News Archives: July, 2015

BlackRock has filed with the Securities & Exchange Commission to make a series of money market fund lineup changes, including liquidating 3 Muni money funds, and converting several Prime Retail funds and some Prime Institutional funds into Government money funds. On the fund closures, BlackRock plans to close BlackRock New Jersey Money Market Portfolio, BlackRock Virginia MMP, and BlackRock North Carolina MMP, according to a July 28 SEC filing. The 3 Prime retail funds that will be converted to Government funds include former Merrill Lynch money funds BIF Money Fund (which used to be CMA Money Fund, at one point the largest money fund in the world), Ready Assets Prime Fund, and Retirement Reserves Money Fund. (They total about $10.5 billion.) Also, FFI Premier Institutional Fund, FFI Institutional Fund, and FFI Select Institutional Fund will be converted from Prime Institutional to Government. (These 3 funds, which used to be Merrill Lynch's Funds for Institutions lineup, total about $7.5 billion.) All totaled, about $18 billion will be changing into Government funds. This is the second MMF initiative by BlackRock over the last few months. (See our April 7 News, "BlackRock Announces Changes, Keeps Options Open; TempFund Floats," and see also ignites.com Friday a.m. coverage for more details.)

The Muni filing says, "On July 28, 2015, the Board of Trustees of BlackRock Funds (the "Trust") approved a proposal to close BlackRock New Jersey Municipal Money Market Portfolio, BlackRock North Carolina Municipal Money Market Portfolio and BlackRock Virginia Municipal Money Market Portfolio to new investors and thereafter to liquidate the Funds. Accordingly, effective 4:00 P.M. (Eastern time) on August 28, 2015, each Fund will no longer accept purchase orders from new investors. On or about December 15, 2015 (the "Liquidation Date"), all of the assets of the Funds will be liquidated completely, the shares of any shareholders holding shares on the Liquidation Date will be redeemed at the net asset value per share and each Fund will then be terminated as a series of the Trust. Shareholders may redeem their Fund shares or exchange their shares into an appropriate class of shares of another money market fund advised by BlackRock Advisors, LLC or its affiliates at any time prior to the Liquidation Date. The Funds may not achieve their investment objective as the Liquidation Date approaches." The funds currently have about $110 million in total.

On the Prime to Government conversions, the $7.2 billion BIF Money Fund (and BBIF MMF) will be converted to a Government fund. The filing says, "The Board of Trustees of the Fund (the "Board") recently approved certain changes to the principal investment strategies of the Fund in order for the Fund to meet the definition of a "government money market fund" under Rule 2a-7 under the Investment Company Act of 1940, as amended. The Board has chosen not to subject the Fund to discretionary or default liquidity fees or temporary suspensions of redemptions due to declines in the Fund's weekly liquid assets. These changes will become effective January 4, 2016. Investors should review carefully the specific changes to the prospectus of the Fund, which are detailed below."

It continues, "Accordingly, effective January 4, 2016, the Fund's prospectus is amended as follows: The Fund invests at least 99.5% of its total assets in cash, U.S. Treasury bills, notes and other obligations issued or guaranteed as to principal and interest by the U.S. Government, its agencies or instrumentalities, and repurchase agreements secured by such obligations or cash. The Fund invests in a portfolio of securities maturing in 397 days or less (with certain exceptions) that will have a dollar-weighted average maturity of 60 days or less and a dollar-weighted average life of 120 days or less. The Fund may invest in variable and floating rate instruments, and transact in securities on a when-issued, delayed delivery or forward commitment basis."

The FFI moves from Prime Institutional into Government are detailed in another SEC filing. Each will have a new name, adopting the BlackRock moniker. It says, "The Board of Trustees of Funds For Institutions Series (the "Board"), on behalf of each Fund, recently approved certain changes to the principal investment strategies of the Funds in order for each Fund to meet the definition of a "government money market fund" under Rule 2a-7 under the Investment Company Act of 1940, as amended. The Board has chosen not to subject the Funds to discretionary or default liquidity fees or temporary suspensions of redemptions due to declines in a Fund's weekly liquid assets."

BlackRock adds, "In connection with such changes, the Board also approved a change in the name of each Fund and the master portfolio corresponding to each Fund. Additionally, the Board has approved a change in each Fund's investment objective. These changes will become effective January 4, 2016." The filing says the FFI Premier Institutional Fund will be renamed BlackRock Premier Government Institutional Fund, FFI Institutional Fund will be renamed BlackRock Government Institutional Fund, and FFI Select Institutional Fund will be renamed BlackRock Select Government Institutional Fund."

Further, BlackRock also filed to convert the $2.2 billion Ready Assets Prime Money Fund into the Ready Assets Government Liquidity Fund. The filing reads, "The Board of Trustees of the Fund (the "Board") recently approved certain changes to the principal investment strategies of the Fund in order for the Fund to meet the definition of a "government money market fund" under Rule 2a-7 under the Investment Company Act of 1940, as amended. The Board has chosen not to subject the Fund to discretionary or default liquidity fees or temporary suspensions of redemptions due to declines in the Fund's weekly liquid assets. In connection with such changes, the Board also approved a change in the name of the Fund to "Ready Assets Government Liquidity Fund." These changes will become effective January 4, 2016."

Also, the $1.2 billion BlackRock Retirement Reserves Fund will be converted to a Government fund, although there was no mention in the fund's SEC filing of a name change. Like the others it says, "The Board of Trustees of Retirement Series Trust (the "Board"), on behalf of the Fund, recently approved certain changes to the principal investment strategies of the Fund in order for the Fund to meet the definition of a "government money market fund" under Rule 2a-7 under the Investment Company Act of 1940, as amended. The Board has chosen not to subject the Fund to discretionary or default liquidity fees or temporary suspensions of redemptions due to declines in the Fund's weekly liquid assets. These changes will become effective January 4, 2016.... The Fund invests at least 99.5% of its total assets in cash, U.S. Treasury bills, notes and other obligations issued or guaranteed as to principal and interest by the U.S. Government, its agencies or instrumentalities, and repurchase agreements secured by such obligations or cash."

Finally, BlackRock also filed to state that several of its Government and Treasury funds will comply with the new regulations for Government funds. Specifically, BIF Government Securities Fund and BIF Treasury Fund will also comply with the SECs new definition of Government funds, according to the prospectus supplement filings. It says, "Government Fund invests 100% of its total assets in cash, U.S. Treasury bills, notes and other obligations issued or guaranteed as to principal and interest by the U.S. Government, and repurchase agreements secured by such obligations or cash.... Treasury Fund invests 100% of its total assets in cash, U.S. Treasury bills, notes and other obligations of the U.S. Treasury." The FFI Government Fund and FFI Treasury Fund will meet the new requirements, according to the prospectus supplement.

Goldman Sachs Asset Management announced significant changes to its money market fund lineup yesterday, including the launch of new funds. Goldman, the seventh largest money fund manager in the US with $145.6 billion, was the first company to respond to the SEC reforms when it announced back in January that it would comply early with the new definition of Government MMFs. (See our Jan. 22 "News", "Goldman Govt Funds Comply Early; Invesco on Gates/Fees; Champ Exits.") But this new press release, "Goldman Sachs Asset Management Increases Focus on Advanced Compliance with Money Market Fund Rules," goes much deeper, announcing the launch of a new Prime Retail fund, the conversion of a Prime fund to a Government fund, the repositioning of a Government fund to a Treasury fund, and the launch of a new Government fund. (For a recap of all of the changes that have taken place through mid-July, see our recent story, "Managers Rolling with Reform Changes; Recap of Announcements So Far.")

The release says, "Goldman Sachs Asset Management ("GSAM") today announced a series of further steps to assist clients in preparing for the Securities and Exchange Commission's ("SEC's") money market fund requirements under amended Rule 2a-7, scheduled to go effective in October 2016. This follows GSAM's announcement in January 2015 stating that its U.S. government money market funds will continue to operate in accordance with the new definition of "government money market fund" established by the SEC in July 2014."

Dave Fishman, Managing Director and Co-Head of Global Liquidity Management, comments, "To inform its most recent product updates, GSAM has gathered feedback and insight from our clients and vendors. `This insight has helped us shape a series of solutions designed to help clients prepare for regulatory reform, streamline their operations, manage risk and make informed investment decisions."

GSAM filed with the SEC to make the following changes. One, "The launch of a new retail prime fund: The Goldman Sachs Investor Money Market Fund will be a "retail money market fund," as defined by amended Rule 2a-7. The new Fund will invest across the entire money market fund universe, including in securities issued or guaranteed by U.S. government agencies or instrumentalities, obligations of banks, commercial paper and other short-term obligations of U.S. companies, states, and municipalities and other entities and repurchase agreements. Under amended Rule 2a-7, retail money market funds are permitted to maintain a stable net asset value ("NAV") of $1.00 per share, and are only available to investors who are natural persons. The Fund will have the same pricing structure as GSAM’s Financial Square Money Market Funds."

Two, "The repositioning of the Goldman Sachs VIT Government Money Market Fund: In response to demand from insurance investors, GSAM plans to convert the Goldman Sachs Variable Insurance Trust ("VIT") Money Market Fund from a prime fund to a "government money market fund" as defined by amended Rule 2a-7. The Fund will be renamed the Goldman Sachs VIT Government Money Market Fund, and will pursue its investment objective by investing only in "government securities." These changes do not require any shareholder action."

Three, "The launch of a new government money market fund: The Goldman Sachs Financial Square Federal Instruments Fund intends to be a "government money market fund" as defined by amended Rule 2a-7. The Fund will seek to maintain a stable NAV of $1.00 per share, and complete GSAM's current suite of government money market mutual funds. GSAM believes this Fund will be best suited for investors who are primarily concerned with state tax exempt income."

Four, "The repositioning of a current government money market fund: The Goldman Sachs Financial Square Federal Fund currently invests in securities issued or guaranteed by the United States, including U.S. Treasury securities, certain U.S. government agencies or instrumentalities and repurchase agreements solely with the Federal Reserve Bank of New York. Effective September 30, 2015, the Fund will be renamed the Goldman Sachs Financial Square Treasury Solutions Fund. The Fund will invest in U.S. Treasury securities, and enter into repurchase agreements solely with the Federal Reserve Bank of New York. This Fund is designed to be a product alternative for "Treasury-only" investors concerned with market capacity constraints."

Further, the release says, "In addition to the changes listed above, GSAM's Global Liquidity Services Portal has been updated to handle fluctuating, same-day settling money funds that price multiple times per day and also supports automated transactions, settlement and custom reporting, all designed to reduce operational complexities." "We have been enhancing our Global Liquidity Services Portal functionality to help guide investors through investment decision making in the new world, and help identify investments that best fit their needs," explains Kathleen Hughes, Managing Director and Head of the Global Liquidity Sales team.

Goldman continues, "Furthermore, GSAM continues to evaluate the implementation requirements' impact to clients, and is still finalizing its plan for GSAM's prime and tax-exempt money market funds. GSAM anticipates announcing its final plans by the end of 2015." "GSAM's evolving liquidity lineup is the latest in our continued effort to help liquidity investors navigate through the changing regulatory landscape. We will continue to evolve in this space and you can expect future product launches in line with client needs," says `James McNamara, Managing Director and President of Goldman Sachs Mutual Funds.

Goldman Sachs AM has made several announcements regarding compliance with the new SEC rules. The release explains, "In January 2013, GSAM became the first U.S. asset manager to begin disclosing a daily market value NAV for its U.S.-domiciled Commercial Paper Money Market funds.... In October 2013, the firm launched the Transparency Insight Tool on its Global Liquidity Services Portal. This tool combines data-rich views of fund holdings with industry-leading analytics to help investors consider their risk exposure in the same way as GSAM's MMF managers evaluate funds. GSAM continues to improve features on this online platform, including the October 2014 addition of the "Fund Tracker" feature, which offers functionality to help monitor fluctuating NAVs and liquidity levels, among other metrics. Other features include research material written by GSAM experts and real-time portfolio notifications."

Finally, the release adds, "GSAM began early compliance with Rule 2a-7 in January 2014, when the Goldman Sachs Funds' Board of Trustees approved changes to allocations within four funds. Funds affected at that time were: the Goldman Sachs Financial Square Government Fund; Goldman Sachs Financial Square Federal Fund; Goldman Sachs Financial Square Treasury Obligations Fund; and Goldman Sachs Financial Square Treasury Instruments Fund. On July 14, 2015, GSAM met the first compliance deadline for Rule 2a-7 changes announced in July 2014, the requirement that money market funds be able to file Form N-CR within one business day of certain events, such as changes in fund price, the provision of financial support to a fund and the imposition of a liquidity fee or suspension of fund redemptions."

In a letter to shareholders in their latest Semi-Annual Report, American Funds President Kristine Nishiyama updated clients on the status of the $15.0 billion American Funds Money Market Fund given the looming money market fund reforms. The fund, while not officially a "government" money fund, meets current requirements for a Government MMF (80% in Govt securities). But it wouldn't meet the new requirements when they kick in in October 2016. So, between now and then, the firm has a decision to make on whether they go Government or not. Fidelity Investments, meanwhile, is already making the shift toward government securities in its $112 billion Fidelity Cash Reserves Fund (which will become the Government Cash Reserves Fund in October 2016), according to Barclays' Strategist Joseph Abate in his "US Weekly Money Market Update." Also, Fidelity released commentary in its "Insights and Outlook" series on government supply called, "Market Participants Remain Skeptical of Federal Open Market Committee Rate Forecast."

Nishiyama's letter, dated May 13, says, "As mentioned in our annual report, the SEC in July announced new rules governing money market funds. Government money market funds and retail prime money market funds will continue to maintain a stable NAV. However, institutional prime money market funds will be required to float their NAV, During times of stress, redemption gates and liquidity fees can be imposed on all non-government money market funds whether retail or institutional, at the discretion of the fund's board. Government money funds will be excluded from this requirement, but can opt in with proper notice to investors. American Funds Money Market Fund has historically invested between 85% and 90% of its assets in U.S. government securities, which is consistent with the previous SEC requirement of 80%. In order to qualify as a government money market fund, it must invest at least 99.5% of its assets in government securities, cash or repurchase agreements backed by government securities."

She comments, "We have reviewed the details of the rule and continue to evaluate options for the fund, including increasing the allocation of government securities to 99.5% in order to avoid the floating NAV, redemption gates, and liquidity fee requirements. The compliance date for these most significant changes to the rule is October 14, 2016. In the near future, we'll share with you how the fund will be managed going forward." (`Note: Our condolences to American Funds and the family of founder and fund industry giant Jim Rothenberg, Chairman of the Capital Group Companies, who passed away last week.)

Abate is seeing the shift to government already taking place in Fidelity Cash Reserves. In his weekly commentary, he writes, "In late January, Fidelity announced plans to convert several money funds to government-only status by the end of the year. The largest fund that will be converted held about $112bn in assets at the end of June -- unchanged from its January 31 level. Like other funds, this fund's WAM has been shrinking, although the decline (about 28%) is significantly larger than the industry average since January (15%)."

He continues, "But at the end of June, 51% of the fund's assets are invested in CP and CDs -- down from 65% at the end of January. At the same time, the fund has ramped up its holdings of government debt and repo -- from 15% to 31%. Thus, in aggregate the fund appears to have shifted roughly a quarter of its non-government holdings at the end of January into government-only eligible paper. Unsurprisingly, given the shortage of bills, the fund has met much of the demand for government paper with $10bn worth of repo from the Fed's RRP program."

Abate adds, "We expect the supply of bills to get even scarcer this fall as the Treasury negotiates around the debt ceiling. Although figures are still a bit murky and the exact timing is unclear, it is possible the Treasury might need to drain its cash buffer to retire $140bn or more in bills to create debt ceiling capacity to settle its late year coupon issuance. As a result, we expect that the fund's RRP holdings could climb to the full $30bn counterparty limit. But even then, the fund will still need to find $82bn in repo from dealers as well as bills."

Fidelity's Michael Morin, Director of Institutional Portfolio management, and Kerry Pope, Institutional Portfolio Manager, also discuss supply and demand issues in Fidelity's latest update. They write, "The Treasury has said that it will expand bill issuance to generate sufficient cash to cover one week's worth of outflows, to protect against a market disruption. This would suggest that the Treasury is seeking to increase bill issuance by an estimated $125 billion to $150 billion. However, this additional supply would be offset by the improvement in the budget deficit, which has lessened the Treasury's borrowing needs. Bill supply as a percentage of the Treasury's portfolio continues to be at a multi-decade low of approximately 11%, representing a decrease of more than $620 billion since the financial crisis peak in 2008."

They explain, "The supply of floating rate coupons and coupons rolling inside 397 days until maturity has provided a 4% increase in overall money market Treasury supply this year. A challenging supply-and-demand balance may be made even more difficult in the months ahead if the debt ceiling becomes an issue. Cuts to Treasury bill supply may be necessary should the Treasury exhaust its extraordinary measures and be forced to draw down its operating cash balance. While Congress could find a way to "kick the can down the road," the debt ceiling still presents a real risk to the already constrained market supply starting around October 2015."

Morin and Pope continue, "During the first half of the year, issuance of agency securities and repurchase agreements (repos) continued to contract -- a decrease of 7% and 3%, respectively. While this trend for agencies and repos is expected to continue, the growth in nonfinancial and foreign-financial commercial paper for the same period has helped to slow the downward supply trend—up 15% and 14%, respectively. The Fed announced plans to conduct term RRP operations during quarter-ends throughout 2015.... The early announcement of additional supply kept markets orderly during quarter-end."

On shortening WAMs, they write, "Fund weighted average maturities (WAMs) continued to trend lower, and our institutional prime funds ended June with WAMs at or less than 30 days. At the end of June, prime funds were positioned for a potential rate increase later in 2015 and potential redemptions in the second half of the year associated with regulatory reforms. Also, given the heightened demand for bills and agency discount notes, prime funds increased their holdings of short-dated time deposits to facilitate liquidity thresholds. Looking forward, government and Treasury funds could be more dependent on the Fed's RRP facility in the face of increasing demand and limited supply."

Finally, Fidelity adds, "For example, the seven-day term repo auction, which was introduced to help participants get over quarter-end, attracted $115 billion in bids, or just over $15 billion in oversubscriptions at the end of the second quarter, while the two-day term repo auction attracted more than $103 billion in bids, or just over $3 billion in oversubscriptions. The pricing on both auctions was 8 basis points, 3 basis points above the overnight RRP facility. Money market fund inflows may increase once market rates exceed administered rates. This rotation will assist banks in shedding a portion of the estimated $700 billion to $900 billion in excess deposits accumulated during the Fed's zero percent rate policy."

SEI Investments is the latest fund family to consolidate its fund lineup and liquidate share classes, shifting all of its outstanding share classes into A shares, according to recent SEC filings." The July 6 Prospectus Supplement says that for each of the following funds, SEI Prime Obligations Fund, SEI Money Market Fund, SEI Government Fund, SEI Government II Fund, SEI Treasury Fund, and SEI Treasury II Fund, the B, C, and H shares will be converted into the A shares. Specifically, it says, "At a meeting held on June 22-23, 2015, the Board of Trustees of the Funds approved the conversion of each Fund's Class B Shares into Class A Shares." Additional filings say the same for the B, C, H and Sweep shares, merging them into A shares. (See also our latest brief on share class consolidations, Crane Data's July 2 "Link of the Day," "JPM MMFs Abandon B Shares; Federated Liquidates S-​T Euro Prime MMF.")

The filing continues, "Like Class B Shares of the Funds, Class A Shares are able to charge a contractual shareholder servicing fee equal to 0.25% of the average daily net assets of the share class. Also like Class B Shares of the Funds, Class A Shares do not charge any distribution (12b-1) fees. In addition to the shareholder servicing fee, Class B Shares of the Funds also are able to charge an administrative servicing fee up to 0.05% of the average daily net assets of the share class. (Class A Shares of the Funds do not charge any administrative servicing fee). However, due to the current low yield environment, most of the Class B shareholder and administrative servicing fees have been waived for the last several years. After voluntary fee waivers, the actual fees for Class B Shares are currently the same as Class A Shares of the Funds."

Finally, the SEI Supplement adds, "The Board's approval of the conversion of each Fund's Class B Shares into Class A Shares was based on these and other factors. Accordingly, effective on or about the close of business on September 4, 2015 (the "Conversion Date"), all Class B Shares of each Fund will automatically convert to Class A Shares of the same Fund. No contingent deferred sales charges will be assessed in connection with this automatic conversion. This automatic conversion is not expected to be a taxable event for federal income tax purposes or to result in the recognition of gain or loss by converting shareholders, although shareholders should consult their own tax advisors. For your convenience, we have included a side-by-side comparison of the current contractual fees and expenses of both Class B and Class A Shares of the Funds, as disclosed in the respective Prospectus dated May 31, 2015. Actual fees incurred by shareholders of the Funds have been lower than those set forth below due to voluntary fee waivers." The language is similar for the C and H class conversions.

In other news, for the first time since 2007, money market funds showed inflows for the month of June this year, up $15.5 billion. So far in July, assets are up $34 billion compared to last year when they were down $18 billion. As these two months are typically down months for the MMF industry, one wonders where the flows might be coming from. One possibility is bank deposits. Case in point, in its 2Q earnings call earlier this month, JP Morgan's CFO Marianne Lake said the company had succeeded in its goal of shedding $100 billion of non-operating deposits in the second quarter. The company announced this initiative in February citing new banking regulations that made it more expensive for large banks to hold deposits.

Did some of this cash find its way into money funds? Money in motion is the theme of a white paper released last week called "Looking Beyond Bank Deposits and Money Market Funds," by Capital Advisors Group. The piece looks at the impact of new bank deposit and money market fund rules on the cash landscape. With the potential for a trillion dollar shift within the world of cash investing, Capital Advisors Director of Investment Research Lance Pan examines "cash investment strategies in a new era." One of the major beneficiaries, they say, may be Separately Managed Accounts.

In Capital Advisors' white paper, Pan writes, "As the economy improves and interest rates move higher, a new and different world awaits treasury investment professionals. Money market fund reforms may make liquidity less reliable and yields less predictable than in the past. And stricter regulations on bank deposits might lead corporate treasuries to find new homes for their cash. In short, the good old days of decent yields in safe investments are gone. By the time new regulations are fully implemented in 2016, bank deposits and money market funds alone may no longer be sufficient cash management tools for many corporate treasuries."

The paper continues, "It's now clear that the recent bank and money market fund regulations should have a long-lasting structural impact. As interest rates and yields start to rise, managers are considering new strategies that were delayed in the years since the financial crisis. In this new era, higher risk awareness, greater sensitivity to liquidity costs and stricter systemic regulation will require new approaches to corporate cash investment. Therefore treasury investment managers are looking for alternatives. For many, direct purchases of marketable securities in separately managed accounts (SMAs), beyond bank accounts and money market funds, may become a primary alternative cash strategy."

Pan comments, "Money market fund reforms going into effect between now and October 2016 -- including implementation of floating net asset values (NAV), liquidity fees, and redemption gates -- are already transforming money funds as vehicles for short-term cash management. Recent banking reforms are also directly impacting corporate cash investors. Capital requirements in the Basel III accords and other regulations designed to secure the global banking system are creating disincentives for banks to hold non-operating deposits. Capital Advisors Group estimates these rule changes could provoke more than a trillion dollars in asset shifts in 2015 and 2016, impacting the liquidity, yield and utility of most cash instruments."

He tells us, "Stratifying cash balances into several sub components and applying associated strategies helps to delineate the three objectives of cash management. As it becomes increasingly difficult to deliver on all three objectives with money market funds, a stratified approach may allow cash managers to pick the best strategies suited for each. At the aggregate level, they may continue to use deposits, money market funds, and direct purchases in a comprehensive approach."

On Separately Managed Accounts, Pan says, "With a greater proportionate focus on direct purchases, certain treasury organizations may find it appropriate to use separately managed accounts (SMAs). On the one hand, SMAs allow organizations to maximize direct purchase strategies that are not feasible in bank deposits and money market funds. On the other hand, they have the benefit of professional expertise, risk diversification, customized liquidity, and counterparty risk oversight. For many organizations, separate accounts may afford higher income potential without sacrificing principal stability and liquidity." He concludes, "In the final analysis, separately managed accounts do not represent a new strategy, but rather a return to the more traditional way of corporate cash management, which may be more versatile and durable than other alternatives."

During Federated Investors' Second Quarter earnings call with analysts, Chief Executive Officer Chris Donahue said Federated is working on developing "private" money funds that mirror existing Federated MMFs and he expects to have "substantially all of our product changes to be completed by the end of this year." He was joined on the call by Federated President Ray Hanley, CIO Debbie Cunningham, and CFO Tom Donahue, who discussed a range of money market fund related issues, from fee waivers to new product development. We also mention some excerpts from Northern Trust's earnings call, which mentioned fee waivers and fund "top-ups".

According to Federated's 2Q earnings release, "Money market assets were $242.0 billion at June 30, 2015, down $3.2 billion or 1 percent from $245.2 billion at June 30, 2014 and down $6.2 billion or 2 percent from $248.2 billion at March 31, 2015. Money market mutual fund assets were $208.8 billion at June 30, 2015, down $3.6 billion or 2 percent from $212.4 billion at June 30, 2014 and down $5.5 billion or 3 percent from $214.3 billion at March 31, 2015." Further, "Revenue increased by $15.1 million or 7 percent primarily due to a decrease in voluntary fee waivers related to certain money market funds in order for those funds to maintain positive or zero net yields and an increase in revenue from higher average equity assets." Federated derived 31% of its 2Q revenue from money market assets.

On fee waivers, the release continued, "Fee waivers to maintain positive or zero net yields on money market funds and the resulting negative impact of these waivers could vary significantly in the future as they are contingent on a number of variables." On the earnings call, they said, "Looking forward, we estimate that gaining 10 basis points in gross yields from beginning Q2 levels would likely reduce the impacts of yield waivers by about 40% and a 25 basis point increase would reduce the impact by about 65%. We expect to recover about two-thirds of the remaining money fund yield waivers related pre-tax income."

On the earnings call, CEO Chris Donahue said, "We announced our plans during the second quarter for funds characterized as retail under the 2014 money fund rules, and we continue to make progress on the institutional products line-up. We expect to provide more details on these products in the coming months. We expect, as we have mentioned before, to have products in place to address the cash management needs of all of our money fund clients. These will likely include, prime and muni money market funds that meet the new requirements, government money funds, separate accounts, and offshore money funds."

He continued, "We are also working on privately placed funds and in attempt to mirror existing Federated money market funds for our qualified institutional investors, either unable or unwilling to use the money funds that have been modified under the new rules. We expect to have substantially all of our product changes completed before the end of this year which is well in advance of the October 2016 requirements for floating NAVs or institutional prime and Muni funds." He also said the transition of $4 billion in money market assets from the acquisition of Reich & Tang and the acquisition of $100 million in money market assets from Touchstone Advisors will be completed this month.

In the earnings call transcript, posted by Seeking Alpha, one analyst wondered if the money market fund industry was seeing inflows from JP Morgan shedding $100 billion in deposits. Hanley responded by saying that, "It appears to us that, yes, the money did not flow into the money funds" and "stayed on the sidelines." [Note: Crane Data believes money funds did see much of this JPM bank money in June. MMFs haven't seen an inflow in June since 2007, and they've averaged outflows of $41 billion in the month over the past 7 years prior to 2015. But they experienced an inflow of $15 billion this year.]

But he added, "Over the longer haul, however, meaning post-2016, when the dust settles on what these money funds are going to look like.... When all that settles out, then there is no reason in my mind to expect that if the bank is not bidding for that money, then ... a large portion of it will be available to the money fund.... So it will be a determination made by corporate treasures and alike, as to where they think their best investment lie. And I am just waiting for the dust to settle, but still remain convinced that our future has greater money market assets in the post-2016 environment." Hanley added, "We think money funds will continue to get their share when you get -- especially when you get past the noise of the product reconstitution."

When asked if they have seen any changes in behavior yet among institutional or retail investors, Tom Donahue said, "We have not yet seen meaningful change in investor behavior. One consistency is, they wish they didn't have to deal with it. The other consistency is, they know that they do. You've seen some modest moves into government funds," he said, but for the most part investors are in wait and see mode.

On the matter of interest rates, Cunningham said, "Our outlook at this point is that the process will start in September and then it might be an every other or every third meeting type of increase. Our expectation would be they get to 1%, and they wait and see then. One percent is still highly accommodative. There is lots of room for growth from an economic perspective with 1% interest rate. Yet it brings the US back to a little bit more of a normal situation in comparison to the other parts of the world." With regard to fee waivers, Tom Donahue added, "In terms of the waivers, if it's 25 basis points in September, remember we mentioned that would recover 65%. If it gets all the way to 1%, that would virtually eliminate the waiver situation."

Also, money fund fee waivers, "top-ups" and bank deposits came up during Northern Trust's second quarter earnings call. On money market fund fees, CFO Bill Bowman said, "Lower money market mutual fund waivers also contributed to growth this quarter. Money market mutual fund fee waivers in C&IS were $14 million, 8% lower year-over-year and 11% lower sequentially driven primarily by higher gross yields in the funds.... [W]e recorded a pre-tax charge of $45.8 million related to voluntary cash contributions to four constant dollar net asset value funds.... While the market based net asset values of the four funds were well above the prescribed threshold for transactions to occur at $1, this voluntary action offsets legacy losses realized by the funds during the financial crisis. The market base NAV's now approximate one across all four funds." (See the call transcript on Seeking Alpha.com.)

He added, "So, money market fee waivers were down for two reasons in the quarter. One was primarily because the yields are up and short term rates have risen if you look across overnight repo rates in particular moving up, so that's one factor. And we've slightly lower cash balances in those funds available. So the combination of those two were the drivers, but I would highlight that rate -- the short end of the rate curve moving up does help produce a lower fee waivers."

Bowman explained about "topping-up" several MMF NAVs, "We constantly evaluate our liquidity products and suite of products that we provide to our clients. And as you are well aware there is a lot of SEC reform and other items that have been appearing. So as we went through the evaluation process, we looked at some of the legacy issues that existed in four funds and made the determination as a management team that the right time to address the legacy issue losses ... was now. I'll be clear, all four funds traded above the $0.995 NAV price that is required. These top-ups will bring them to $1." When asked if this was in preparation for MMF reform October 16, 2016, Bowman replied, "That is a part of it, but it was also as we're looking at our array of liquidity products and offerings to our clients in conjunction with that reform. We felt that this was the right time." [Note: Money funds have to now report actions under the new Form N-CR, so this early July deadline likely triggered the move.]

Finally, on deposits, Bowman said, "Total deposits averaged $92 billion in the quarter, up 9% year-over-year and 7% sequentially with strong growth in non-interest bearing demand deposits." When asked if Northern is grabbing some share from competitors who are trying to push deposits off the balance sheet, Bowman replied, "Yes, so we certainly see clients that are approaching us because of discussions they have had elsewhere around the use of other's balance sheet. I would say that we're taking a transaction by transaction approach to that and looking at the overall breadth and nature of the relationship we attain with those deposits before we take -- and I am speaking [of] very large deposits here -- before we take those on. So if it's an opportunity that say a hedge fund has a billion, we want to dialogue about what the other opportunities are with them other than what we would say as a very transactional oriented deposit or very rate sensitive deposit. And we're actively pursuing those in terms of deal-by-deal."

In the July issue of our new newsletter, Bond Fund Intelligence, we wrote about a session at Crane's Money Fund Symposium in Minneapolis last month called "MMF Alternatives: Ultra Short, Private, SMAs," which examined the space beyond 2a-7 money market funds. Given the yield and regulatory environments, this space continues to attention from investors. Much of the discussion focused on Ultra Short Bond Funds, the primary focus of Bond Fund Intelligence, but we also discuss the growing interest in Separately Managed Accounts. Below, we reprint the article, which featured commentary from moderator Alex Roever of JP Morgan Securities; and panelists Jonathan Carlson of BofA Global Capital Management; David Martucci of JP Morgan Asset Management; and Paul Reisz of PIMCO. (For a look at the latest Bond Fund Intelligence and BFI XLS, e-mail us at info@cranedata.com and include "Sample BFI" in the Subject line.)

What are clients in this space looking for? Explained Martucci, "It's that space between money market funds and short duration bond funds. It's a pretty broad space and I think Crane has done a good job of trying to break up that segment into conservative ultra short and ultra short, which plays into how we think about the world. JP Morgan's Managed Reserves strategy is an extension of our money market fund strategy. We keep an eye on our interest rate risk and our spread duration risk and try to limit the volatility." Added Reisz, "You have individual investors that have become tired of 7 years of earning a small amount in a money market fund or bank deposits so they're looking for additional return. The key message though is they need to understand what they're buying. Communication is important. They need to understand the risks."

How is demand for this product? Stated Carlson, "The demand is picking up on the SMA side, certainly from people getting out of prime funds, and I would argue we're seeing more from people who were using bank deposits. Those assets are increasingly finding their way into SMAs as well." Added Martucci, "The asset growth in this space has been significant. As we get closer to October 2016, clients do have to consider them. The easy decision is going into 'Govie' funds. But what's the next move? I think clients are going to have to become more serious about segmenting cash. While gates and fees are a very remote situation, if you're a treasurer, you want to eliminate that from any potential outcome. So the obvious thing that I think treasurers are going to have to consider is an SMA because that is truly where you have total control of your liquidity. Is it a $200 billion opportunity? A $500 billion opportunity? That I don't know, but I definitely think SMAs are going to increase."

On the increase in demand, Reisz added, "It's a combination of things. Some investors are looking to earn a little bit more so they are stepping out of money markets. Also, if there is even a remote chance of a fee and a gate, that to a certain extent scares them. Even if there's a low probability, it's still something that they want to avoid. Government money market funds may be the answer for some, but then once rates start to go up there will be a differential. We've seen the step out. But we've also seen the step in, the de-risking in a rising rate environment."

Martucci said ultra short bond funds are well positioned. "Over the next year, this is a time for us to shine. If we can, in this ultra short space, outperform money market funds, or deliver a limited amount of volatility and still outperform over a 3-, 6-month time period, I think, as clients start to consider their alternatives come October 2016, they have to consider this strategy and give it a good hard look."

Carlson added, "I think yields always matter, not as much to some clients as others, but yields matter." Later, he commented, "If you're managing an SMA and it is longer term in nature, if you can't beat the yield on a money market fund, you're doing something incredibly wrong. SMAs benefit from being longer than the typical money market fund, lower quality, and they also have cheaper fees. So from a yield perspective, comparing net yield on your SMA to a net yield on your money market fund -- whether it's a Govie or Prime fund -- it's going to be hard to figure out a time when we're not going to look better than those funds."

Reisz discussed managing risk in the ultra short bond funds. "In managing a strategy like this, you have to careful about what could happen in terms of interest rate volatility. There may be yield seekers, but preserving principle is also going to be important. So that's where you have to think about where you are on the yield curve. Risk management is going to be key." On portfolio holdings, Carlson said, "Everybody's got Treasuries and agencies, then corporates. More and more we're seeing people being accepting of the securitized asset classes and really in the order of: first, asset-backeds; then, mortgage-backeds; and, commercial mortgage-backeds."

Martucci added, "I would agree with that. We're also seeing agency MBS come back into the mix ... and we even see CMBS starting to get more interest." Reisz commented, "We're able to invest in a broad range of sectors. We look to purchase high quality securities that have attractive, risk adjusted returns, but cannot be purchased by money market funds. It is becoming the "New Normal" for liquidity management. If you've done the research and you think that it's a company that's strong fundamentally, it's a way to add some value in the portfolio. But make sure you're well-diversified." He added, "You have to think about the liquidity profile, what kind of volatility it could it create in the portfolio, and then make sure the clients are well aware of that. Make sure they understand what you are buying because ultimately, the client is looking for liquidity and principle preservation and then they are looking for return."

How do they benchmark performance? Carlson explained, "The irony of it is, on the one hand there are a lot of benchmarks out there, but on the other hand, there are very few meaningful benchmarks in this space. For your typical SMA, maybe a year in overall duration and then you've got a very government heavy benchmark so you're really stuck with a 1-year Bill. And if you can't beat the 1-year Bill, you know you've got a real problem. What we find is most of our clients have more than one manager and ultimately the benchmark for anything we do are the other managers -- and we are their benchmark."

Martucci said, "On a quarterly basis we try to outperform a money market fund. If we deliver that, I think clients will be happy with what we're delivering. From a benchmark standpoint, we usually use a Bill-type benchmark, but again I think the opportunity cost really is staying in true cash so I think we have to consider that as we're building portfolios." Reisz added, "We keep is simple. The reason for that is, if as a default we should be protecting principal, then that is where the habitat of the portfolio needs to be. Even if a client is looking for yield, ultimately they're still viewing this as a safe investment -- a short duration portfolio that earns some yield beyond money markets that they can access for liquidity."

On liquidity, Reisz commented, "The depth is down from where it's been. There's less issuance. Treasuries are down about $600 billion from their peak, and agency discount notes are down about $500 billion. On the other hand if you look at short duration credit -- that's up. And the reason for that is that you have a lot of corporates that have been issuing further out the curve and terming out their debt. Even if it is an enhanced cash short duration portfolio, a very large segment of that will be sitting in money market like securities. So we do have a lot a lot of liquidity in our portfolios. The flexibility in the strategy is important as well. Having access to multiple sectors makes a huge difference in terms of liquidity."

He continued, "We're managing open end mutual funds, and that means that liquidity is needed every day. We need to make sure that in our portfolios we have enough to meet any need, and it doesn't matter whether it's a core bond fund, a short duration bond fund, or a money market fund. You still have to think about liquidity.... We are focused on liquidity and we stress test our portfolios [and] individual securities. We look at what could the bid ask spread be in a worst case situation. We're doing it every day and we are always focusing on what's the downside? What's the 'black swan' event? We're always looking at that because the only way you can really raise liquidity is if you're thinking about what are the risks."

Martucci added, "What this naturally does is raise the profile of SMAs. Every week we read about liquidity concerns. If you're a client and you'd rather own your own liquidity, and not be dependent on someone else potentially needing liquidity, that's a positive technical for the SMA space."

Finally, on spreads, Reisz explained, "You've always had a differential, until now, between Prime and 'Govie' and that should start to normalize. Let's say that there are short duration bond strategies that utilize the old money market rules for 90 days as the weighted average maturity -- you might end up picking up another 20 basis points or so. Let's say it's a short duration bond fund that's investment grade, half year duration -- as things start to normalize again you might incrementally pick up a little bit more yield; that could be 30, 40 basis points. If it's a two year duration portfolio, then you're talking about yields that could be in the 1.5–2.0% range just depending on the guidelines. Again, you have to communicate with clients and just make sure that they understand that. Sure you're picking up 1.5%, but you could also lose that much over a time period as well."

Experts from the three leading fund rating services addressed some of the concerns and questions that have been out there about money market fund ratings in a session at last month's Money Fund Symposium. The segment, called "Money Fund Ratings Roundtable," was moderated by Crane Data President Peter Crane and featured panelists Rory Callagy, Senior Analyst at Moody's; Roger Merritt, Managing Director of Fitch Ratings; and Peter Rizzo, Senior Director at Standard & Poor's Ratings. The discussion featured a range of issues, including ratings trends, the impact of regulations, and new criteria. (Note: Subscribers and attendees may access the full conference recordings and Powerpoints via our "Money Fund Symposium 2015 Download Center." Crane Data will also be hosting its next conference event, the 3rd annual European Money Fund Symposium Sept. 17-18 in Dublin.)

Rizzo gave some background and recent trends related to money market funds ratings. Historically the demand for MMF ratings has been driven primarily by institutional investors, who have it in their investment guidelines that money must be put into rated funds, said Rizzo. The number of S&P AAA rated money market funds has dropped in recent years from 777 at the end of 2010 to 735 in June 2015, due mainly to industry consolidation, said Rizzo. The amount of assets in rated funds has stayed essentially flat over the time period with $1.693 trillion at the end of 2010 compared to $1.686 trillion at the end of 2014 and $1.588 trillion in June 2015. The bulk of AAA rated fund assets are institutional with 44% of rated funds in Prime Institutional funds, 43% in Government Institutional. Just 5% is in Government Retail, 5% is in Tax-Free, and 3% is in Prime Retail.

Merritt concurs that the demand for AAA rated funds is investor driven. Case in point, he cited a proposal by the European Commission to abolish ratings for money market funds in Europe. "They have since backtracked on that primarily because they heard from corporate treasurer that they value the ratings, they value the third party independent oversight, and in some cases the additional conservatism that comes along with a rated fund," he commented.

Callagy added that from Moody's perspective, the withdrawal of some ratings recently is partly due to the difficult yield environment. "The ratings that we have are predominantly AAA," he said. "As funds have sought more yield or for one reason or another decided that our methodology and the models that we use are too restrictive and they can't maintain the AAA rating, they've moved to withdraw the rating rather than try to operate with the same type of strategy but at a lower rating." But Callagy also cited the growing need for ratings in the space outside 2a-7 money market funds. "That world right outside 2a-7 is not standardized and there are a lot of different strategies, so we think that ratings are actually more relevant in that space. Investors in that space could benefit from the rating agencies views on the different risk that managers are taking."

On the subject of money fund reforms, specifically the floating NAV requirement, Rizzo said it won't change the approach that S&P takes to rating money funds. "We view the floating NAV as a neutral rating factor. We expect to continue to apply our methodology as is. We believe that despite the requirement for some funds to float NAV, fund managers will still likely aim to minimize share price fluctuations. So, we would continue to apply our 0.25% deviation for the AAAm rating," stated Rizzo. Merritt concurred, adding, "We rate constant NAV and variable NAV funds under the same global criteria for money funds. We're focused on the risk attributes of the portfolio in terms of credit market and liquidity risk and not as concerned about the accounting convention."

Callagy discussed the outlook that Moody's gave the MMF industry for 2015. "Every December we put an outlook out on the money market fund industry, and it's what we believe the conditions will be like over the next 12 to 18 months. I think saying that it's negative is probably not too far off. We've heard a lot about the challenges on the supply side, the reform side, and potential change in interest rate policy and how that makes it challenging work for money managers." One positive, he added, has been that Moody's new bank rating methodology has had a positive impact on money market fund credit and stability profiles.

Merritt spoke about the criteria Fitch uses to rate money market funds. "The nice thing about money funds, and why they've been so successful, is they are pretty simple to understand, simple to analyze. You have three pillars -- credit risk, liquidity risk, and market risk. At different points in time, the industry or a particular fund is going to be in a different set of stresses so you may be emphasizing one over the other at any given point in time."

Callagy cited a similar framework, but added, "One of the things that we look at is not just absolute liquidity, but liquidity relative to your top three shareholders. We think that's important because it shows you'll be able to meet those redemptions if they were to redeem. We think that that's a good metric. The other metric or a model that we use that gets a lot of attention is our NAV stress model. The result is very helpful to us because in our opinion it provides a nice relative ranking of the funds exposure and market risk -- as a result of that we can differentiate between funds."

Fitch made its last change in criteria in 2010, just ahead of the first round of SEC reforms, explained Merritt. "Much of what we put in place dovetailed pretty well with what the SEC ultimately was looking for -- mandatory liquidity buckets, a tighter ratings framework in general based on some of the lessons learned from the crisis. For the most part it's remained relatively stable," he said.

Rizzo was asked about S&P AAAm ratings and the prohibition against A-2 counterparties, even with repo collateralized with Treasuries. He explained, "The issue is Tier 2, A-2 exposures in AAAm rated funds. At this point we believe that an A-2 risk or Tier 2 risk is inconsistent with AAAm rated funds. We hold 'AAAm's to a high standard. We understand if the supply of A-1s decreases that poses challenges. We've solicited feedback. We're hearing what the market has said. But at this point that's the risk profile we believe is consistent for the AAAm rated funds. We are evaluating whether collateralized A-2 is something that could be considered for AAA, but at this stage that's the profile."

Crane brought up that JP Morgan recently cancelled ratings for a few of their funds, but he wasn’t aware of any others that have followed suit. "I think it's reflective of the difficult supply environment that managers are really straightjacketed in what they can do," he said. (See also Crane Data's May 20 "News", "JP Morgan Streamlines AAA Ratings on Money Funds; Lux Current Yield.")

With the October 2016 implementation of the pending money fund reform rules a little over a year away, money market fund managers have been busy this year making plans to adapt to the new environment. We have reported extensively on the announcements that have come to our attention over the past six months, including the most recent, this week's announcement by Deutsche and filings from State Street. Of the 20 largest money market fund complexes, almost all have issued updates, including the 5 largest -- Fidelity, JP Morgan, BlackRock, Federated, and Vanguard. Only 4 of the top 20 companies have not made their plans known publicly, including Northern, BofA, Franklin, and American. Here is a recap of the changes announced so far, including links to our original "News" stories.

First, we look at the changes from the top 5 firms (based on assets). 1. Fidelity will shift about $130B from Prime Retail to Government, including the world's largest money market, Fidelity Cash Reserves, and will merge MMFs with similar strategies. The company has not yet commented on its plans for Institutional MMFs, but an Operational Update issued on April 14 revealed some details, including some new share classes for some existing funds.

2. JP Morgan said JP Morgan Prime, the largest Institutional Prime fund, will remain as such and will be subject to Floating NAV, while JP Morgan Liquid Assets will shift to Retail. JPM's release is one of the few to detail which funds will be retail and which will be institutional among its lineup. 3. BlackRock said its largest money market fund, TempFund, will remain a Prime Institutional fund, subject to floating NAV. The Prime Institutional $2.4B TempCash will remain Prime Institutional, but will be converted to a 7-day maximum maturity fund while some Muni funds will also be converted to 7-day funds. Also, some Prime Retail funds may be converted to Government funds, although no details have emerged yet.

Also, 4. Federated will convert some of its Prime Institutional Funds to 60-day maximum maturity funds. Details on which funds or amount of assets converted have not been released. In June, Federated issued a second update, announcing it will have 6 Prime Retail and Muni funds and will merge away 7 funds, including 3 Retail and 4 Government funds. 5. Vanguard's announcement says that it won't offer any Prime Institutional or Municipal floating NAV funds but instead will be pure Retail. Specifically, Vanguard Prime MMF will be designated a Prime Retail fund with the Institutional Shares being changed to Admiral (retail) Shares. Also, it reopened its Federal MMF, designated 6 muni funds as retail, and renamed the Vanguard Admiral Treasury Fund the Vanguard Treasury MMF.

Here is what the 6-10 largest MMF managers have announced. 6. Dreyfus is considering offering 60-day maximum maturity Prime Institutional funds. Dreyfus will offer all types of money funds and same-day settlement on floating NAV MMFs. 7. Charles Schwab will not implement fees and gates on its government, and will have a range of options, including Floating NAV funds. A spokesperson for Schwab tells Crane Data, "We are committed to providing our clients a wide array of choices in how they manage their portfolios. Clients in Prime or Municipal MMFs who will be eligible for "Retail" funds and who continue to meet Schwab's MMF Sweep Feature criteria will stay in the Cash Feature they have selected.... You should expect to see filings designed to ensure all of our existing Prime and Municipal funds remain "Retail," as well as filings for new "Institutional" funds, as appropriate."

8. Goldman Sachs said it will start complying with the new definition of Government MMFs early, converting 4 Government MMFs to the 99.5% requirement. It also said it won't have fees and gates. 9. Morgan Stanley won't impose fees and gates on government funds, and anticipates adapting its current funds to the new rules. However, the company is planning on developing new products that meet the needs of investors in this space. 10. Wells Fargo designated which funds will be Institutional, Retail, and Government. It is also working on new products and won't impose fees and gates on Government Funds.

Next, we summarize the plans for the 11th through 15th largest money fund managers. 11. Northern. No announcement yet. 12. SSgA won't impose fees and gates on government funds, and the flagship State Street Institutional Liquid Reserves, a Prime Institutional fund, will adapt to reforms and offer the floating NAV. State Street also filed with the SEC to launch 3 new money market funds, including a 60-day maximum maturity fund, and 3 new ultra short bond funds, including one that looks like a money fund in disguise. 13. Invesco won't implement fees and gates on its Government Funds. 14. BofA Funds. No announcements yet. 15. Western Asset Management will adapt funds to new requirements, but won't have fees and gates on Government funds. It will also launch two Short-Term Bond Funds.

We also briefly look at the 16th through 20th largest MMF managers. 16. First American won't impose fees and gates on Government Funds and is also considering developing 60 day funds and Private funds. 17. UBS won't impose fees and gates on its Government funds. But it will have full roster of funds, including FNAV funds. It is working on Private Funds, SMAs, and Ultrashort Bond funds. 18. Deutsche Asset and Wealth Management will convert 5 Prime Institutional portfolios into Government funds and will keep just one Prime Institutional Fund, the $113 million Deutsche Variable NAV Money Market Fund. It will also offer Retail funds, Separately Managed Accounts, and is considering new products as well. 19.Franklin. No announcement yet. 20. American Funds. No announcement yet.

Finally, the SEC reforms have prompted several managers to get out of the money fund business, including Reich & Tang, which sold its MMF assets to Federated; Touchstone, which sold the bulk its MMF assets to Dreyfus and Federated; and Alpine, which announced its liquidation in March.

Deutsche Asset & Wealth Management is shifting the vast majority of its Prime money market funds to Government funds as part of its money fund reform reorganization plans, the company announced Monday in a press release entitled, "Deutsche Asset & Wealth Management Announces Intended Plans for Money Market Fund Reform." In short, Deutsche will convert 5 Prime Institutional portfolios into Government funds, including Cash Management Fund; Cash Reserves Fund Institutional; Deutsche Money Market Series; Deutsche Money Market VIP; and Prime Series of Cash Reserve Fund, Inc. It will keep just one Prime Institutional Fund, the $113 million Deutsche Variable NAV Money Market Fund. Deutsche is the 18th largest money market fund manager with $31.2 billion in assets, and $55.8 billion in global MMF assets. It will also offer Retail funds, Separately Managed Accounts, and is considering new products as well.

The release explains, "Deutsche Asset & Wealth Management (Deutsche AWM) today announced its intended plans to ensure that Deutsche Money Market Funds are fully compliant with the new regulations adopted by the Securities and Exchange Commission (SEC) with regard to money market funds ahead of the compliance date of October 2016. As a leading asset and wealth manager and provider of liquidity management services, Deutsche AWM plans to offer a full array of money market funds for both institutional and retail investors that comply with the amendments to Rule 2a-7. In addition, Deutsche will continue to offer customized separate account and insured deposit capabilities."

Joe Benevento, Head of Cash Management for Deutsche AWM, comments, "We are proud to continue our legacy as an industry leader and fiduciary for our clients in liquidity management, and we expect that regulatory reform will also create client demand for additional innovative services.... We are committed to our investment process and will continue to work with our clients to discuss their individual needs and seek solutions to help them."

The Deutsche release continues, "As part of its overall plan, Deutsche AWM will continue to offer the Deutsche Variable NAV Fund, which was launched in 2011. The fund operates as a money market fund in compliance with Rule 2a-7 and provides institutional investors with daily liquidity while valuing its portfolio securities using market based factors. This floating NAV prime fund has a track record of over four years. Deutsche AWM was a pioneer in developing and building experience operating a same day liquidity floating NAV money fund."

The company provided further details in an accompanying release, "Deutsche AWM Money Market Fund Reform Update." It says, "Deutsche Asset & Wealth Management (Deutsche AWM) is working closely with the Board of the Deutsche Money Market Funds to ensure that our money market funds are fully compliant with the amendments ahead of the final compliance date of October 14, 2016."

The Update tells us, "Deutsche AWM expects to offer the following 6 investment solutions for cash investors: 1. Institutional Prime Money Market Funds: Deutsche AWM will continue to offer the Deutsche Variable NAV Money Fund.... 2. Government Money Market Funds: Deutsche AWM currently offers two funds that invest exclusively in government securities: (i) Treasury Portfolio, a series of Investors Cash Trust; and (ii) Government & Agency Securities Portfolio, a series of Cash Account Trust. Deutsche AWM plans for each of these two funds to continue to operate as a "government money market fund" under amended Rule 2a-7."

On the Prime to Government conversions, it says, "In addition to the funds listed above, Deutsche AWM recommended, and the Board of each fund approved, subject to shareholder approval, that the following prime funds revise their investment policies and operate as government money market funds ... prior to October 14, 2016: Cash Management Fund; Cash Reserves Fund Institutional; Deutsche Money Market Series; Deutsche Money Market VIP; and Prime Series of Cash Reserve Fund, Inc. Additionally, the Deutsche government money market funds currently do not intend to impose liquidity fees or gates. If a government money market fund were to elect to have the ability to implement liquidity fees or gates in the future, the fund would provide shareholders with prior notice."

Deutsche's potential solutions also include: "3. Retail Money Market Funds: Prior to October 14, 2016, Deutsche AWM plans to offer the following retail money market funds: Deutsche Money Market Prime Series; Tax-Exempt Portfolio, a series of Cash Account Trust; and Tax Free Money Fund Investment. These funds intend to adopt policies and procedures reasonably designed to ensure that only natural persons are invested in the fund. As prime or tax-exempt, these funds will be required to have the ability to implement liquidity fees and gates under certain circumstances by October 14, 2016."

They continue, "4. Separately Managed Accounts (SMA): As part of our holistic approach to meeting the unique investment needs of cash investors, Deutsche AWM will continue to leverage the strength of its broad global investment platform to offer customized solutions (i.e. SMAs) to clients that typically have known time horizons, risk tolerances and targets for yield and liquidity. This service is typically suitable for certain institutional and high net worth investors for cash that they would consider core."

Deutsche adds, "5. Deutsche Bank Insured Deposit Program (IDP): Deutsche AWM will continue offering the IDP as a means of aligning intermediaries and depository institutions while serving as a complement to an investor's liquidity needs. The IDP enables financial intermediaries to provide individuals, municipalities and corporations the benefit of extended FDIC insurance. Leveraging our proprietary deposit management system, the program provides financial intermediaries with a capital efficient means to deliver pass-thru deposit insurance for all clients -- regardless of account type -- while creating a stable, diverse and cost-effective deposit base for a growing network of member banks."

Finally, the list of solutions includes: "6. New Solutions and Services: We expect that the amendments to Rule 2a-7 and other regulatory changes will create client demand for new and innovative services. We continue to work with our clients to discuss their needs and design solutions to address them."

State Street filed with the Securities & Exchange Commission last week to launch 3 new money market funds and 3 new ultra-short, "enhanced cash" bond funds, we first learned from mutual fund publication, ignites. A search of the SEC EDGAR database filings shows that State Street Institutional Investment Trust filed Form N-1A Registration Statements on July 15 for the new State Street 60 Day Money Market Fund, State Street Institutional Liquid Assets Fund, and State Street Cash Reserves Fund. The 3 new bond funds are State Street Ultra Short Term Bond Fund, State Street Current Yield Fund, and State Street Conservative Income Fund." (See also our recent "News" articles, June 15 "SSgA Says State Street ILR Will Float, Defends Gates, Fees," and June 19 "SSgA White Paper Calls for Cash Bucketing, Short-​Duration Bond Funds.")

The filing for State Street 60 Day Money Market Fund says, "Although the Fund is a money market fund, the net asset value ("NAV") of the Fund's shares will "float," fluctuating with changes in the values of the Fund's portfolio securities. The Fund typically accepts purchase and redemption orders multiple times per day, and calculates its NAV at each such time. The Fund attempts to meet its investment objective by investing primarily in a broad range of short-term, high credit quality money market instruments. Under normal circumstances the Fund invests at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in instruments with remaining maturities of 60 days or less."

State Street Institutional Liquid Assets Fund's filing explains, "Although the Fund is a money market fund, the net asset value ("NAV") of the Fund's shares will "float," fluctuating with changes in the values of the Fund's portfolio securities. The Fund typically accepts purchase and redemption orders multiple times per day, and calculates its NAV at each such time. The Fund attempts to meet its investment objective by investing in a broad range of money market instruments. These may include U.S. Government securities (including U.S. Treasury bills, notes and bonds and other securities issued or guaranteed as to principal or interest, as applicable, by the U.S. government or its agencies or instrumentalities); certificates of deposit and time deposits of U.S. and foreign banks; commercial paper and other high quality obligations of U.S. or foreign companies; asset-backed securities, including asset backed commercial paper; mortgage-related securities; and repurchase agreements. These instruments may bear fixed, variable or floating rates of interest or may be zero-coupon securities." The fund will have the following share classes: Premier (0.12% expense ratio), Institutional (0.15%), Investor (0.20%), Administration (0.37%), and Investment (0.47%).

The filing for the retail State Street Cash Reserves Fund says, "The Fund is a money market fund and seeks to maintain its net asset value ("NAV") at $1.00 per share, although there can be no assurance that it will be able to do so. The Fund attempts to meet its investment objective by investing in a broad range of money market instruments. These may include U.S. Government securities (including U.S. Treasury bills, notes and bonds and other securities issued or guaranteed as to principal or interest, as applicable, by the U.S. government or its agencies or instrumentalities); certificates of deposit and time deposits of U.S. and foreign banks; commercial paper and other high quality obligations of U.S. or foreign companies; asset-backed securities, including asset backed commercial paper; mortgage-related securities; and repurchase agreements. These instruments may bear fixed, variable or floating rates of interest or may be zero-coupon securities."

State Street Ultra Short Term Bond Fund's new filing explains, "The State Street Ultra Short Term Bond Fund seeks to achieve its investment objective by investing in a diversified portfolio of U.S. dollar denominated, investment grade fixed income securities. Under normal circumstances, the average effective duration of the Fund is expected to be one year or less. Effective duration is a measure of the expected sensitivity of market price of an investment to changes in interest rates, taking into account the anticipated effects of structural complexities (for example, some bonds can be prepaid by the issuer). Generally, the longer a portfolio's duration, the more sensitive its value will be to changes in interest rates." The fund will offer Institutional shares at a 0.35% expense ratio and Investment with 0.67% in expenses.

The filing for the new State Street Current Yield Fund, which appears to be a bond fund run like a money fund (but not an MMF), says, "The State Street Current Yield Fund seeks its investment objective by investing in investment grade quality, short-term instruments. The Fund invests in many of the types of instruments in which a money market fund may invest, but without many of the same credit and other limitations that apply to a money market fund. The Fund is not a money market fund, and its net asset value per share will fluctuate. Under normal circumstances the Fund pursues its investment objective by investing in instruments with a remaining maturity of 90 days or less. These may typically include U.S. Government securities (including U.S. Treasury bills, notes and bonds and other securities issued or guaranteed as to principal or interest, as applicable, by the U.S. government or its agencies or instrumentalities); certificates of deposit and time deposits of U.S. and foreign banks; commercial paper and other high quality obligations of U.S. or foreign companies; municipal commercial paper; asset backed commercial paper; and repurchase agreements. All of the Fund's investments will be denominated in the U.S. dollar."

Finally, State Street Conservative Income Fund's filing says, "The State Street Conservative Income Fund seeks its investment objective by investing principally in debt instruments. The Fund invests in many of the types of instruments in which a money market fund may invest, but without many of the same credit, maturity, and other limitations that apply to a money market fund. The Fund is not a money market fund, and its net asset value per share will fluctuate. The Fund's investments may include among other things U.S. Government securities (including U.S. Treasury bills, notes and bonds and other securities issued or guaranteed as to principal or interest, as applicable, by the U.S. government or its agencies or instrumentalities); certificates of deposit and time deposits of U.S. and foreign banks; commercial paper and other high quality obligations of U.S. or foreign companies; municipal securities; asset backed commercial paper; and repurchase agreements. All of the Fund's investments will be denominated in the U.S. dollar. The Fund intends to limit its weighted average maturity (taking into account interest rate adjustments) to 90 days and its weighted average life (maturity without regard to interest rate readjustments) to 250 days. The Fund will not purchase securities with more than 2 years to maturity."

In other news, ignites wrote early last week, "Bents Sue Reich & Tang for $80M Over Deal Gone Bad." The story says, "Three years after being cleared of fraud charges leveled by the SEC over their management of the failed Reserve Primary money market fund, Bruce Bent and his son are back in court. But this time the Bents are the plaintiffs, accusing Natixis affiliate Reich & Tang of failing to make royalty payments on the FDIC-insured cash management business it bought from them in 2011 . Two companies run by the father and son -- Double Rock Corp. and Island Intellectual Property -- have sued Reich & Tang in New York Supreme Court for breach of contract and more than $80 million in damages. The Bents also claim that Reich & Tang "fraudulently induced" the sale of their cash management business for "a fraction of the true value" by promising that the firm would make periodic payments for licensing patents held by Island Intellectual Property and then failing to do so."

The ignites piece adds, "Bent Sr. is known as the inventor of money market funds, and both men are known for their role in the 2008 collapse of the Reserve Primary Fund, which broke the buck at the height of the financial crisis. The SEC alleged that the two executives lied to investors, independent trustees and rating agencies about their intentions of supporting the Primary Fund amid redemptions in September 2008. A jury cleared the Bents of fraud in 2012." In April of this year, Reich & Tang sold their money fund business to Federated.

"What would you do with a trillion dollars?" That was the question from conference host Peter Crane that kicked off the session called "Government and Treasury Money Fund Issues" at last month's 7th Annual Money Fund Symposium in Minneapolis. Government money funds are poised to pick up hundreds of billions of dollars in assets come October 2016 when SEC reforms go live. Some say it could be as high as a trillion when you factor in money migrating from Prime money funds and bank deposits, both of which face new regulations. Government money market fund portfolio managers Michael Bird of Wells Fargo Advantage Funds, and Susan Hill of Federated Investors, shared their thoughts on the "Govie" Fund space. The session was moderated by Citigroup Fixed Income Strategist Andrew Hollenhorst and featured Jonathan Hartley of the Federal Home Loan Banks-Office of Finance. Also, we report on the challenges and opportunities in the Tax-Exempt money fund space from the session, "Muni & Tax Exempt Money Fund Issues," featuring Colleen Meehan of Dreyfus, John Carbone of Vanguard, and Isaac Fine of Fidelity Management and Research. (Note: Next year's Money Fund Symposium will be June 22-24, 2016, in Philadelphia, but we'll be hosting our next European Money Fund Symposium in two months, Sept. 17-18, 2015, in Dublin.)

In the Symposium "Government" fund session, Hollenhorst talked about the possible flows into the space. "I don't think anyone has a good number on the amount of demand that we will see for government securities, but we expect that it will increase substantially. All we can do at this point is try to ballpark what the potential demand will be. It's ultimately the end user, investors in money funds, that will determine what that demand is. We can't know what it will be until we see what they decide to do. Initially, the discussion was around outflows from Prime Institutional because of the floating NAV, but a lot of the concern has shifted to the gates and fees portion of the money fund reform rather than the floating NAV. So maybe we'll see less from Prime but what caught some of us by surprise is the potential flows out of the retail space."

Hollenhorst continued, "When you do surveys of corporate institutional buyers of money find shares you get a number like 50%, in terms of who is thinking about moving cash. So apply 50% of the institutional prime and you get to a number like $450 billion. If you think there's some outflow from retail prime that number could be even higher. Another potential inflow into government funds could come from bank deposits. Some large banks announced that they're trying to reduce deposits on their balance sheet by as much as $100 billion, that's just one bank. If you apply the same ratio of the deposit reduction that we heard from that one bank to the rest of the large banks you could also get to a number like $400 billion. I'm not claiming that we're going to see $850 billion in new demand, but I think we have to admit the possibility that we'll see hundreds of billions of flows into this space."

Hill doesn't know how much money will flow into Govie funds, but there is another question. "It's not so much how much comes over, it's how it gets there. If it comes all at once in October 2016, and in big amounts, the front end is going to be stressed. That's probably a bad scenario, but I don't think that's how it's going to happen. We have had open dialogues with our clients so as we get closer to that date we will have an idea of where they want to go and how to get them there. The dollar amount? Your guess is as good as mine. We're hoping that it's not at the extreme of what's been discussed."

The panelists discussed the importance of the Fed's reverse repo facility. Said Hill, "How big does this facility need to be in light of the potential shifts? It needs to be potentially large enough on a daily basis to remove the concern about whether you can get invested." In other words, it needs to be large enough to handle the amount of expected demand. "Obviously it can't be a permanent part of the market and it should be here only as long as it's needed. It needs to be there and it could be needed for a more extended period of time."

Bird commented, "My hope is that when lift-off takes place, it become an unlimited facility and they fully remove the cap. Then maybe adjust it from there based on the usage." He added, "We're hoping that it's going to be around for a number of years, but we do know that at some point it is probably going to go away. So we've begun taking steps to define what's being called non-traditional repo counterparties to expand our direct repo base." In terms of flows, Bird added that while moving from Prime to Govie might be an easy choice now given the small difference in spreads, that could change. "Sixteen months down the road it may be a more difficult choice for them if we see the spread between yields in Prime and Government funds increase."

On Treasury Bill supply, Bird said, "It's going to be a tough environment for the bill market, as we see rates go higher. For those [Treasury-only] funds that can only invest in that product, it's probably going to take a little longer than say a prime fund or a government fund for you to see those yields start to increase." In other words, the spreads between Government and Treasury-only funds could widen. Hill explained, "As we move into the new world, you'll see these Treasury-only funds lag a little bit. You may see more investors look at that alternative if it's a higher yield."

Bird added, "If we're talking about the migration of prime funds potentially into government and treasury funds as we get into the compliance phase of reform, Prime investors already have that risk tolerance to be in a prime fund, and they're comfortable with the credits in the repos. They really shouldn't have much of a problem moving into a Government fund and overlooking the Treasury-only and Treasury plus funds. I think most of the attention in terms of the migration will be towards the Government funds as opposed to the Treasury funds."

In the Muni money fund session, Meehan talked about the ramifications of money fund reforms on the market. "From a market perspective going forward, I think that we are going to mirror the taxable market in the demand for short term highly liquid product, which is the VRDN space. It is going to be very strong, and that's going to keep the rate on the short end very low." She added, "An item that people have been talking about is 60 day and in funds. I think we will see that in the muni space, but I also think we will see 7 day funds." Just as in the taxable space, they will have to be marketed as a floating NAV fund, she said, "But because of that reset mechanism that is in place for those securities, that product will always be priced at par <b:>`_."

Finally, Meehan commented, "Investors have not been in tax exempt funds for the last several years for tax free income. The reason they're in these funds is for diversification. How can we help our clients maintain high quality liquid assets with minimal disruption? I think investors should include muni funds in their overall picture for diversification and also, when we come out with some of these products, to minimize their dependence on government funds going forward." She added, "What keeps me up at night? The lack of understanding of some of these changes that are coming. Our job is to educate our clients to make sure that we're providing our clients with the necessary information and the necessary fund lineup to meet their needs."

The Federal Reserve Bank of New York announced that it was making some changes to the Federal Funds rate last week in a release entitled, "Statement Regarding the Calculation Methodology for the Effective Federal Funds Rate and Overnight Bank Funding Rate." In February, the NY Fed announced plans to enhance the effective federal funds rate calculation process by "transitioning the data source from data supplied by federal funds brokers to transaction-level data collected from depository institutions in the FR 2420 Report of Selected Money Market Rates." Also in February, the New York Fed also announced a new overnight bank funding rate (OBFR) that's calculated based on both federal funds transactions and the Eurodollar transactions of U.S.-managed banking offices, as reported in the FR 2420. The new release says, "As part of the preparation for these changes, the methodology for calculating the EFFR was reviewed to determine if enhancements could be made to provide a more robust measure of trading conditions in the federal funds market."

The statement continues, "Analysis conducted as part of the review suggested that changing the calculation of the EFFR to a volume-weighted median -- the rate associated with transactions at the 50th percentile of overnight transaction volume -- would have a number of advantages relative to the current practice of using a volume-weighted mean. As noted in the minutes of the June 2015 Federal Open Market Committee (FOMC) meeting, the results of the review were discussed with the FOMC, and the New York Fed will implement this change to the calculation methodology concurrently with the change in data source to the FR 2420. The OBFR will also be calculated using a volume-weighted median when publication commences. The change to a volume-weighted median for the EFFR and publication of the OBFR are expected to be implemented in the first few months of 2016, after revisions to the FR 2420 data collection are complete and the reported data are well-established."

The Fed statement explains, "As noted in the February statement, the Desk will announce a specific implementation date and additional information closer to the effective date of the changes. For both the EFFR and OBFR, use of a volume-weighted median is expected to enhance the resilience of the calculated rates to various measurement issues. Under most circumstances the volume-weighted median and volume-weighted mean measures are expected to result in similar levels for these rates. No inferences should be drawn about changes to the stance of monetary policy from the implementation of this revision."

Finally, it adds, "In order to provide insight into the attributes of the volume-weighted median, a technical note is being issued concurrently with this statement. This technical note discusses the historical relationship between the two central tendency measures and provides analysis that supports the choice of the volume-weighted median."

In his weekly Short-Term Fixed Income update, JP Morgan Securities' strategist Alex Roever comments, "The first change will redefine the rate as a volume-weighted median of Fed funds transactions instead of the volume-weighted mean. The second change will replace the data source that the Fed uses to calculate Fed funds. Instead of using brokered Fed funds transactions data, the Fed will source data from FR2420, which currently collects various money market rate information, including Fed funds transaction-level data, from a large set of domestic banks and agencies of foreign banks operating in the US. The changes are set to take place in early 2016."

Roever continues, "Broadly speaking, the amendments to the Fed funds calculation methodology will produce a rate that is going to be less volatile, more stable and represent a much more accurate and comprehensive picture of the Fed Funds market. We have commented previously that the existing Fed funds market is somewhat dysfunctional since banks have less need to borrow funds overnight, as they are flush with reserves and discouraged from borrowing short-term. Volumes have shrunk, and remaining transactions are concentrated among a smaller set of buyers and sellers, exposing the rate to increased volatility. Furthermore, the Fed funds effective rate has historically only relied on transactions conducted via Fed funds brokers and ignored Fed funds transactions that are directly negotiated between counterparties to calculate the rate."

In another recent commentary, "Confidence Contagion and the Fed's Headache," Barclays strategist Joseph Abate writes, "We suspect that a Greece- or China-related financial shock to US money markets -- if one occurs -- would share some similarities with the 2011 sovereign debt crisis. The 2011 flare-up began as a confidence shock that rippled through money funds and eventually spilled over into the real economy as a reduction in financing for non-financial and non-EU firms. Even though money fund had no direct exposure to Greece in 2011, media reports linked Greek debt to money fund holdings of French bank paper. In May 2011, French bank exposure in money funds was indeed large at $233bn or nearly 10% of the industry's holdings. Nervous investors immediately began pulling their money out of prime funds -- and within 6m, prime fund balances fell by $210bn or 13%. Approximately half of the $210bn leaving prime funds in the summer and fall of 2011 shifted into lower risk government-only funds. The balance migrated into bank deposits at large US institutions that at the time were covered by unlimited deposit insurance from the FDIC."

He continues, "We see some similarities between 2015 and 2011, although in important ways the starting conditions are different today. Money funds still hold no Greek paper. But money fund holdings of French bank paper have increased significantly since December 2011 -- rising to $211bn and are just slightly off their 2011 peak. Similarly, money fund holdings of European paper (both secured and unsecured) are about as large today as they were in 2011 (at about $350bn). But, unlike 2011, most of the exposure to Greece is held by large official institutions such as the IMF, ECB, and euro zone governments so there is little room to link it indirectly to money fund holdings of European bank debt. Money funds hold just $32bn in SSA paper -- mostly from institutions in the Netherlands or in Germany. Moreover, a significant portion of the paper has explicit government guarantees. Finally, money fund exposure to Chinese institutions is very low at just $6bn, despite its notable growth since 2011."

He notes, "Clearly, predicting swings in investor confidence is tricky -- especially given the money fund investor base's well-documented risk aversion and propensity to flee. Thus, while the fundamentals of money fund holdings are quite different today, we judge there is still a risk of a confidence shock that precipitates a 2011 exodus from prime funds. Given the potential for a confidence shock, are there any leading indicators worth watching? We expect any confidence-driven shock (again, assuming there is one) to quickly show up in two leading indicators of front-end markets: the level of prime fund money fund balances and usage of the Fed's overnight RRP program."

In their latest "Overview, Strategy, and Outlook" Wells Fargo Advantage Funds' Money Market Funds team offered a nice recap of Crane's 7th Annual Money Fund Symposium last month in Minneapolis, focusing on the major themes that came out of the conference -- Fed RRP, Supply, Fund Flows, and Market Liquidity. We also report on a new paper from Fitch Ratings called "Cash Management: The World Has Changed, Your Investment Guidelines Should, Too," which highlights the importance of reviewing investment guidelines, particularly the use of ratings agencies. The Wells team, led by Jeff Weaver, Head of Money Funds and Short Duration Strategies, writes, "In late June, more than 500 industry professionals descended on Minneapolis for the seventh annual Money Fund Symposium, sponsored by Crane Data. This is the largest conference aimed at money market fund portfolio managers, credit analysts, investors, servicers, issuers of money market securities, and others involved in the money market fund industry."

Wells tells us, "As we noted in 2014, the common takeaway from last year's conference was an underlying current of frustration over continued low interest rates, a lack of conclusion to the regulatory reform process, and the lack of supply of investable assets. This year, the atmosphere seemed to be more workmanlike, for lack of a better term, because many issues seemed to have been resolved. Now that we're past the biggest hurdle -- issuance of the new 2a-7 rules for money market funds from the Securities and Exchange Commission -- the focus is on compliance and implementation; there were several panels dealing with these subjects alone. Also different from last year, we are on the precipice of the U.S. Federal Reserve (Fed) beginning to tighten and normalize interest rates; this is a welcome development to yield-starved investors, and the prospect of ending this six-and-a-half-year-long drought left some giddy with anticipation."

They touched on the major themes from Symposium, writing, "Two themes remained in common from last year and will likely be the subject of much discussion in the future as well: the role of the Fed's reverse repurchase agreement (RRP) facility and the ongoing and lamentable lack of supply. In reality, the two may remain linked for some time because there is no general consensus on how long the facility will remain in place or how large it will be. Opinions on the subject range from it becoming a permanent, full-allotment facility that is prepared to absorb any excess demand for government securities to the opposite extreme of remaining capped at its current size and being wound down shortly after the Fed starts its tightening cycle. The actual outcome probably lies somewhere in between the two scenarios, with the Fed lifting the cap to facilitate lift-off, providing abundant liquidity to ensure rates behave as it intends, and then winding down the facility over time."

Further, Wells says, "And two new themes emerged: the size of funds flowing from the prime and banking sectors into the government sector and what that would do to yields and an emerging lack of liquidity in some markets due to regulatory reform and demand for government instruments. The size and timing of cash flows to government funds depends on many factors, not the least of which are the overall level of interest rates and the comfort investors have with not only a variable net asset value but also the concept of fees and gates and when, or even if, they would be imposed. Liquidity, or the lack thereof, will also bear ongoing scrutiny, as it, too, will be affected not only by the size of cash flows to government funds but also by global issues that spur a flight to quality or affect the relative attractiveness of these securities to investors in countries where securities trade at negative rates. To the extent that those pressures ease, there may be some increase in liquidity."

WAMs were also discussed. Wells comments, "One of the many topics covered at the Crane conference was that prime money market fund portfolios continued to shorten their weighted average maturities (WAM). According to Crane Data, the WAM of institutional prime funds dropped from 38 days at the end of March to 34 days in June. This decline seems partially related to the projection of future Federal Open Market Committee (FOMC) activity and the risk premium being built into the market for future rate hikes. While the overall tone of the Fed's statement at the conclusion of its June meeting was a bit dovish, it is the near-term expectations of a Fed in play that has moved some money market rates."

Finally, they add, "The shortening of WAMs has prompted issuers to react by increasing yields (and spreads) in an effort to obtain longer term funding for liability management and regulatory reasons. It is not our strategy to position our portfolios to time possible interest-rate changes; rather, we focus on the goal of being adequately compensated for investments in any tenor we select. Consequently, our focus on preservation of capital by investing in high-quality securities and maintaining a high degree of liquidity is unchanged. We believe we are properly positioned to adjust quickly to changing market conditions as well as maintain our commitment to our twin objectives of liquidity and stability of principal."

The Fitch paper looks at investment guidelines and the use of ratings. It says, "Treasurers and cash managers face a daunting set of challenges due to post-crisis regulatory and market changes. They need to not only understand the impact of these challenges, but also to evolve by undertaking a strategic re-assessment of how they manage cash and updating their investment guidelines accordingly. As corporate treasurers update their firms' investment guidelines to reflect the new realities of money fund reform, Basel III, and cash segmentation, the use of ratings in the investment policy also warrants a review. Best practices at industry leaders dictate an approach that takes into account all of the 'big three' global rating agencies (Fitch Ratings, S&P, and Moody's). Legacy investment policies that only rely on one or two rating agencies are out of sync with the market and restrict cash managers from accessing certain segments of the markets. The use of credit opinions from all three agencies to inform investment decisions is the norm for sophisticated financial players."

Fitch adds, "The financial crisis fostered major changes in rating coverage by the three major agencies. Now, there is a relatively wide variation of coverage between the agencies in the various segments of the fixed-income market. Banks and Corporates increasingly carry ratings from two of the three global rating agencies. Analysis shows that since 2009, rating coverage of money market funds also has changed considerably. Moody's and S&P's coverage of money funds has declined. During the same period, Fitch Ratings has substantially increased its rating coverage of money market funds. High-quality money market tranches of U.S. asset-backed securities are another example. 55% of this sector is rated by Fitch and one other rating agency. Therefore, if a corporation's policy excludes Fitch Ratings from their investment guidelines, that investor stands to miss out on a large portion of that market."

Fitch concludes, "As asset managers develop new liquidity products like short term bond funds and private money funds, ratings will be key to these new funds given their lightly regulated nature compared to money funds. Rating coverage of these products may vary by agency. Treasurers should ensure their investment guidelines do not restrict them from evaluating new cash strategies that may be appropriate for their firm's liquidity profile.... Treasury management best practices call for a senior-level review of investment policies on a regular basis, generally annually. The advent of money fund reform combined with other regulatory and market changes makes these reviews -- done in a thoughtful, strategic way -- imperative."

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 late last week. The July edition, with data as of June 30, 2015, shows asset increases for the majority of US money fund complexes in the latest month. However, most fund complexes show losses over the past three months due to steep drops in April. Assets increased by $9.2 billion overall, or 0.4%, in June; over the last 3 months, assets are down $53.3 billion, or 2.1%. But for the past 12 months through June 30, total assets are up $42.2 billion, or 1.7%. Below, we review the latest market share changes and figures. (Note: Crane Data's July Money Fund Portfolio Holdings were released on Friday, and our July Money Fund Intelligence was released last Wednesday.)

The biggest gainers in June were Federated, Fidelity, BofA, UBS, Vanguard, and Dreyfus, rising by $7.1 billion, $5.0 billion, $4.3 billion, $1.8 billion, $1.5 billion, and $1.5 billion, respectively. BofA, JP Morgan, First American, Oppenheimer, and Western had the largest increases over the 3 months through June 30, 2015, rising by $3.2B, $2.0B, $1.1B, $1.0 billion, and $928M, 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 by far with $403.1 billion, or 16.0% of all assets (up $5.0 billion in June, down $333 billion over 3 mos., and down $2.0B over 12 months). Fidelity was followed by JPMorgan's $249.9 billion, or 9.9% (up $367M, up $2.0B, and up $11.6B for the past 1-month, 3-months and 12-months, respectively). BlackRock remained the third largest MMF manager with $205.8 billion, or 8.2% of assets (up $1.6B, down $9.8B, and up $21.5B). Federated Investors was fourth with $200.8 billion, or 8.0% of assets (up $7.1B, down $5.0B, and down $1.2B), and Vanguard ranked fifth with $174.6 billion, or 6.9% (up $1.5B, up $909M, and up $3.8B).

The sixth through tenth largest U.S. managers include: Dreyfus ($166.4B, or 6.6%), Goldman Sachs ($145.6B, or 5.8%), Schwab ($145.2B, 5.8%), Morgan Stanley ($116.9B, or 4.6%), and Wells Fargo ($107.6B, or 4.3%). The eleventh through twentieth largest U.S. money fund managers (in order) include: Northern ($78.8B, or 3.1%), SSgA ($76.8B, or 3.0%), Invesco ($53.9B, or 2.1%), BofA ($50.7B, or 2.0%), Western Asset ($45.0B, or 1.8%), First American ($42.1B, or 1.7%), UBS ($36.5B, or 1.4%), Deutsche ($31.2B, or 1.2%), Franklin ($24.5B, or 1.0%), and American Funds ($15.0B, or 0.6%). Crane Data currently tracks 70 managers, down one from last month.

Over the past year through June 30, 2015, BlackRock showed the largest asset increase (up $21.5B, or 11.6%), followed by Morgan Stanley (up $12.6B, or 12.1%), Dreyfus (up $12.2B, or 7.9%), JP Morgan (up $11.6B, or 4.9%), Goldman Sachs (up $7.0B, or 5.0%), and Franklin (up $6.1B, or 33.1%). Other asset gainers for the year include: Northern (up $4.3B, or 5.8%), Vanguard ($3.8B, 2.2%), BofA (up $3.7B, or 7.9%), First American (up $3.1B, or 8.0%), and Western (up $3.1B, 11.8%). The biggest decliners over 12 months include: Schwab (down $12.9B, or -8.2%), SSgA (down $7.1B, or -8.5%), Reich & Tang (down $4.6B, or -42.6%), RBC (down $3.6B, or -19.7%), Deutsche (down $3.3B, or -9.4%), Fidelity (down $2.0B, or -0.5%), American Funds (down $1.6B, or -9.6%), T. Rowe Price (down $1.4B, or -8.6%), and Federated (down $1.2B, or -0.6%). (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 (dropping Vanguard to 7), 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 ($409.7 billion), JPMorgan ($379.5 billion), BlackRock ($306.5 billion), Goldman Sachs ($225.5 billion), and Federated ($208.9 billion). Dreyfus/BNY Mellon ($191.6B), Vanguard ($174.6B), Schwab ($145.2B), Morgan Stanley ($134.7B), and Western ($124.1B) 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 July 2015 Money Fund Intelligence and MFI XLS show that yields remained largely unchanged in June, though gross yields again inched higher (as did Prime Inst yields). 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 ticked up to 0.16% (from 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% (same as last month). For the 12 month return through 6/30/15, our Crane MF Average returned 0.02% and our Crane 100 returned 0.03%.

Our Prime Institutional MF Index (7-day) yielded 0.05% (up from 0.04%), 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 yielded 0.01%. The Gross 7-Day Yields for these indexes were: Prime Inst 0.23% (up from 0.22%), Govt Inst 0.13% (same as last month), Treasury Inst 0.08% (same), and Tax Exempt 0.13% (up from 0.11%) in June. 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 1.43% for 10-years. (Contact us if you'd like to see our latest MFI XLS or Crane Indexes file.)

Crane Data released its July Money Fund Portfolio Holdings Friday, and our latest collection of taxable money market securities, with data as of June 30, 2015, shows a big jump in holdings of Repo and a sizable drop in Other (Time Deposits), par for the course for quarter-end. Money market securities held by Taxable U.S. money funds overall (those tracked by Crane Data) increased by $58.3 billion in June to $2.494 trillion (note: we added the huge internal Vanguard Market Liquidity Fund to our collection this month, which inflated the numbers by $51.7 billion). MMF holdings assets increased $31.6 billion in May, but dropped $49.3 billion in April, $19.2 billion in March, and $52.1 billion in February. Repos remained the largest portfolio segment, ahead of CDs. Treasuries stayed in third place, followed by Commercial Paper. Agencies were fifth, followed by Other (mainly Time Deposits) securities, then VRDNs. Money funds' European-affiliated securities represented 19.3% of holdings, down from 28.8% the previous month. Below, we review our latest Money Fund Portfolio Holdings statistics.

Among all taxable money funds, Repurchase agreements (repo) increased $140.5 billion (26.6%) to $667.9 billion, or 26.8% of assets, on the traditional quarter-end spike in Fed RRP usage, after increasing $10.7 billion in May, decreasing $113.6 billion in April and increasing $98.7 billion in March. Certificates of Deposit (CDs) were up $21.8 billion (4.2%) to $502.3 billion, or 20.1% of assets, after rising $10.8 billion in May, jumping $1.7 billion in April, and dropping $37.4 billion in March. Treasury holdings increased $12.5 billion (3.1%) to $421.3 billion, or 16.9% of assets, while Commercial Paper (CP) dropped $10.4 billion (2.7%) to $379.8 billion, or 15.2% of assets. Government Agency Debt increased $24.2 billion (7.3%) to $355.8 billion, or 14.3% of assets. Other holdings, primarily Time Deposits, fell $83.3 billion to $146.9 billion, or 5.9% of assets. VRDNs held by taxable funds decreased by $3.3 billion to $20.2 billion (0.8% of assets).

Among Prime money funds, CDs represent almost one-third of holdings at 32.8% (down from 34.5% a month ago), followed by Commercial Paper at 24.7%. The CP totals are primarily Financial Company CP (14.4% of total holdings), with Asset-Backed CP making up 5.6% and Other CP (non-financial) making up 4.7%. Prime funds also hold 7.6% in Agencies (up from 6.7%), 4.2% in Treasury Debt (unchanged), 11.1% in Treasury Repo, 2.1% in Other Instruments, and 5.0% in Other Notes. Prime money fund holdings tracked by Crane Data total $1.541 trillion (up from $1.520 trillion last month), or 61.8% of taxable money fund holdings' total of $2.494 trillion.

Government fund portfolio assets totaled $458 billion, up from $441 billion in May, while Treasury money fund assets totaled $494 billion, up from $475 billion in May. Government money fund portfolios were made up of 52.2% Agency Debt, 18.7% Government Agency Repo, 3.7% Treasury debt, and 25.0% in Treasury Repo. Treasury money funds were comprised of 68.9% Treasury debt, 30.8% Treasury Repo, and 0.2% in Government agency, repo and investment company shares. Government and Treasury funds combined total $952 billion, or 38.2% of all taxable money fund assets.

European-affiliated holdings fell $222.1 billion in June to $480.1 billion on the quarter-end shift from time deposits to Fed repo (among all taxable funds and including repos); their share of holdings fell to 19.3% from 28.8% the previous month. Eurozone-affiliated holdings decreased $114.9 billion to $263.4 billion in June; they now account for 10.6% of overall taxable money fund holdings. Asia & Pacific related holdings increased by $14.2 billion to $305.6 billion (12.3% of the total). Americas related holdings increased $264.0 billion to $1.704 trillion, and now represent 68.3% of holdings.

The overall taxable fund Repo totals were made up of: Treasury Repurchase Agreements (up $164.5 billion to $438.1 billion, or 17.6% of assets), Government Agency Repurchase Agreements (down $22.3 billion to $142.4 billion, or 5.7% of total holdings), and Other Repurchase Agreements ($87.4 billion, or 3.5% of holdings, down $1.7 billion from last month). The Commercial Paper totals were comprised of Financial Company Commercial Paper (down $6.9 billion to $221.9 billion, or 8.9% of assets), Asset Backed Commercial Paper (up $2.4 billion to $86.2 billion, or 3.5%), and Other Commercial Paper (down $6.0 billion to $71.8 billion, or 2.9%).

The 20 largest Issuers to taxable money market funds as of May 31, 2015, include: the US Treasury ($421.3 billion, or 16.9%), Federal Reserve Bank of New York ($361.4B, 14.5%), Federal Home Loan Bank ($234.8B, 9.4%), Wells Fargo ($70.7B, 2.8%), Bank of Nova Scotia ($61.0B, 2.4%), JP Morgan ($59.5B, 2.4%), RBC ($57.2B, 2.3%), Bank of Tokyo-Mitsubishi UFJ Ltd ($55.5B, 2.2%), Bank of America ($54.1B, 2.2%), BNP Paribas ($51.8B, 2.1%), Toronto-Dominion Bank ($47.7B, 1.9%), Sumitomo Mitsui Banking Co ($44.1B, 1.8%), Federal Farm Credit Bank ($42.6B, 1.7%), Federal Home Loan Mortgage Co. ($42.2B, 1.7%), Credit Suisse ($38.8B, 1.6%), Bank of Montreal ($37.9B, 1.5%), Mizuho Corporate Bank Ltd. ($37.4B, 1.7%), Credit Agricole ($33.3B, 1.3%), Federal National Mortgage Association, ($33.0B, 1.3%), and Svenska Handelsbanken ($32.4B, 1.3%).

In the repo space, the Federal Reserve Bank of New York's RPP program issuance (held by MMFs) remained the largest program with $361.4B, or 54.1%, up from $137.6B a month ago. The 10 largest Fed Repo positions among MMFs on 6/30 include: JP Morgan US Govt ($20.7B), Vanguard Prime MMkt Fund ($14.3B), Fidelity Inst MM MMkt ($14.0B), Fidelity Inst MM Prm ($14.0B), JP Morgan US Govt ($20.7B), Federated Trs Oblg ($13.4B), Morgan Stanley Inst Lq Gvt ($12.7B), JP Morgan Prime MM ($11.5B), Vanguard Market Liquidity Fund ($11.0B), Fidelity Cash Reserves ($10.4B), and Federated Gvt Oblg ($9.0B).

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 ($361.4B, 54.1%), Bank of America ($40.9B, 6.1%), Wells Fargo ($35.8B, 5.4%), JP Morgan ($27.1B, 4.1%), BNP Paribas ($24.2B, 3.6%), Citi ($21.1B, 3.2%), Bank of Nova Scotia ($18.9B, 2.8%), Credit Suisse ($17.3B, 2.6%), RBC ($17.0B, 2.5%), and Goldman Sachs ($12.1B, 1.8%),

The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: Bank of Tokyo-Mitsubishi UFJ Ltd ($49.7B, 5.5%), Sumitomo Mitsui Banking Co ($44.1B, 4.9%), Bank of Nova Scotia ($42.1B, 4.7%), RBC ($40.2B, 4.5%), Toronto Dominion Bank ($36.8B, 4.1%), Wells Fargo ($34.8B, 3.9%), Bank of Montreal ($32.6B, 3.6%), Skandinaviska Enskilda Banken AB ($32.4B, 3.2%), Mizuho Corporate Bank Ltd ($32.4B, 3.6%), and JP Morgan ($32.1B, 3.6%).

The 10 largest CD issuers include: Sumitomo Mitsui Banking Co ($38.1B, 7.6%), Bank of Tokyo-Mitsubishi UFJ Ltd ($36.5B, 7.3%), Toronto-Dominion Bank ($32.9B, 6.6%), Mizuho Corporate Bank Ltd ($31.5B, 6.3%), Bank of Montreal ($30.3B, 6.1%), Bank of Nova Scotia ($30.0B, 6.0%), Wells Fargo ($25.8B, 5.2%), RBC ($20.1B, 4.0%), Canadian Imperial Bank of Commerce ($19.6B, 3.9%), and Sumitomo Mitsui Trust Bank ($18.4B, 3.7%).

The 10 largest CP issuers (we include affiliated ABCP programs) include: JP Morgan ($23.6B, 7.4%), Westpac Banking Co ($18.0B, 5.7%), Commonwealth Bank of Australia ($17.4B, 5.5%), RBC ($15.7B, 5.0%), National Australia Bank Ltd ($13.4B, 4.2%), BNP Paribas ($13.1B, 4.2%), HSBC ($11.2B, 3.5%), Australia & New Zealand Banking Group Ltd ($11.2B, 3.5%), Bank of Nova Scotia ($10.9B, 3.4%), and Bank of Tokyo-Mitsubishi UFJ Ltd ($8.9B, 2.8%).

The largest increases among Issuers include: Federal Reserve Bank of New York (up $223.8B to $361.4B), Federal Home Loan Bank (up $25.9B to $234.8B), US Treasury (up $12.5B to $421.3B), Svenska Handelsbanken (up $9.7B to $32.4B), Toronto-Dominion Bank (up $3.8B to $47.7B), Bank of Nova Scotia (up $3.6B to $61.0B), Bank of Montreal (up $2.6B to $37.9B), Australia & New Zealand Banking Group Ltd (up $2.5B to $19.5B), Citi (up $2.0B to $31.5B), and Bank of America (up $1.9B to $54.1B). The largest decreases among Issuers of money market securities (including Repo) in June were shown by: Credit Agricole (down $37.3B to $33.3B), Barclays PLC (down $31.2B to $11.7), DnB NOR Bank ASA (down $27.8B to $7.6B), Natixis (down $17.8B to $25.4B), Swedbank AB (down $16.3B to $15.9B), Skandinaviska Enskilda Banken AB (down $15.7B to $16.8B), Societe Generale (down $14.3B to $19.4B), BNP Paribas (down $12.1B to $51.8), ING Bank (down $3.6B to $24.1B) and General Electric (down $2.9B to $7.1B).

The United States remained the largest segment of country-affiliations; it represents 58.2% of holdings, or $1.450 trillion (up $252B). Canada (10.1%, $251.7B) moved up to second place followed by Japan (7.5%, $186.0B). France (5.8%, $145.2B) fell to fourth place, while Australia (3.6%, $90.6B) rose to fifth place and Sweden (3.2%, $80.4B) rose to sixth. The U.K. (2.9%, $71.9B) dropped down to seventh, while The Netherlands (2.6%, $65.5B), Switzerland (2.3%, $56.7B), and Germany (1.9%, $46.7B) round out the top 10 among country affiliations. (Note: Crane Data attributes Treasury and Government repo to the dealer's parent country of origin, though money funds themselves "look-through" and consider these U.S. government securities. All money market securities must be U.S. dollar-denominated.)

As of June 30, 2015, Taxable money funds held 26.3% of their assets in securities maturing Overnight, and another 15.5% maturing in 2-7 days (41.8% total matures in 1-7 days). Another 20.9% matures in 8-30 days, while 13.2% matures in 31-60 days. Note that three-quarters, or 75.9% of securities, mature in 60 days or less, the dividing line for use of amortized cost accounting under the new pending SEC regulations. The next bucket, 61-90 days, holds 11.1% of taxable securities, while 10.2% matures in 91-180 days and just 2.9% matures beyond 180 days.

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

A white paper released by the U.S. Treasury's Office of Financial Research provides heretofore unavailable data on Liquidity Funds, Short-Term Investment Funds, and Separately Managed Accounts, culled from the SEC's Form PF (Private Fund) data. The OFR paper identifies the size of the Liquidity Fund market at $288 billion, the STIF Fund market at $285 billion, and the Managed Account market at $359 billion. The paper, "Private Fund Data Shed Light on Liquidity Funds," written by David Johnson, says, "This brief analyzes for the first time a new confidential dataset collected by the Securities and Exchange Commission (SEC), the Form PF filings of liquidity funds. Like money market funds and banks' short-term investment funds, liquidity funds generally invest in short-term assets and have portfolios structured to meet investors' near-term liquidity needs. According to first quarter data, Form PF filers managed $288 billion in liquidity funds and an additional $359 billion in parallel managed accounts. In comparison with prime money market funds, liquidity funds hold assets with relatively longer maturities, have larger holdings of Treasury securities, and invest in a broader range of asset classes."

It continues, "This brief analyzes liquidity funds using the data filed on the SEC's new Form PF. As defined on the SEC's Form ADV, liquidity funds are private funds "that seek to generate income by investing in a portfolio of short-term obligations in order to maintain a stable net asset value per unit or minimize principal volatility for investors." Liquidity funds, like other private funds, are open only to accredited investors and qualified purchasers (they are not available to retail investors) and are not required to abide by the rules governing mutual funds. Consequently, they may invest in riskier assets, engage in greater levels of liquidity transformation, or concentrate investments more in particular markets or securities than money market funds do. (Liquidity transformation involves using liquid assets, such as cash, to buy harder-to-sell assets, such as certain corporate bonds.) Liquidity funds are commonly used for purposes such as managing cash collateral from securities lending transactions or cash from operations. Potential risks associated with investing in liquidity funds are similar to those of other money funds, including credit, liquidity, and interest rate risks."

Further, OFR comments, "As of March 31, 2015, 42 liquidity funds had filed quarterly data and 20 funds filed annual data on Form PF. There are about $3 trillion managed in money market mutual funds and approximately $300 billion in short-term investment funds. In total, liquidity fund managers invested $646 billion on behalf of clients, including $288 billion in liquidity funds and $359 billion in parallel managed accounts. Parallel managed accounts are any managed accounts or other pools of assets managed by an adviser that pursues substantially the same investment objective and strategy and invests side-by-side in substantially the same positions as a private fund. Liquidity funds' largest investments include: U.S. Treasury securities (26 percent), bank certificates of deposit (CDs) (16 percent), unsecured commercial paper (15 percent), and U.S. Treasury and agency security repos (14 percent). Approximately half of the assets in liquidity funds have maturities of 30 days or less (31 percent of assets have maturities of 7 days or less and an additional 16 percent have maturities between 8 and 30 days) while the other half have maturities of 31 to 397 days. Less than 2 percent of assets have maturities longer than 397 days."

The paper explains, "A comparison of liquidity funds with prime money market funds shows that liquidity funds tend to hold securities with longer maturities. Although two-thirds of money market fund securities had final maturities of 30 days or less, only half of liquidity fund securities had this maturity profile. Again, assessing whether assets with longer maturities have less liquidity would require more detail on the securities in questions and analysis of the strength of secondary markets for those assets. Holdings in liquidity funds differ in significant ways from those in prime money market funds, which are money market funds that primarily invest in corporate debt securities. Liquidity funds tend to hold more Treasuries and have more investments in floating rate notes and other asset classes. Conversely, prime money market funds tend to have larger investments in CDs, unsecured commercial paper, and bonds issued by government agencies or government-sponsored enterprises (GSEs). The differences between the relative riskiness of these strategies is difficult to judge because of the lack of information on the specific security composition of liquidity fund holdings (liquidity funds are not currently required to disclose security-level information) and on fund counterparties, particularly for repo transactions."

Who invests in these funds? The OFR paper says, "Investors in liquidity funds tend to differ from typical money market fund investors. Money market funds' institutional and retail clients often include insurance companies, pension plans, and individual U.S. citizens. These sources only account for 6 percent of liquidity funds' assets under management. About 30 percent of liquidity fund assets are held by other private funds and 31 percent are held by investors outside the United States. About 16 percent of client assets are categorized as owned by "other" investors. Investor concentration in liquidity funds tends to be fairly high. Three-fifths of funds that file quarterly are at least 80 percent owned by their top five investors. Fifteen funds are completely owned by their top five investors and those investors held 60 percent of total fund shares."

Could Liquidity Funds pose a risk to financial stability? Johnson writes, "The main financial stability concern linked to liquidity funds is the possibility of runs, similar to those money market funds and certain local government investment pools experienced in 2008. The greater availability of data on liquidity funds, money market funds, and other money funds since 2008 has helped to reduce these risks by increasing the visibility of fund activities for investors and regulators. Liquidity funds have redemption structures comparable to money market funds. Liquidity transformation risks in liquidity funds overall do not appear to be significantly different from prime money market funds.... Individual liquidity funds, however, may exhibit greater liquidity transformation risks than average prime money market funds.... Investor concentration levels in many liquidity funds are relatively high."

On asset growth it continues, "Since the announcement of the new rules in July 2014, assets managed in liquidity funds and their parallel managed accounts have increased from $583 billion in June 2014 to $646 billion in March 2015. However, assets managed in money market funds increased more during that period, rising from $2.91 trillion to $3.01 trillion. Assets in prime funds declined from $1.8 trillion in December 2014 to $1.75 trillion in March 2015, probably attributable to tax-payment-related outflows."

Finally, the OFR report says, "In its July 2014 amendment to the money market fund rule, the SEC also included a provision aligning the reporting structures for liquidity funds on Form PF with the reporting structure for money market funds on Form N-MFP. This alignment, which will be effective in April 2016, will facilitate analysis of cash and liquidity management across short-term markets using combined data collected on Form N-MFP, Form PF, and the Office of the Comptroller of the Currency's Monthly Schedule of Short-Term Investment Funds. The OFR's analysis of new data on bilateral repo transactions, as outlined in the recent OFR brief, "Repo and Securities Lending: Improving Transparency with Better Data," may also help shed light on these short-term funding markets."

The Association for Financial Professionals' "2015 Liquidity Survey", released Wednesday, shows that corporate treasurers have concerns about money fund reforms, continue to increase bank deposits and continue to increase cash levels. The press release says, "Treasury and finance professionals continue to value safety of principal above all when investing corporate cash, but the number fell 3 percent in 2015, according to new research by the Association for Financial Professionals. The 2015 AFP Liquidity Survey, underwritten by State Street Global Advisors (SSGA), revealed a continued stance on preservation of principal in finance professionals' safety-first investing attitude -- a sign that companies may not be willing to accept more risk in order to earn more yield on corporate investments just yet. Additionally, 31 percent cite liquidity as the primary investment objective -- the highest since AFP began tracking the importance of organizations' cash investment objectives in 2008." Specifically, 46% said their organizations "would not invest in prime funds or would move money out of prime funds altogether."

The release continues, "One possible factor in finance pros' downplaying safety could be Securities and Exchange Commission rule changes to money market funds. The new rules do not take effect until October 2016, but a majority of organizations are planning to make changes in how they invest in prime MMFs. A full 56 percent of all corporate cash holdings are maintained in banks -- the largest percentage reported since AFP began its Liquidity Survey series in 2006." Barry F.X. Smith, global head of SSGA's cash management business, comments, "The results of this liquidity survey confirm that the changing cash landscape is top of mind for our treasury clients.... Money market reform makes this landscape more challenging to navigate and investors need new insights to help them succeed in this period of uncertainty and change."

The 33-page report, which generated 936 responses, provides deeper insight into liquidity management. As previously stated, 56% of cash is kept in bank deposits, while the amount in money market funds decreased slightly. "Organizations invest in an average of 3.2 vehicles for their cash and short-term investment balances, an increase from the average 2.7 investment vehicles reported in 2014 and 2013. The overall majority of organizations continue to allocate most of their short-term investment balances -- an average of 77 percent -- in three safe and liquid investment vehicles: bank deposits, money market funds (MMFs) and Treasury securities."

AFP explains, "But organizations are shifting away from MMFs: MMFs account for only 15 percent of organizations' short-term investment portfolios, off one percentage point from the 16 percent reported in both 2014 and 2013, below the 19 percent in 2012 and significant lower than the 30 percent in 2011. Larger organizations with at least $1 billion in annual revenues continue to allocate more of their short-term investments to money markets than do smaller ones (20 percent of portfolios versus 11 percent)." Outside the US, 68% are in bank deposits and 14% are in MMFs.

There was substantial amount of commentary related to money market funds. On criteria for selecting a money fund, AFP says, "[F]or the majority of organizations (54 percent) the most important factor when selecting a fund was not the fund ratings as one might suspect, but rather the fund sponsor taking a role in the bank relationship mix and support. Forty-six percent of finance professionals rank fund ratings as the number one consideration when selecting a fund, while 37 percent rank counterparty risk of underlying instruments as the primary deciding factor. The second most important factor in selecting a money market fund is yield (cited by 39 percent of practitioners), closely followed by both counterparty risk and diversification of underlying instruments... In prior years, fund ratings and yield were the top two criteria. With changes in money market funds occurring in 2016, the determinants for selecting a fund could change as well."

The survey says, "The majority of finance professionals expect their organizations will make significant changes in their approach to investing in prime money market funds as a result of the new SEC rules. Nearly half (46 percent) anticipate their companies will either discontinue investing in prime funds altogether or move some or all their holdings out of those funds. Another 20 percent indicate that their organizations would move their money into government MMFs or into bank products to maintain stability. Prime money funds currently account for nine percent of organizations' cash and short-term investments (vs. 56 percent for bank deposits)." Also, 6% is in Government/Treasury funds and 1% is in Muni/Tax Exempt funds.

The report adds, "Many investors moved money out of prime funds during the financial crisis and some of that money has not yet come back. As funds start to make announcements about share class changes, fund changes and the like, the additional clarity around money fund options will help companies make their investment decisions and align their investment policies accordingly."

But, "For many, the floating NAV is simply a deal breaker." Specifically, 29% said they would not invest in Prime funds altogether and 17% would move out of Prime funds. Also, 37% would not make any significant changes to how it invests in Prime funds, while 20% would move into Government funds or bank products. It adds, "Only 12 percent report that their companies would make changes to their investment policies to accommodate floating NAV funds. For those organizations that do decide to invest in prime funds, the number one factor to consider is concentration risk. Companies prefer not to be over-weighted in a certain fund if redemptions of the fund through announced changes occur. Companies will need to be proactive in managing their fund lineup to make sure they monitor fund changes and ratings."

Further, "The full "fallout" from the changes in money fund treatment won't be clear for some time. Many questions remain. Where will the money flow from in terms of money fund changes? The most likely answer (as of the writing of this report) is that money will flow out of bank deposits into Treasuries and money market funds if ratings, fund sponsorship, and yield all fit within certain parameters. The most likely recipients of bank deposit outflows will be government securities or government money funds, assuming the Fed's Reverse Repo program remains intact and the supply of government securities post Quantitative Easing are absorbed."

Will wider spreads make a difference? AFP writes, "Since organizations will face an environment in which interest rates are more optimal than they are currently, along with the SEC's 2a7 fund rule changes fully implemented, AFP asked survey participants about their organizations' appetite for prime funds vs. government funds given the expected yield differential based on the underlying securities. Regardless of the spread between government funds and prime funds, nearly half of the organizations would not invest in prime funds. Twenty percent of finance professionals report that their companies would invest in prime funds if the spread was at least 50 bps; an additional 19 percent would do so if the spread was at least 10 bps.... Remember that safety of principal is cited as the most important company investment objective. With a floating NAV, the ability to access cash at full value from one day to the next puts this objective at risk and thus is a major concern for some companies."

What about alternatives? The survey tells us, "Separately Managed Accounts is most often cited as an alternative organizations would consider in response to the money market reform implemented by the SEC (52 percent of survey respondents). Other options organizations would opt for are extending maturities (19 percent) and investing in money funds that have final maturity of 60 days or less that offers amortized cost treatment (17 percent). Separately managed accounts offer better transparency and an investment mandate unique to the company.... As long as safety, liquidity and yield keep pace, the ability to implement new products will center on risk management and explaining any new alternatives to companies' Senior Management, since liquidity has proven vital to organizations throughout the past several years with the banking crisis. If those investments are hard to explain or if the risks versus the returns are unquantifiable, the likelihood they will be added to an investment policy remain elusive. Companies would rather give up yield to maintain safety of principal -- a proven concept."

On investment policies, it explains, "As organizations prepare for the changes that will result from the SEC money market fund reform, finance professionals anticipate various changes in their organization's investment policies. One out of three organizations will likely implement changes in fund concentration risk if they have invested in prime funds. Companies will want to review their investment policies in terms of those changes that will impact their investments in money funds and evaluate the risks that might result come from those regulatory changes. Other changes survey respondents foresee as a result of the new SEC rules are: Fund rating changes (cited by 23 percent of survey respondents); Adding separately managed accounts (22 percent); Defining counterparty limits for bank deposits (22 percent)."

On ratings, it adds, "Nearly eight out of ten finance professionals report that their organizations' investment policies require money funds to be rated. The stipulations regarding ratings are fairly stringent: 35 percent indicate their policies require at least one rating agency assign an AAA rating and 27 percent indicate that money funds have to earn AAA ratings from at least two agencies. Investment policies at larger organizations, those with an investment grade rating, and those which are publicly owned are more likely than other companies to require money funds be rated. Those companies with more stringent money fund requirements are also more likely to have written investment policies."

Finally, on WAMs, AFP says, "Finance professionals report that their organizations continue to place most of their short-term investment portfolios into instruments with very short maturities. On average, 66 percent of all short-term investment holdings are in vehicles with maturities of 30 days or less.... Looking ahead through the first half of 2016, the vast majority of survey respondents -- 81 percent -- expect their organizations to maintain the current profile for maturity within their short-term investment portfolios. Finally, 31% increased their cash balances last year within the US, while 46% were unchanged and 22% decreased their cash balances."

The July issue of Crane Data's Money Fund Intelligence was sent out to subscribers Wednesday morning. The latest edition of our flagship monthly newsletter features the articles: "Vanguard Goes Pure Retail; UBS, SSgA, MS Reveal Plans," which explains what several of the largest managers have said recently on money fund reforms; "Anticipation, Change Focus of 7th Money Fund Symposium," which recaps the highlights of our record breaking conference last month in Minneapolis; and "Responding to MM Reform Questions at Crane MFS," which features commentary from the SEC's Sarah ten Siethoff and other attorneys on reform FAQs. It also discusses recent fund liquidations. We have also updated our Money Fund Wisdom database query system with June 30, 2015, performance statistics, and sent out our MFI XLS spreadsheet earlier this a.m. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our July Money Fund Portfolio Holdings are scheduled to ship Friday, July 10, and our July Bond Fund Intelligence is scheduled to go out on July 17.

The lead article in MFI says, "In June, a wave of fund companies announced how they plan to adapt to the new money fund rules, including one of the biggest, Vanguard. UBS, SSgA and Morgan Stanley also made MMF announcements. Of note, Vanguard became the first to decline to offer institutional floating rate Prime or municipal money funds, though every other large complex had pledged to offer these to date."

It continues, "A press release entitled, "Vanguard To Designate Prime And Tax-​Exempt Money Market Funds For Individuals," explains, "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 $1 NAV. In addition, Vanguard announced two name changes, effective December 2015: Institutional Shares of Vanguard Prime MMF will be renamed Admiral Shares. Vanguard Admiral Treasury MMF will be renamed Vanguard Treasury Money Market Fund."

In our "profile" this month, we review the highlights of our Money Fund Symposium. It reads, "Crane's 7th Annual Money Fund Symposium, which was held in Minneapolis in late June, is now in the books, and it goes down as our largest conference ever. We had a record number (501) of attendees, and we also had what many have called our best program ever. Thanks to those that participated! Below, we review some of the highlights."

MFI explains, "The conference kicked off with a welcome address and Q&​A featuring Karla Rabusch, President of Wells Fargo Advantage Funds. Rabusch said, "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 [them]. But we need to make sure that we're fitting our clients' needs into the regulatory framework. There is always going to be a place for money funds. We'll see how they transition -- how much [shifts] to government funds, how much stays in prime, how it all works. There are obviously going to be opportunities, and we're all going to find ways to meet the needs of our clients."

It adds, "Day 1 also featured a session on the "State of the Money Fund Industry" with Crane Data's Peter Crane, Federated Investors' Deborah Cunningham, and JP Morgan Securities' Alex Roever. Crane said, "Money funds still hold $2.6 trillion; 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?" Roever added, "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.... 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?" Predicting fund flows out of prime or bank deposits and potentially into government funds is "the biggest parlor game.""

The third article says, "One of the featured speakers at Crane's Money Fund Symposium in Minneapolis, June 24-26, was Sarah ten Siethoff, Senior Special Counsel at the Securities & Exchange Commission, who elaborated on some Frequently Asked Questions on money fund reforms. She sat on a panel along with attorneys Stephen Keen of Perkins Coie; and Jack Murphy of Dechert, in a session called "Money Fund Rules: Questions on the Rule." Keen & Murphy provided an overview of reforms, then focused their attention on some of the FAQs that they felt required additional clarification."

The issue also has a brief entitled, "Fund Liquidations Jump in June. It says, "JP Morgan, Fidelity, Federated, Touchstone, and Reich & Tang all liquidated money funds in recent weeks as a result of lineup changes and mergers precipitated by reforms."

Crane Data's July MFI XLS, with June 30, 2015, data shows total assets rising by $15.5 billion in June, after rising $26.8 billion in May. (MMFs assets fell by $156.8 billion total in the first 4 months of 2015.) YTD, MMF assets are down by $114.8 billion, or 4.3% (through 6/30/14). Our broad `Crane Money Fund Average 7-Day Yield and 30-Day Yield remained at 0.02%, while our Crane 100 Money Fund Index (the 100 largest taxable funds) stayed at 0.03% (7-day and 30-day). On a Gross Yield Basis (before expenses were taken out), funds averaged 0.16% (Crane MFA, up 0.01% from last month) and 0.19% (Crane 100, same as last month) on an annualized basis for both the 7-day and 30-day yield averages. Charged Expenses averaged 0.14% and 0.15% (unchanged) for the two main taxable averages. The average WAMs for the Crane MFA and the Crane 100 were 36 and 39 days, respectively, down 2 days and 1 day, respectively, from last month. (See our Crane Index or craneindexes.xlsx history file for more on our averages.)

In other news, the International Monetary Fund released its annual assessment of the US economy, commenting on a number of areas, including money markets. On money market funds it says reforms have helped, but vulnerabilities remain. "Changes to the triparty repo infrastructure (including reengineering of the settlement cycle, improvements in the collateral allocation processes, and limits on intra-day credit) have reduced risks. Despite reforms, vulnerabilities in the triparty repo market remain large (including the reliance on two clearing banks). Potential next steps could include the use of central counterparty clearing houses for repo transactions. This, in turn, would require implementing adequate risk management requirements for central counterparty clearing houses including cyber resilience, standardized stress testing, and recovery and resolution regimes. The requirement that some money market funds move to a floating net asset value by 2016 is a positive step. `However, a significant share of funds will be able to maintain stable net asset values, allowing institutional and retail investors to treat their investment as deposit-like, despite their greater liquidity risks. Shifting all money market funds to floating net asset values should be reconsidered."

Opportunities in China and European money market fund regulations were the main topics of a session at Crane's Money Fund Symposium 2015 in Minneapolis entitled "European and Global Money Fund Outlook." The segment featured Jonathan Curry of HSBC Asset Management (and until recently Chairman of the Institutional Money Market Fund Association) giving an update on European money fund reforms, followed by commentary from John Donohue of JP Morgan Asset Management on the awaking giant that is the Chinese money fund industry.

Curry said assets under management in IMMFA funds have been growing despite major challenges, including low and negative interest rates, a paucity of supply, and pending regulations in both the money fund and banking sectors. On reforms, Curry provided an update of where things currently stand. In March, the EU's Committee on Economic and Monetary Affairs voted to pass a compromise position. The proposal retained a CNAV structure for government funds and retail funds and created a new Low Volatility NAV fund type (LVNAV) that is a hybrid between CNAV and VNAV with use of amortized cost accounting below 90 days. CNAV funds would be available to only about 10% of investors.

In a statement issued back in March, IMMFA commented on the proposal, saying, "The options presented to the CNAV industry, which makes up over 50% of AUM, are severely limited under the Parliament's draft. The Retail CNAV and EU Public Debt CNAV options are restricted in scope, and under current market conditions together account for less than 10% of the CNAV AUM.... The proposed LVNAV structure is not an adequate substitute for the CNAV product. Only a very small proportion of the current CNAV market would be able to transition into this new MMF formulation. Furthermore it is unclear how useful this construct would be to investors. Even then, under a so-called 'sunset clause' the authorisation of these funds would lapse five years after the Regulation comes into force.... IMMFA remains confident that through the ongoing negotiation a more feasible solution for the MMF industry will be found -- that promotes financial stability whilst preserving efficient short term capital markets in Europe. IMMFA remains committed to working with all parties involved in the regulatory debate and hopes that in the long run an approach which is both practical and effective will prevail."

Curry explained that the Presidency of the European Parliament passed to Latvia in January 2015, and that they are unlikely to work on this file. Luxembourg takes over the EU Presidency in July 2015, but he said their involvement is made more difficult as they are one of the main 3 domiciles for MMF in Europe. He says, "Bilateral meetings have been taking place between the "big 5" to try and find a compromise position. Germany appear to be blocking any compromise at this time," he said.

"IMMFA will prepare a strategy to engage with the European Council and European Member States on the proposal. Despite a negative yield environment for government Euro MMFs, due to last year's cut in the ECB's "deposit facility" to negative 0.20%, the good news is that assets in IMMFA funds have grown. Corporate cash balances continue to remain high and implementation of new banking regulations will push more cash into MMFs," he added. Curry concluded, "The asset management industry is committed to providing useful and reliable products which suit the investors' needs. IMMFA is committed to maintaining standards in the industry and to engaging in dialogue with regulators."

Donohue focused on what he called the "sleeping giant that is being awoken" in money markets -- that is Asia in general but more specifically, China. "We at JP Morgan believe that is the next big opportunity," he said. JP Morgan has over US $20 billion in Asia-Pacific assets, and the numbers have grown steadily over the last few years. "Assets are growing, which is a good story in and of itself, but I think the better story is the mix of assets. Back in 2008, the primary source of those assets were U.S. dollars. If you look fast forward to today, that mix has completely shifted. So now you have an overwhelming amount of those assets in local currencies -- that's because these clients want to hold local currencies as those currencies appreciate against the dollar. We would expect this story to continue to play out."

"Clearly the opportunity is in mainland China." He continued, "Since 2013, assets in money funds have grown four-fold. `That is primarily driven by retail money market funds particularly these e-commerce or online fund providers like Alibaba," which owns the Yu'e Bao Money Fund. [It] has grown from nothing to $94 billion, or approximately RMB700 billion, since 2013. Typically, money market funds in China have much longer weighted average maturities, longer WALs, and lower credit quality, explained Donohue. But there has also been significant growth over that same time period in AAA-rated funds, he stated. Assets in [one] J.P. Morgan Fund, a joint venture fund in Shanghai, have doubled. "`A lot more of the local entities are starting to look at these AAA, western style funds much more seriously. We would love to see this market grow. Growing a sector and an industry can only help grow the pie for everyone."

Donohue explains, "One of the biggest challenges in China is you have to do everything through a joint venture right now. You own 49% of the J.V. and the Chinese entity that you partner with owns 51%.... As it stands today the players that are going to be able to get in there are part of the large global entities that already have a footprint in China. That said, I think over the next couple to several years we're quite confident that you will see that loosen up. We think that at some point the Chinese regulators and government will allow wholly owned investment advisers to get in there and deliver their own pure investment solutions.... It's still a very small piece of the global money fund industry, but it's a pretty attractive place to be."

Donohue added, "One thing to keep in mind is that a lot of the funds distributed in Asia are Luxembourg based funds so they are not immune to the [pending European] regulations. I think one of the outcomes there is that you are potentially going to see a lot of funds transition to more domiciled regulated funds and move away from Luxembourg. That's something that we should just keep an eye on and consider as we as we move forward."

While money funds are not specifically regulated in China, regulators have taken notice. The regulating authority has proposed to lower the WAM down to 120 days and have 5% overnight liquidity. He says, "It's much more liberal than anything that we're used to in the U.S. or Europe. But one of the things that it will do is standardize the product and standardization I think benefits Western or global asset management firms."

At our annual Crane's Money Fund Symposium in Minneapolis in late June, we presented the views of some of the leading money market strategists in the business to get their thoughts on everything from the Fed Reverse Repo Program to fund flows; repo and T-Bill supply to interest rates. Here we report on two of those sessions. The first, "Repo Review and Money Market Observations," featured Joseph Abate from Barclays, and Lou Crandall from Wrightson ICAP. The second, "Strategists Speak: Rates and Higher Rates," included commentary from Brian Smedley of Bank of America Merrill Lynch; Michael Cloherty of RBC Capital Markets; and William Marshall of Credit Suisse. (See last week's "Crane Data News" articles below to read more coverage of Symposium, or watch for our July Money Fund Intelligence publication on Wednesday a.m. Subscribers and Attendees may also see the recordings and Powerpoints at our "Money Fund Symposium 2015 Download Center.") In the first session, Abate talked about the decline of liquidity in the market. "It's ... hard to define liquidity ... but [paraphrasing a Chief Justice on another topic], 'I know it when I see it.' How I would describe liquidity is 'You know it when it's not there.' At the end of the day liquidity is something that its absence is what defines it."

He went on to examine different parts of the market starting with Treasury bills. "This market clearly is on the downtrend at least as measured by turnover. Now that isn't to say that bills themselves are not liquid instruments, it's just that they're less liquid instruments, and there are a couple of reasons why the bill market might be perceptibly less liquid. The first has to do with dealer risk aversion. Generally for those of you who trade bills, most of you would argue that it's gotten harder to trade bills. I don't think I need to tell this audience that bills are in fact scarce and difficult to find not only are they difficult to find but expensive. Clearly there's some scarcity premium that goes into the bill market."

He also said there's been a decline in turnover in both the commercial paper and repo markets. On the repo market, he continued, "I would argue that the combination of regulatory pressure and risk aversion is most apparent in the repo market. In repo market, banks basically act as channels or conduits between money market funds and people who need to finance themselves or finance an inventory of securities. As large banks are increasingly unwilling to intermediate in this market you have a wedge that's opening up. In the repo market there's been this discussion about the fact that repo supply in a general sense isn't sufficient to meet the demand. Relatively speaking the demand for repo has gone up and the supply has gone down and the gap between the two is about $500 billion. But not only is there a gap between the supply and demand of repo, there's a wedge that prevents repo collateral from moving from those who need financing to those who are looking to provide financing." Abate concluded, "Liquidity risk is moving from the dealer to the end user -- to the person who is holding the securities. And that's a significant shift in financial markets."

Crandall also talked about a potential bill squeeze. "As things stand now it looks as if the debt ceiling will come to a head sometime in mid-November, maybe early December. Somewhere mid-to late-fourth quarter, the Treasury's probably going to face severe constraints on its borrowing. Starting in late September, we anticipate a decline of somewhere on the order of $200 to $250 billion in the supply of bills. Joe showed a chart from the Treasury about the supply of bills declining to just 11% of the total debt outstanding. If Congress takes the debt ceiling down to the wire, that's going to get down to 9% by the end of November. This would come obviously at a very difficult time for the market. We're going to be in the midst of the transition from Prime funds to 'Govie' funds, so the demand for these kinds of instruments will be very strong. Plus, we don't know when the Fed's going to raise rates, and that's a critical part of the question of what the impact of this will be. If the Fed raises rates in September, it will also increase the size of the RRP facility. But if the Fed doesn't tighten in September, the RRP facility is probably still frozen at $300 billion, and that's not going to be enough in the face of this bill squeeze. It would lead to an extremely illiquid period in the fourth quarter of this year."

On the Fed's Reverse Repo Program Abate added, "I think at liftoff the program will go unlimited -- I think maybe it'll stay unlimited at the second hike, and then very quickly a cap will be imposed. If they want the cap to be effective, it needs to be above $400 billion, given the size of the gap and given the projections for increase in demand for government assets." Crandall had a slightly different take. "I agree with that, but I'm fairly optimistic that that cap won't become binding for quite some time."

In the "Strategists Speak" session, there was also much discussion about the RRP. BofA's Smedley said, "They've [The Fed] said that quickly after liftoff they intend to minimize use of the facility. Now we think that could be measured in weeks as opposed to months after liftoff. One of the ways I think they will do that is by offering more term reverse repos. The Fed is more comfortable absorbing that cash in the term facility than they are in the overnight program."

However, Cloherty sees it differently. "I think the RRP is going to be huge and I think it's going to last a very, very long time. If the RRP is small, there's too much demand for it, and it's always overflowing, then no one can arbitrage against it. I think we're going to need a large one, unlimited or what's for all practical purposes unlimited, so it's not overflowing. I think we'll have that for many years until the Fed balance sheet runs off and shrinks to its traditional size."

He added, "The bad thing about unlimited RRP is this is a year where anything good that happens to your government funds is bad for your prime funds, because the amount of cash that stays in prime is going to be dependent on how wide the spread between Govie and Prime funds is. The trouble is that none of us have any clue how much cash is going leave [Prime funds]. The statistical model I use is the 'wild guess'. I can give you a number but the number is going to be plus or minus $400 billion, so it's completely useless," he joked. "If you're a prime fund, you're going to have to set up for the worst case possible outflow. You're going to have to get ludicrously short."

On the RRP, Marshall said, "I think I'd probably fall somewhere in between my two colleagues up here in terms of how permanent and how large the facility will be. In my view it is likely to be significantly larger, and I think that it will be somewhat longer lasting in nature." He added that the amount of inflows into Government funds will depend on the spread between Government and Prime funds. "Hopefully that will be somewhat clearer by the time we get to next October, and hopefully we'll have a Fed that's well into a hiking cycle." Finally, Marshall showed a slide that showed how money market fund assets ballooned during past Fed rate hike cycle, with about an 18-month lag. Given that history and the regulatory pressure that banks are under, money funds could start to see asset gains once the hike cycle matures, he said.

Day 3 of Crane's Money Fund Symposium last week featured two sessions on Money Market Fund Reforms, including one with Sarah ten Siethoff, Senior Special Counsel at the Securities & Exchange Commission, who answered some questions on the SEC's "Frequently Asked Questions" release. She sat on a panel along with attorneys Stephen Keen, Senior Counsel, Perkins Coie; and Jack Murphy, Partner, Dechert, in a session called "Money Fund Rules: Questions on the Rule." The other reform-related session on the final day of the conference, called "More on MMF Reforms: Adoption Issues," featured Joan Swirsky, Counsel, Stradley Ronon Stevens & Young; and Robert Plaze, Counsel, Stroock & Stroock & Levan.

In the first session, Keen provided an overview of reforms, then focused his attention on some of the FAQs that he felt required additional guidance or clarification. Specifically, he brought up FAQ number 8: "Should a floating NAV MMF that values certain portfolio securities that mature in 60 days or less at amortized cost, report its share price on its website (even if that price is affected by the use of amortized cost), or should it report the MMF's NAV calculated before using amortized cost, even if that were to result in a different price?" Ten Siethoff responded, "If a floating NAV MMF's use of amortized cost to value a portfolio security were to result in a difference between its share price and its NAV calculated without the use of amortized cost, the amortized cost value of the portfolio security would not be "approximately the same" as the fair value of the security. Under these circumstances, the MMF should not use amortized cost to value that security."

Keen asked ten Siethoff, "For [an] FNAV fund using amortized cost for some of its portfolio, does it still have to mark-to-market that piece of the portfolio that's using amortized cost for purposes of putting up this website disclosure? He added, "There really should not be a difference between amortized cost and the market based estimated value of the portfolio -- at least not a big enough one to cause a difference at the fourth decimal point."

Ten Siethoff, speaking on behalf of herself and not the SEC, responded, "One of the things that this highlighted was how people were interpreting the guidance that we had in the release about the use of amortized costs for sixty day and under securities. It was a very conscious decision to do floating NAV out to the fourth decimal place. A big motivator of that was to have fluctuations in the funds tied to changes in the market and to have fluctuations out to the 4th decimal place. The staff felt that that overarching goal of the reforms would be undercut if funds were able to smooth their valuation through the use of amortized cost by holding a high proportion of 60 day and under. The second piece ... we spent a lot of time thinking about was that the decision to have the valuation guidance in the release talking extensively about when you can use amortized cost."

She added, "In a world of floating NAV, it could play a very big role. So we felt the need to clarify what we meant by that guidance, particularly in a world where we didn't want to undercut the heart of the reforms that the Commission was trying to do. So we spent some time in the release talking about that and the questions about 'What do you mean when you say the same? Do you mean exactly the same?' In our minds, approximately the same was very narrow, and I think that was what was put to light by the FAQs. We meant you could have very tiny differences and we weren't going to nitpick over that. But the overarching goals of the reform was that we were doing a floating NAV out to the 4th decimal place to have fluctuations. And when we got the FAQ saying, 'Well, what if for a floating NAV fund the web reporting price using market value is different?' Our immediate reaction was 'that wouldn't be approximately the same.' I know this has been a really important question for a lot of people so I wanted to walk through the history."

There was also some discussion of FAQ 26: "If a MMF's weekly liquid assets have fallen below 30% (but not below 10%) of MMF's total assets, may the board of directors determine to impose a fee or gate at a later time in the future, whether it is the next day's opening or another specified time?" The SEC responded, "While a fee or gate may not immediately come into effect due to practical considerations, a MMF should begin to implement a fee or gate immediately. Any delay beyond that required to take into account practical considerations would raise significant concerns. Directors should consider whether it would be consistent with their fiduciary duties to allow for a material lapse of time between their determination and implementation. Staff recognizes that it may not be feasible for a fee or gate to take immediate effect. For example, it may take time to notify intermediaries and shareholders. The MMF's transfer agent and other intermediaries may also need additional time to implement the liquidity fee or gate. Staff recognizes that a MMF's board may need to consider the practical limitations on the capacity of intermediaries and systems when implementing a liquidity fee or gate."

Keen said, "I think the Staff gave the only answer it could here. Fundamentally, they said, 'Look, if you think you need a fee or gate, we assume that's because there's something important going on that you need to stop redemption activity.' That needs to happen. You can't sit around and wait for it. On the other hand, they understand that there are operational limitations to everything. The boards don't have telekinesis, and they cannot sit together and will the fund to suddenly have liquidity. So the answer basically says that 'We realize there's a tension here and boards are going to have to find the right balance.' I did a blog post that basically said this is why you gate first -- gating buys you time to do a liquidity fee if that's the route you're going." Ten Siethoff added, "We recognized that there was no 'Easy' button that I push and there goes the fee or gate. `But by the same token, if you're doing this, time is of the essence and facts and circumstances are changing quickly right underneath your feet. So you can't just sit there and wait forever."

On the prospect of the SEC issuing future FAQs, ten Siethoff said, "The staff is always willing to consider any questions that come in the door. The initial set of 50-some F.A.Q.'s that we issued were from a collection of a whole variety of questions that came in. Some came through trade associations; some came straight to us. We continue to get questions on the FAQs as well as on additional topics that were not addressed by the first set of FAQs. We intend to, throughout the entire compliance, put out more [FAQs] if there are additional areas that need clarification."

Finally, session moderator and conference host Pete Crane asked about the status of two items, the credit ratings removal amendment and the Treasury's tax simplification and relief proposal. Ten Siethoff explained, "On the Treasury tax, they are working on that. They have gotten some additional questions and issues ... as the process has gone along, so they are considering more than just what was initially raised. On the credit ratings removal, we're ... actively working on that and we are definitely conscious that people are going to be rewriting policies and procedures for part of the reforms. It's good to have that sooner rather than later so you can bake that into the process and not have to go through everything twice. So I can't promise anything on timing, but I can say we're very aware of that and therefore trying to move on as quickly as we can."

Finally, in the session that followed, Plaze and Swirsky focused on three reform-related issues that have garnered the most attention among money market fund clients -- the valuation of securities that mature in 60 days or less; becoming a Government money market fund; and "topping up" impaired NAVs." (Note: Conference attendees and Crane Data subscribers may access session recordings and Powerpoints via our "Money Fund Symposium 2015 Download Center" or at the bottom of our "Content" page.)

Today, we recap more from Crane's Money Fund Symposium, the world's largest gathering of money fund and cash investing professionals, which took place last week in Minneapolis. (Next year's event is scheduled for June 22-24 in Philadelphia.) We cover two of the "heavy-hitter" sessions below; the first is entitled, "Major Money Fund Issues 2015," which closed Wednesday afternoon's agenda, and the second, "Senior Portfolio Managers Perspectives," which took place Thursday morning. The former featured Rick Holland of Charles Schwab as moderator, with Nancy Prior of Fidelity Investments, Esther Chance of Invesco, and Matt Jones of BlackRock. The "Major Issues" panel discussed a range of topics, but it focused much of its discussion on how fund managers are adapting to money market reforms.

Fidelity's Prior commented, "Our plan, which we announced in January, starts first and foremost with a commitment to offering a full line of money market products so we will have government funds, muni funds, prime funds, institutional funds, and retail funds. But when we went through that conversation with many of our customers ... it became clear to us that though they recognize that the possibility of gates and fees is extremely remote, they prefer to be in funds that were not subject to gate and fees."

She continued, "Three of our prime funds, where we are changing the mandate from prime fund to a government fund, also require shareholder approval. We went out to our shareholders and have received approval on two of those three. Cash Reserves, which is our largest one -- we have received shareholder approval to convert that fund. There's one fund remaining that we have not yet obtained.... Overall, 5 of the 6 shareholder mandates have been obtained and we are looking towards the fourth quarter of this year to execute on that part of the plan." Prior adds, "`The next part for us is the institutional/retail designation -- designating which will be retail and which will be institutional. That will be done in the third or fourth quarter of this year."

On supply in the Government space, Prior explained, "The amount of government securities that are eligible for money market funds is just about $7 trillion, so there is a good supply demand dynamic today. But there will be more assets that are seeking these government securities.... We do know that the Treasury is potentially going to increase their Bill issuance, so that will help. And the Fed's reverse repo facility certainly helps. But our expectation is that with the size of that government market as it is it's going to become a matter of price -- and it will be interesting to see how those supply dynamics really do impact price.... I think supply on the prime side as well as the government side is a challenge for the industry. I think it's one that we will overcome, and I think most of it will be a matter of price."

On BlackRock's changes, Jones commented, "We're going to offer five CNAV government funds and we won't impose fees and gates. The key consideration for us is every single one of those funds will have access to the RRP program which, while there is some speculation that the program's going to go away at some point in the future, we don't see the Fed removing that facility certainly in the short term. On the institutional side, the floating NAV structural changes will be applied to the TempFund -- our $60 billion flagship prime fund. It's a huge change for us. What many in the industry are trying to figure out is how do you replicate that intraday liquidity that exists under the current product structure in a floating NAV fund? How many times do you price the NAV? What does your custodian do in terms of intraday overdraft facilities. These are things that we [are] think[ing] about very intensely."

Later, he said, "The big thing we wrestle with is this whole concept of intraday liquidity and how money moves through the system in the future.... The whole plumbing aspect of what bank regulation and 2a-7 reform is doing to slow down the cash in the market is one of our major concerns." He added, "We talked to our shareholders about a 60-day product, but we decided to go with a 7-day fund, leveraging the same amortized cost guidelines the SEC put out in the release. We think the shorter maturity profile is going to keep a tiny bit more stability in the NAV. Also, as we move into normalization, we feel that a product that is this short may be attractive to our investors."

Chance explained her company's strategy, saying, "Invesco certainly intends to have a full product lineup -- we're going to have Treasury funds, government funds, CNAV and FNAV, Prime and Muni funds. The biggest challenge right now is the intraday strike components -- that seems to be an overarching issue. How many strikes per day is appropriate? How much is too much?" She also discussed Invesco STIC Prime Fund, a 60-day maximum maturity fund that has been around for 35 years. "We started our STIC Prime portfolio back in 1980. The idea was to create an ultra-conservative prime based portfolio that was very liquid, very conservative. It has had a really strong appeal certainly in a rising interest rate environment when the fund will perform extremely well.... It's interesting because now there's so much attention on this product. We've gotten a lot of questions on how the fund performed during various interest rate cycles."

Chance added, "One of reasons we kept the fund around is because it does serve that purpose when you have disruptions in the marketplace. There's a natural tendency for clients to go into government funds, because there's a flight to quality. But when they want to tiptoe back into the prime space you can offer them a product that has lower volatility, lower risk, and is a nice entrance into a prime space. You have a government fund, then you have a traditional prime fund, and the 60-day and in fund fits right smack dab in the middle."

The "Senior Portfolio Manager" panel, moderated by Wells Fargo Securities' Garrett Sloan, included Rob Sabatino of UBS Global Asset Management, Jim Palmer of US Bancorp Asset Management, and Danny Burke of Goldman Sachs Asset Management. Sloan summed up the state of the market in one word -- anticipation. "The money market fund industry is essentially in a state of anticipation," says Sloan. "Anticipation for investors to make decisions about what they want to do with their cash next year; anticipation for money fund providers to make decisions about the appropriate product lineup to match investor needs; anticipation for the Federal Reserve to move policy rates and whether actual money market rates will move with those policy rates; anticipation over whether issuers will continue terming out bigger and bigger portions of their balance sheets due to regulatory constraints; and, anticipation over how much the spread between government and credit products will widen. All of this anticipation leads to a very difficult environment for portfolio managers in which to operate," he explained.

On repo strategy, Sabatino said, "Over the past year we probably decreased our repo positions primarily due to yield. We still have a sizeable position, but given the pickup in yields I think it's more attractive to be in time deposits. That being said, the Fed's Reverse Repo Program has been key to our strategy, especially in our Treasury only fund that allows for repo. We've done both Term as well as Overnight. I think it's going to become a huge part of our market -- it's going to step in for the lack of supply. It's a little more difficult dealing with some of the credit downgrades. Losing two counterparties recently, I think that had a big impact on the entire market and we might see more of that going forward."

On the potential for fund flows from Prime to Government, Palmer said, "I think a lot of investors will either be interested in prime funds or will assume the risk versus a government fund once the spread starts to widen. If we were to get a rate increase or two then investors could really see the differential, and then they could start making better decisions about the kind of risk they're willing to assume. What that is I don't know. As the last panel talked about, they'll know it when they see it. But they are not going to tell us right now because they don't know, and quite frankly, if I were in their shoes I wouldn't tell us until I had to and right now they don't have to."

On portfolio structure, Sabatino comments, "I think we are constrained by supply. We talked about meeting the 7-day liquidity bucket.... When you look at most prime funds in this environment, because of how low Treasury yields are, we really don't have much exposure.... I wouldn't expect to be seeing a huge amount of supply of short term commercial paper or bank debt, so we might have to move and change the structure of prime funds and own more Treasuries and Agencies. That being said, as long as we can get deposits, repo, and overnight instruments we would opt for that just from a yield perspective. But overall, how we look at our portfolio isn't going to change dramatically other than the fact that we all agree we're going to have to get more liquidity.... Palmer adds, "The other aspect is, as we get closer, everybody will just have more weekly liquidity. Thirty percent will just be the starting point and then everybody will put on their own internal buffer above thirty percent because nobody, post reform, is going to want to breach that number."