FDIC insurance at much higher levels. New institutional offerings are pushing the limits toward $20 million or higher, by accessing many of the more than 7,000 banks across the country. Liquidity though, is often limited to once-a-week or twice weekly withdrawals.

According to the Association for Financial Professionals' 2014 AFP Liquidity Survey, 26% of organizations that maintain cash and short-term investment holdings at banks used "structured" FDIC-insured products to invest in bank deposits last year, up from 24% in 2013. Advocates say that the products offer safety and liquidity with slightly higher returns. (Watch for results from the new AFP Liquidity Survey to be released later this month's at our Money Fund Symposium in Minneapolis June 24-26.)

"The space is expanding. It's no longer just a few players. New entrants are coming in, and there's probably going to be more as investors look for alternatives to money market funds," says Eric Lansky, President, StoneCastle Cash Management. New entrants include Wertz York, Insured Deposit Portal, American Deposit Management, Anova Financial, and TCG Financial Services.

In April, online money fund trading "portal" Institutional Cash Distributors announced that it will distribute StoneCastle's FICA product through its platform. Jeff Jellison, ICD CEO Americas said, "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."

Lansky commented, "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 <b:>`_." StoneCastle's FICA program, which launched in 2009, recently broke above $8 billion in assets under management. "Our priority is to deliver as best a yield and as high a level of capacity as possible," says Lansky.

At last week's New York Cash Exchange conference, sponsored by the Treasury Management Association of New York, there were a number of excellent money market fund-related sessions, including the show-opening, "Money Fund Rates and Regulations Roundtable," moderated by Crane Data's Pete Crane and featuring Craig Ferrero, Managing Director, JP Morgan Asset Management, Ronald Hill, Director, BlackRock, and Andrew Hollenhorst, Fixed Income Strategist at Citi. Crane summed up the current cash landscape, and Prime Institutional money funds' place in it, with a quote from a recent film. "It's like the line from the movie 'Argo' where they say, 'We have nothing but bad options. But this is the best bad option, by far.' That's what we are going to be seeking out this morning -- the best bad option for your cash."

The Roundtable began with macro analysis of the market by Hollenhorst, who focused on two key issues -- interest rates and Federal Reserve's Overnight Reverse Repo Program. "The first order of importance for any front end investor right now is what the Fed is going to do. The issue is not just when the fed will hike rates, but also how the Fed will hike rates," said Hollenhorst. When the Fed does hike rates, it not only gets rates off zero, "it opens up the possibility for fee rebates to go away in some of the money funds, it opens up the possibility for a little bit more pricing power on the part of commercial paper issuers, and you get those spreads opening up. That's when you could actually see cash migrate back into a prime product," he explains.

The most important tool in the Fed's arsenal is the Overnight Reverse Repo Program. Right now it's capped at $300 billion, but Hollenhorst expects that to increase. If the Fed does not increase the size of that facility, the expected demand for government funds due to money market reform could outweigh the available supply, says Hollenhorst. "The Fed needs to respond by increasing the size of the RRP. My view is, when the Fed lifts off rates they will probably have that facility operating around $1T in total size. They might do some of that in term, they might do some of that in overnight repo, but they need to have significant size in the facility to make sure that they floor rates."

Hollenhorst adds, "From the perspective of those operating money funds, it's created a major wildcard in that we don't how large it's going to be and how long it's going to be available. The Fed has continued to indicate that this is something that's going to be around for a temporary period of time. My view is that the temporary period of time is probably many years to come given how large the balance sheet is and how long it takes to take that down." T-bills and Agency supply will be less of a factor, he said. "The reason I emphasize that less is because there's not that much room for expansion in either space. Fannie Mae and Freddie Mac are actively reducing the size of their balance sheets, so if anything we should have a continued reduction in Agency discount notes and other short Agency paper. There's not a lot of new supply there."

On T-Bills, he said, "The deficit has contracted from $1 trillion to $500 billion, which is great news for the U.S. fiscal picture but bad news for those who are investors in T-Bills. Recently, Treasury indicated that they are increasing the supply of Bills, so we're actually getting some positive Bill issuance right now. But that's because Treasury wants to hold a larger cash balance going forward so they are going to have to keep a little more cash as a reserve. That's helpful for the market, but it's not clear that they'll do a lot more than that."

Hill said BlackRock has spent a lot of time talking to clients about money fund reform. "The conversations range anywhere from what our fund lineup is going to look like post-reforms to what we're doing today. We spend a lot of our time with our clients, thinking about how these changes are affecting them and how we can develop a product that keeps everything less disruptive."

One of the new products that BlackRock is developing is a 7-day maximum maturity fund. "We're probably an outlier in terms of why we thought a 7-day fund fit into the new world, and a lot of this has been growing through the money market reform discussions. One thing that people have gotten comfortable with is actually the floating NAV, and one thing that we continue to hear concerns about is fees and gates. So there's a lot of discussion about how do you manage a fund to minimize the NAV volatility but also provide some relative assurances that you decrease the likelihood of fees and gates ever being implemented into a fund. The reason we thought the 7 day provided some advantage over a longer term max maturity fund is that you would be able to remove the concerns related to liquidity. Thinking about it from an investment perspective, we thought that a 7-day max maturity fund would be beneficial to the market. In a rising rate environment, a shorter maturity fund is going to recapture rates quicker when the Fed begins to tighten monetary policy."

Ferrero concurred. "We actually launched our [Current Yield, 10 day maximum WAM] fund a few years ago in anticipation of this rising rate environment, so it had nothing to do with money market fund reform. Hopefully, as we start to get this rising rate environment, it might be of interest to some clients." Ferrero also agreed with Hill that clients are getting more comfortable with the floating NAV. "I have an excel spreadsheet that tracks the shadow NAV of our Prime MMF out to 4 decimals--it's actually comical how little it moves day to day. Every day, literally for the last three years, it's been either 1.0001 or 1.0000. We're talking about such a minimal move."

On gates and fees, Ferrero said money fund providers will try hard not to drop a gate if the liquidity dips just below 30%. Crane agreed, "If you look at the scenarios that might trigger a gate or a fee -- nobody is going to implement a gate and fee for a minor breach." It would take something major like a default, like Lehman Brothers, or a systematic meltdown, said Crane.

The panelists agreed that while the idea of gates and fees may be a turn off for investors initially, their attitude might change once spreads widen. Said Ferrero, "It's easy to say in this rate environment, 'I don't want to deal with gates and fees and floating NAV because spreads between Prime and Govies is single digits.' If we get the two rates hikes by the end of the years, the effective Fed Funds rate is going to be in the low 60s -- some prime funds are probably going to be right around that range. If all continues to move along as expected, we're probably expecting another 2 or 3 rate hikes next year before the reforms. So Prime could realistically be at 1.00 to 1.25%. Because a lot of money will be shifting to 'Govie' funds, the spreads are not going to be 10 basis points, it's probably going to be 30, 40, maybe 50 basis points. Is that a meaningful enough difference for corporate investors?"

Ferrero continued, "Back to your joke earlier that money funds are the lesser of two evils -- the question is, where do you go with this money?" The hope is that corporate investors get comfortable with their fund providers, comfortable with the floating NAV, and comfortable knowing they're not going to put down gate and fee for something minor he told the NY Cash crowd.

Finally, the conversation shifted to alternatives, primarily separate accounts and private money funds. Ferrero said many clients have expressed interest in separately managed accounts. "They're sitting on more cash than ever and they're tired of these yields." J.P. Morgan has about $100 billion in separately managed accounts in a range of strategies, from those that mirror existing money funds to those that go a step beyond money funds. The latter is where they are seeing the bulk of the interest from corporate investors. There's a significant yield pick up over Prime MMFs, from 30 to 50 basis points, "and you're not extending out too far where you have to worry about this rising rate environment."

BlackRock is seeing similar interest in SMAs, said Hill. Separate accounts have been top of mind the last 2 or 3 years for several reasons -- the extremely low rates, large cash balances, and the control investors have over the portfolio. "It's their ability to exclude certain investment, to add certain investments, to change when they have cash and liquidity needs.... They have excess cash and there's a lot of pain in earning zero when you don't have to. In a separately managed account, they're able to add yield in a very risk controlled way."

There was also a lot of interest in and a lot of discussion at the NYCE about "Private Funds," both inside and outside of the sessions. Ferrero said that private placement funds are permitted by Rule 3c-7 and are exempt from Rule 2a-7. One of the differences between 3c-7 funds and 2a-7 funds is the number of investors are limited and it can't be mass marketed to retail investors, only institutional investors, he said. Look for more coverage of New York Cash and Private funds in the pending June issue of Money Fund Intelligence.

The Investment Company Institute released its latest monthly "Trends in Mutual Fund Investing" late Thursday, which confirmed that total money fund assets had their worst month in an already bad year in April, decreasing $80.0 billion, or 3.0%, to $2.565 trillion. Money market funds have now posted 4 straight months of asset declines through April 2015, but that losing streak is about to come to an end in May. ICI's weekly "Money Market Mutual Fund Assets" reports (see Friday's "Link of the Day" show money fund assets have increased for the 2nd straight week and for 3 out of the last 4 weeks. We review ICI's latest weekly and monthly asset figures, as well as its latest Portfolio Composition figures, which verify the previously reported plunge in Fed Repo in April, below.

Money fund assets are up about $32 billion month-to-date (from 4/29) through May 27, according to our analysis of ICI's weekly data. Institutional assets have risen by $28 billion while Retail assets are up just $4 billion. Crane Data's Money Fund Intelligence Daily finds that money fund assets are up $57 billion through May 28 with Institutional assets gaining $52 billion (Prime Inst accounted for $37 billion of this) and retail gaining just $2 billion. Year-to-date through May 27, total money market fund assets are still down $119 billion, or 4.4%, according to ICI data.

ICI's "Trends in Mutual Fund Investing April 2015" shows that total money fund assets decreased by $80.0 billion, or 3.0%, to $2.565 trillion in April. It was the worst month of the year for money funds and the fourth straight month of declines. Assets dropped by $32.9 billion in March, $13.9 billion in February, and $33.4 billion in January; through 4/30, MMFs declined by $160.2 billion, or 5.8%.

The report says, "The combined assets of the nation's mutual funds increased by $43.78 billion, or 0.3 percent, to $16.18 trillion in April, according to the Investment Company Institute's official survey of the mutual fund industry.... Bond funds had an inflow of $6.84 billion in April, compared with an inflow of $6.32 billion in March.... Money market funds had an outflow of $81.33 billion in April, compared with an outflow of $32.52 billion in March. In April funds offered primarily to institutions had an outflow of $56.88 billion and funds offered primarily to individuals had an outflow of $24.44 billion."

The total number of money market funds stood at 526 (361 Taxable, 162 Tax-Exempt), down 3 from the previous month. MMFs represent 15.8% of all mutual fund assets, while bond funds represent 21.9%, according to ICI's statistics.

ICI's latest "Month-End Portfolio Holdings of Taxable Money Funds" shows sizable decreases in Repo and Treasuries, and increases in CDs and CP in April. (See Crane Data's May 12 "News," "May MF Portfolio Holdings Show Plunge in Fed Repo, Jump in TDs, CP.") ICI's series shows that CDs moved ahead of Repo as the largest composition segment. Holdings of CDs increased by $73.4 billion, or 13.6%, in April to $614.0 billion, after decreasing $107.5B in March. CDs represent 26.4% of assets. Note that we include ICI's Eurodollar CD totals of $30.5 billion in its overall CD totals.

Repo decreased $121.8 billion, or 19.2%, in April (after increasing $100.5 billion in March) to $513.5 billion as the quarter-end surge in Fed RRP abated. Repos represent 22.1% of taxable MMF holdings. Treasury Bills & Securities remained in third place despite decreasing by $40.2 billion, or 9.1%, in April to $400.9 billion (17.3% of assets). Of that total, $199.2 billion in comprised of Treasury Bills, while $201.7 billion is made up of Other Treasury Securities.

Commercial Paper was fourth, increasing $13.0B, or 3.7%, to $359.9 billion (15.5% of assets). U.S. Government Agency Securities stayed in fifth, dropping $6.8 billion, or 2.1%, to $321.4 billion (13.8% of assets). Notes (including Corporate and Bank) dropped by $2.9 billion, or 4.3%, to $65.6 billion (2.8% of assets), and Other holdings (including Cash Reserves) jumped by $8.5 billion to $46.6 billion.

The Number of Accounts Outstanding in ICI's series for taxable money funds increased by 351.9 thousand to 23.659 million, while the Number of Funds dropped by 2 to 361. Over the past 12 months, the number of accounts fell by 184.6 thousand and the number of funds declined by 18. The Average Maturity of Portfolios was 41 days in April, down 2 from the previous month. Over the past 12 months, WAMs of Taxable money funds have declined by 4 days.

Note: Crane Data update its May MFI XLS last week to reflect our final 4/30/15 composition data and maturity breakouts for our entire fund universe. (Visit our Content Center and the latest Money Fund Portfolio Holdings download page to access our May Money Fund Portfolio Holdings.)