News Archives: August, 2015

The August issue of our Bond Fund Intelligence newsletter features a profile of Fidelity Investments' Kim Miller, who manages the $4 billion Fidelity Conservative Income Bond Fund. The fund, which launched in 2011, is one of the largest offerings among our Conservative Ultra Short Bond Fund category and was designed to fill the space just outside of money market funds. In the Q&A, which we excerpt below, Miller tells us why he is bullish on ultra-short space. (Note: E-mail us to request a copy of the latest issue of our new Bond Fund Intelligence product and our BFI XLS spreadsheet "complement". As with our MFI, BFI is $500 a year; $1K including the XLS.)

Q: How long have you been managing short-term assets? Miller: I've been at Fidelity for 23 years. I started out as a Municipal Bond analyst then I became a Corporate Bond analyst. Beginning in 2003 I came to the taxable desk and ran both of our institutional money market funds. When I handed those off they had about $140 billion in assets. Then in 2011, I began managing the Conservative Income Bond Fund. Overall, Fidelity has been running short-term bond funds for almost 30 years. Our first short term bond fund was launched in 1986.

Q: Tell us about the launch of Conservative Income Bond Fund. Miller: After December 2008, when the Federal Reserve took interest rates to zero, a lot of Fidelity's institutional shareholders expressed interest in employing different strategies for their short-term investments that didn't need to be immediately available for operating needs. These clients didn't want to earn zero on their entire cash balance, so we started talking about differentiating their short-term investments, sometimes described as the difference between strategic cash and operational cash. By strategic cash, I mean money that they set aside for contingencies or long term capital expenditures. The question was: Is there a product that we can create beyond money markets that will provide a better yield to shareholders without introducing them to undue price volatility? By the end of 2010, we were pretty sure that the opportunity was there, and the fund was launched in in March 2011.

Q: What kind of growth has the fund seen? Miller: Conservative Income has about $4 billion in assets under management. It's been growing steadily, but has leveled off recently. From an institutional perspective, investors wanted to see a 3-year [performance] number, and the fund has been around for 4 years, so we may begin to get some traction from those types of shareholders. But [some of the] money that they would look to redeploy in this fund clearly resides in money market funds, and for the most part I think investors are inclined to wait until reform takes full effect in 2016 before they make any definitive decisions.

Q: What are the investment guidelines for the fund? Miller: The investment objective of the fund is to seek to obtain a high level of current income consistent with the preservation of capital. The fund is designed to complement traditional cash management or liquidity management strategies, not replace them, with less of an emphasis on competing in the Ultra Short category. We talk in 'WAM' terms, not in 'duration' terms, which is more familiar to traditional cash investors.

Normally, the fund maintains a [WAM] of 273 days or less. The fund's lower quality investment grade securities (BBB) exposure is capped at 5%. The fund generally does not purchase any structured product. But most importantly, from the standpoint of NAV stability, the fund normally does not invest in fixed rate securities with a maximum maturity of 2 years or floating rate securities with a maximum maturity of 3 years. That's a real governor when it comes to sourcing supply because it largely precludes the fund from participating in the primary market. So the fund sources most of its supply in the secondary market.

Q: What does the portfolio look like? Miller: It's predominately bonds -- some CDs and CP -- but it's predominantly just short term bonds. The other noteworthy thing is the fund does not buy any subordinated debt. [The fund] doesn't include many Treasury or Government securities, [but] that's more indicative of the interest rate environment.

Q: Who invests in the fund? Miller: There are two classes, and the distinction is between over $1 million and under $1 million. It's about evenly split between the two. The former is built almost entirely on high net worth individuals and the retail class is just retail investors that are looking for the slightly higher yield associated with short-term bond funds. I don't have a lot of strong institutional sponsorship yet, because they are figuring out how they're going to deal with pending changes to Rule 2a-7.

Q: How has the regulatory environment impacted the space? Do you expect to see inflows due to MMF reforms? Miller: There are a couple things going on with the institutional investors that we speak to. First of all, many of them are going to have a lot of difficulty accepting provisions for gates and fees. But I think the bigger challenge is interpreting and understanding the implications of the floating NAV. There are going to be changes in NAV, potentially more frequent than a $10 fund with only two decimals.

Q: What are the risks and rewards of rising interest rates? Miller: We learned a lot in 2004 about how funds behave when the Fed starts raising interest rates. This fund now has close to 65% in floating rate securities indexed to 3-month LIBOR, which I'm hoping starts creeping higher in anticipation of rising rates. With respect to the Fed, I think the threshold for raising rates has never been lower. First of all, FOMC members have indicated a desire to get off zero and labor market conditions certainly allow them to do that. Also, the economy is starting to show some wage inflation. FOMC members have said they only need to be reasonably confident that inflation returns to 2% in a reasonable period. (Note: This interview took place in late July, prior to recent market turmoil.)

How do you interpret what a reasonable period is? The market is thinking a reasonable period is 1 to 2 years, but I think the Fed has a longer term view -- 3 to 5 years. I have every confidence that inflation is going to get to 2% in 3 to 5 years. To me, that gives them the liberty of raising as soon as they want. Frankly, you are going to get a better indication of how the market is going to respond to a rate increase in September than you would in December, so based on the current environment, I fully expect a move in September.

Q: What are the risks to Ultra Shorts? Miller: I think a slower Fed will insulate them a little bit, but the Ultra Short category has a lot of different strategies. The fund has competitors that have up to 20% in high yield, and other competitors buy structured products, some of which are negatively convex and will not do well in a rising interest rate environment. So depending on the strategy, we could see at least for some portion of the asset class, a repeat performance of 2007. But again, I don't think we’re going to have the credit dislocation that we had in 2007.

Q: What do you see for the future of Ultra Shorts? Miller: I'm very bullish on the Ultra Short space. Ultra Shorts serve two purposes: it allows investors that are traditional fixed income investors to shorten up without leaving the asset class entirely. Also, cash right now isn't paying much, so they are not necessarily going to drop all of their fixed income assets into cash. If they are looking to hold on to their investments until other asset classes become more attractive, I think they will look at the conservative end of the Ultra Short category. After the recent changes to 2a-7 become effective, traditional cash investors will probably employ several different strategies. Some of their cash will remain in general purpose money market funds, some will go into government money market funds, and some may be invested directly in treasuries or CDs. Investors with a long time horizon may establish an SMA, but those with shorter scopes will look to conservative Ultra Short bond funds.

Money market mutual fund assets increased for the fourth week in a row and for the 11th of the last 15 weeks, according to ICI's latest weekly "Money Market Fund Assets" report. They've also increased for 4 months in a row, rising $113 billion, or 4.4% since the end of April, the strongest late spring and summer stretch for assets since 2008. Month-to-date in August (through 8/26), money market fund assets are up $47.0 billion to $2.695 trillion. We also review ICI's latest "Trends in Mutual Fund Investing" for July, which shows that total money fund assets increased by $45.9 billion last month, and review ICI's latest "Month-End Portfolio Holdings of Taxable Money Funds" below. The latter verifies our previously reported decrease in Fed Repo and jump in CDs and TDs in July. (See Crane Data's August 12 News, "MF Port Holdings: Repo Plunges; Time Deposits, CDs, CP Jump in July.")

Their most recent asset update for the week ended August 26 says, "Total money market fund assets increased by $9.01 billion to $2.69 trillion for the week ended Wednesday, August 26, the Investment Company Institute reported.... Among taxable money market funds, Treasury funds (including agency and repo) increased by $140 million and prime funds increased by $9.25 billion. Tax-exempt money market funds decreased by $380 million."

It explains, "Assets of retail money market funds increased by $6.38 billion to $887.44 billion. Among retail funds, Treasury money market fund assets increased by $1.42 billion to $200.55 billion, prime money market fund assets increased by $5.63 billion to $506.97 billion, and tax-exempt fund assets decreased by $670 million to $179.92 billion. Assets of institutional money market funds increased by $2.63 billion to $1.81 trillion. Among institutional funds, Treasury money market fund assets decreased by $1.27 billion to $809.78 billion, prime money market fund assets increased by $3.61 billion to $929.15 billion, and tax-exempt fund assets increased by $290 million to $68.33 billion."

ICI's July Trends says, "The combined assets of the nation's mutual funds increased by $136.79 billion, or 0.8 percent, to $16.28 trillion in July.... Bond funds had an outflow of $8.43 billion in July, compared with an inflow of $8.24 billion in June.... Money market funds had an inflow of $47.80 billion in July, compared with an inflow of $12.54 billion in June. In July funds offered primarily to institutions had an inflow of $40.53 billion and funds offered primarily to individuals had an inflow of $7.26 billion." `Money funds now represent 16.4% of all mutual fund assets, while bond funds represent 21.6%.

Year-to-date through August 27, MMF assets are down just $38.0 billion, or 1.4%. As mentioned, August will likely be the fourth straight month that MMF assets increase, following a $45.9 billion increase in July, a $12.9 billion jump in June, and a $38.0 billion rise in May. June and July have traditionally been week months for money funds, which is why the sizable gains are worth noting. The $45.9 billion increase is the best July since at least 2008. Last year, assets dipped $19 billion in July and over the last 6 years they have averaged a decrease of $20 billion in the month. We believe that some of these recent inflows could be coming from bank deposits as well as bond funds, which are bracing for interest rate hikes.

ICI's latest Portfolio Holdings summary shows that CDs (including Eurodollar CDs) increased by $106.9B, or 19.9%, in July to $643.4 billion. (ICI's CD total likely includes Time Deposits, which we, and the SEC, categorize as "Other" -- we reported a sizable increase in Other in July.) CDs jumped ahead of Repo as the largest segment of taxable fund holdings, making up 26.6% of holdings. Repo holdings decreased $100.3 billion, or 15.5%, in July to $544.6 billion, representing 22.5% of taxable MMF holdings.

Treasury Bills & Securities remained in third place among composition segments, increasing by $9.9 billion, or 2.5%, in July to $414.2 billion (17.1% of assets). Commercial Paper stayed in fourth, rising $21.5B, or 6.3%, to $363.2 billion (15.0% of assets). U.S. Government Agency Securities was fifth after increasing $1.9 billion, or 0.6%, to $340.9 billion (14.1% of assets). Notes (including Corporate and Bank) gained by $8.6 billion, or 12.6%, to $76.9 billion (3.2% of assets), and Other holdings (including Cash Reserves) stood at $37.1 billion, down $2.4 billion.

The Number of Accounts Outstanding in ICI's series for taxable money funds decreased by 77.6 thousand to 23.279 million, while the Number of Funds fell 4 to 353. Over the past 12 months, the number of accounts fell by 428.9 thousand and the number of funds declined by 20. The Average Maturity of Portfolios remained at 38 days in July, same as June. Over the past 12 months, WAMs of Taxable money funds have declined by 7 days. At 38 days, WAM's remain at the lowest level since June 2010, according to our analysis of ICI's data.

Note: Crane Data will update its July MFI XLS to reflect the 7/31/15 composition data and maturity breakouts for our entire fund universe next week. Note too that we are now producing a "Holdings Reports Issuer Module," which allows subscribers to choose a series of Portfolio Holdings and Issuers and to see a full listing of which money funds own what paper. (Visit our Content Center and the latest Money Fund Portfolio Holdings download page to access our August Money Fund Portfolio Holdings and the latest version of this new file.)

Ireland's money market fund industry has grown by 4 percent this year through June, according to a new release from the Central Bank of Ireland. Ireland is the second largest money fund market in the world, and the largest outside of the US, with 7.9% of the global MMF market, according to Crane Data's analysis of the Investment Company Institute's quarterly "Worldwide Mutual Fund Assets and Flows." The third largest MMF market, China, with 7.2% market share, also faces new challenges in light of the removal of a cap on bank deposit rates. We discuss the 2nd and 3rd largest money fund global marketplaces below. (Note: The European and Global money fund industry will also be discussed in depth at next month's Crane's European Money Fund Symposium, which will take place Sept. 17-18 in Dublin, Ireland, and in next month's issue of Money Fund Intelligence.)

The Central Bank of Ireland's press release says, "The Central Bank today publishes a new quarterly statistical release on money market funds resident in Ireland. This follows on from the introduction of security by security by security reporting in December 2014. The net asset value of money market funds (MMFs) resident in Ireland grew by over 4 percent from December 2014 to June 2015, rising to E402.3 billion from E387.1 billion in June 2014. This was driven in recent months by euro depreciation as around 87 percent of total MMFs holdings are denominated in Sterling and US dollar."

It continues, "Total assets held by MMFs in June was E405.4 billion. The low yield debt environment saw holdings of euro area debt securities (annualized yield of 0.24 percent) remain broadly stable with noticeable movements into short term Australian and Canadian debt (annualized yield of 0.46 and 0.37 percent respectively). This was driven by sterling denominated funds investing into holdings of Australian debt and by both sterling and dollar denominated funds investing into Canadian debt over the 6 months from December to June 2015 in search for the slightly higher yields available. Euro denominated funds exposure to United States debt also increased from E3.6 billion to E4.4 billion or 21 percent over the 6 months to June 2015."

Further, it adds, "MMFs also sought out to enhance returns by expanding their holdings into securities with longer residual maturities. Securities with residual maturities greater than 3 months increased by 17 percent over the period from December 2014 to June 2015. Holdings of government debt amounted to E51.5 billion in June 2015 with the United States, German and French debt accounting for 85 percent of holdings. This highlights the requirement by MMFs to hold highly rated debt. Equity liabilities stood at E402.3 million in June 2015. Equity liabilities issued to United Kingdom holders in sterling made up the largest contribution at 44 percent (E180.9 billion). Net transactions outflows amounted to E15.2 billion over the 6 months from December 2014 to June 2015, but these were offset by positive revaluations (including foreign exchange effects) of E30.4 billion over the same period."

Crane Data's Money Fund Intelligence International, which tracks the "offshore" or European money market fund sector, shows that over half of the $688.4 billion in assets domiciled in Dublin, Luxembourg or the Cayman Islands are denominated in US Dollars ($373.9 billion, or 54.3%), while E74.7 billion are denominated in Euro and L150.8 billion are in Pound Sterling. Over the past 3 months, USD assets have declined by $3.7 billion. Meanwhile, both Euro and Sterling assets have plunged, dropping by E18.4 billion (-19.7%) and L14.5 billion (-8.8%), respectively. (Crane Data also publishes a `MFI International Money Fund Portfolio Holdings report, which track the monthly holdings of "offshore" money funds.)

Ireland is where the vast majority of these Euro, Sterling, and US Dollar are domiciled. The largest manager of international (outside the US) MMFs is JPMorgan, which is domiciled in `Luxembourg, with $129.6 billion in assets at the end of 2Q, according to MFI International, which tracks these markets. But the next 9 out of 10 largest are all based out of Dublin. The second largest manager of international money market funds, and largest with assets domiciled in Ireland is BlackRock with $100.7 billion, followed by Goldman Sachs with $79.8 billion. Western Asset Management with $79.1 billion is the fourth largest, though much of its money fund base is domiciled in the Cayman Islands. HSBC is the 5th largest "offshore" manager with $34.9 billion, and LGIM is 6th with $29.6 billion.

Meanwhile in China, the central bank cut interest rates in response to its market turmoil, but what impact will this have on Chinese money market funds? China has been one of the few bright spots for money market funds globally in recent years, as assets have skyrocketed. Now the third largest MMF country behind the US and Ireland, China saw assets grow $13.0 billion (up 3.9%) in Q1 to $349.2 billion (7.2% of worldwide assets). Over the last 12 months through March 31, 2015, Chinese MMF assets up are $114.7 billion, or 48.9%. (See our August 10 News, "China Surpasses France as 3rd Largest Money Fund Market: ICI World.")

The Wall Street Journal wrote in "China's Central Bank Cuts Interest Rates," "China stepped up its credit-easing efforts by slashing interest rates and flooding its banking system with new liquidity.... With Tuesday's moves, the Chinese central bank has cut interest rates for the fifth time since November and broadly lowered for the third time the amount of deposits banks are required to hold in reserve."

It added, "In a nod to reforms, the PBOC on Tuesday also dropped a key control on rates for some bank deposits, allowing lenders greater freedom to compete for business. However, the central bank still refrained from fully giving up its control on deposit rates for fear of driving up interest rates and prompting more risk-taking behavior by banks amid a slowing economy, according to people close to the central bank."

It's been a long time since bad news for stocks meant good news for money funds, but we think we've seen a little of the old relationship return over the past week. As the stock market has fallen, with the Dow Jones Industrial Average dropping a total of 1,674 points from August 18 to August 24, money market fund assets have surged. According to the latest numbers from our Money Fund Intelligence Daily product, money fund assets have gained $46.8 billion over the past week (through 8/24). (Note that these were inflated slightly by the addition of several new Fidelity and Federated funds.) The Wall Street Journal's CFO Journal detailed this trend in its story, "Money Funds Raking in Money," which we excerpt from below. Also, the Securities & Exchange Commission released its latest "Money Market Fund Statistics" report, which shows assets up $40.9 billion for the month ended July 31, 2015 (and up $69.7 billion over 3 months) as total assets climbed back over the $3.0 trillion.

The Wall Street Journal blog on money fund inflows features commentary from Crane Data's Peter Crane. The article explains, "Investors are pouring cash into money-market funds, even as stock markets around the world crumble. Companies, pension funds, and individual investors dropped $37.77 billion into money market funds in the week ended Aug. 21, according to Westborough, Mass.-based Crane Data LLC, which tracks the market. That's increased the assets in the funds to $2.6 trillion." (For the 7 day period ended August 24 assets are up $46 billion. Year-to-date through August 19, money market fund assets are now down just $47 billion, or 1.7%, according to ICI's weekly series.)

The Journal story continues, "Crane Data's founder, Peter Crane, said it's unusual to see money flowing into the funds in the summertime, as that's usually when investors are quiet. Last year, for example, investors only put in a total $4 billion into money-market funds between May and August. This year, money-fund assets grew by $85 billion between May and mid-August. Mr. Crane said that banks, beset by new capital rules, have recently been encouraging companies and investment funds to keep less money in their deposit accounts. That's forcing corporate treasurers and fund managers to look for other places to park their cash."

The positive trend for money fund assets began in earnest back in July, the S.E.C. verifies in its latest "Money Market Fund Statistics" report. For the month ended July 31, 2015, assets were up $40.9 billion, pushing total assets back over $3.0 trillion for the first time since March 2015. The report, produced by the SEC's Division of Investment Management, summarizes monthly Form N-MFP data and includes totals on assets, yields, liquidity, WAM, WAL, holdings, and other money market fund trends.

Overall, total money market fund assets stood at $3.005 trillion at the end of July, up $40.9 billion, after falling $3.4 billion in June and rising $32.2 billion in May, according to the SEC's broad total (which includes many private and internal funds not reported to ICI, Crane Data or other reporting agencies). Of the $3.005 trillion in assets, $1.727 trillion was in Prime funds (up $20.6B from June 30), $1,024B was in Government/Treasury funds (up $17.0B), and $254.0 billion was in Tax-Exempt funds (up $3.4B). Total assets were down $75.3 billion year to date through July 31, according to the SEC report. Prime assets were down $45.3 billion year-to-date, while Government/Treasury MMF assets were down $14.1 billion year-to-date. Tax exempt assets were down $15.8 billion year-to-date. The number of money funds was 531, down 6 from last month and down 15 year-to-date.

The Weighted Average Gross 7-Day Yield for Prime Funds on July 31 was 0.24% (up from 0.23%), 0.11% for Government/Treasury funds (up from 0.10%), and 0.07% for Tax-Exempt funds (down from 0.10%). The Weighted Average Net Prime Yield was 0.08% (up from 0.07% last month). The Weighted Average Prime Expense Ratio was 0.16% (unchanged). Gross yields for Prime MMFs are up 4 bps YTD (to 0.24%) and up 5 bps since a year ago, expense ratios for Prime MMFs are up just one bps YTD and over the past year (to 0.16%), and net yields for Prime MMFs are up 3 bps YTD and 4 bps over 1 year (to 0.08%).

The Weighted Average Life, or WAL, was 72.6 days (down from 72.9 days last month) for Prime funds, 76.8 days (up from 75.4 days last month) for Government/Treasury funds, and 34.3 days (up from 33.6 days) for Tax Exempt funds. The Weighted Average Maturity, or WAM, was 36.6 days (down from 36.8) for Prime funds, 40.6 days (up from 39.5) for Govt/Treasury funds, and 32.2 days (up from 31.6) for Tax-Exempt funds. Total Daily Liquidity for Prime funds was 26.4% in July (down from 26.2% last month). Total Weekly Liquidity was 40.0% (down from 41.0%).

In the SEC's "Prime MMF Holdings of Bank Related Securities by Country" table, the US topped the list with $218.2 billion, jumping ahead of Canada with $208.8 billion. France was third Japan was third with $184.9 billion, followed by Japan with $176.7 billion, Sweden ($122.1B), the UK ($93.4B), Australia/New Zealand ($89.8B), The Netherlands ($54.5B), Switzerland ($52.5B), and Germany ($46.4B). The biggest gainers for the month were France (up $73.1B), Sweden (up $34.2B), US (up $27.4B), the UK (up $25.9B), and Norway (up $20.4B). The biggest drops came from Canada (down $7.9B), Australia/New Zealand (down $7.6B), Japan (down $3.2B), The Netherlands (down $2.3B), and China (down $1.4B). For Prime MMF Holdings of Bank-Related Securities by Major Region, Europe had $597.2 billion, while its subset, the Eurozone, had $300.0. The Americas was next with $429.7 billion, while Asia and Pacific had $297.8 billion.

Of the $1.727 trillion in Prime MMF Portfolios as of July 31, $572.6B was in CDs, $338.1B was in Government (including direct and repo), $459.6B was held in Non-Financial CP and Other Short term Securities, $261.6B was in Financial Company CP, and $95.8B was in ABCP. Also, the Proportion of Non-Government Securities in All Taxable Funds was 50.8% at month-end, down from 45.9% the previous month. All MMF Repo with Federal Reserve was $129.4 billion on June 30, down from $372.2B at the end of June. Finally, the Trend in Longer Maturity Securities in Prime MMFs said 41.4% were in maturities of 60 days and over (down from 41.7% last month), while 10.9% were in maturities of 180 days and over (up from 10.6% last month).

As the U.S. Congress heads towards what may be yet another standoff over the Treasury's "debt ceiling" this fall, a new research paper, entitled, "Money Market Funds and the Prospect of a Treasury Default," examines the impact this could have on money market funds. Authors Emily Gallagher, an ICI Economist who did the study while at the Paris School of Economics, Sorbonne, and Sean Collins, ICI's Senior Director of Industry and Financial Analysis, look at past debt ceiling crises in 2011 and 2013 to evaluate the "behavior and motivations of investors redeeming from MMFs during these crises." The debt ceiling battle and possibility of a "technical" Treasury default takes on added significance going forward, given the potentially massive migration to government assets (or not) as a result of money market reforms and other regulatory changes.

The abstract says, "U.S. debt ceiling crises in 2011 and 2013 were marked by significant outflows from money market funds (MMFs). This study evaluates the behavior and motivations of investors redeeming from MMFs during these crises. We find that the majority of redemptions reflect a generalized flight-to-liquidity and are, therefore, primarily a function of the liquidity needs of a fund's investor base. Funds holding Treasury securities at greatest risk of default or with market values below their $1 share price experience flows that are insignificantly different from other funds, all else equal. We also find evidence that a significant portion of the outflows stem, not from liquidity concerns, but from an opportunistic yield play on the repo market created by the crises. Finally, we offer anecdotal evidence that the government's guarantee of bank deposits had the perverse effect of encouraging outflows from MMFs during the 2011 crisis." (Note: The Government terminated its unlimited deposit account guarantees at the end of 2012.)

The introduction of the 44-page paper explains, "A cornerstone of international financial markets is the notion that debt issued by the U.S. Treasury is essentially credit-risk-free. This perception of safety is based on the strength of the U.S. economy as well as on its government's ability to raise taxes, borrow, and print money to meet its obligations. However, the U.S. Treasury's authorization to borrow is subject to a statutory limit. Often referred to as the "debt ceiling," the U.S. Congress sets a limit on the amount the Treasury can borrow. Debt limit increases, once routine, have recently become a bargaining chip in negotiations for spending cuts. Uncertainty over whether last-minute budget negotiations might end in a federal default rattled financial markets in 2011 and, to a lesser extent, in 2013." (Note too: The Treasury is expected to hit the ceiling again in October 2015.)

It continues, "Short-term markets, whose participants are often highly risk averse and value liquidity, were particularly affected. If, as appears to be the case, debt ceiling crises become more frequent, it will be important to understand the factors motivating investors in short-term markets to react during these periods of stress. Money market mutual funds (MMFs), which invest in a mix of high-quality, short-term securities issued by banks, corporations, municipalities, and the U.S. government, provide an ideal setting to examine these reactions. In this study, we identify several possible motivations for investors to redeem from MMFs during U.S. debt ceiling crises and examine whether and to what degree these motivations contribute to outflows."

Collins and Gallagher explain, "We begin by establishing that outflows from prime and government MMFs during the 2011 and 2013 crises were indeed notable in aggregate. We, then, analyze differences in aggregate flows across the two fund categories and the two crises. Next, we test several possible motives to redeem from MMFs. We explore the possibility that investors may redeem from MMFs during debt ceiling crises, not out of fear, but out of profit opportunities. Investors, confident that the debt ceiling would be lifted, may have shifted assets out of MMFs and directly into repo markets to take advantage of higher overnight rates on repos caused by the crisis."

They add, "We also ask whether outflows from MMFs during debt ceiling crises are better described as a flight-to-liquidity or as a flight-to-quality.... Finally, we provide some evidence on whether outflows from MMFs during debt ceiling crises arise from a first-mover advantage derived from the stable $1 net asset values (NAVs) MMFs offer their investors. An analysis of this type could help regulators to better understand disruptions in short-term markets during debt ceiling crises. This analysis could also help money fund managers prepare for future debt ceiling events."

The paper continues, "Our results indicate that MMF investors treat the risk of a U.S. federal default differently than they treat private credit events. Prior studies show that, during the 2008 financial crisis, institutional share classes of prime MMFs with higher yields and larger exposures to troubled securities experienced greater outflows while institutional share classes of government MMFs experience inflows. Thus, during private credit events, sophisticated investors appear capable and willing to monitor their funds' holdings and impose discipline on fund managers. However, using cross-sectional regressions, we observe no targeted response by investors during debt ceiling crises. Instead, outflows from funds with large Treasury exposures were no greater than outflows from other funds."

It tells us, "Funds' investments in Treasuries maturing near the date when a Treasury default would most likely occur (i.e., the "default window") had no significant effect on flows. Instead, redemptions were concentrated in funds with a higher proportion of institutional investors and a history of large flows (i.e., funds serving large-balance investors with greater liquidity needs). In other words, a fund's outflows during debt limit crises seem to be primarily a function of the liquidity needs of the clientele it serves. This result supports the theory that a substantial portion of the outflows were motivated by a flight-to-liquidity. Ironically, though, the flight was from the Treasury market, rather than to, as would normally be expected. This result also indicates that efforts by fund managers to reduce exposures to a potential Treasury default could be less effective than might be presumed."

The authors comment, "Investors also appear to have acted opportunistically during the 2011 and 2013 debt ceiling crises. Investors in MMFs took advantage of yield differentials between repos and MMFs during the debt ceiling crises. Simulations indicate that a quarter of the outflows from prime MMFs during the two crises can be attributed to yields available in repo markets, as opposed to direct concerns about the impact of a federal default. Thus, by shifting assets into overnight repos (which are often collateralized by Treasury securities), a non-negligible portion of investors may have wagered that the debt ceiling crises would be resolved without a default.... Finally, we observe no significant relationship between a fund's flows and its market valuation. This finding indicates that investors are motivated to redeem during debt ceiling crises primarily by the desire to maintain the liquidity of their principal rather than by concerns about the actions of other investors. This result has policy implications since it suggests that, even in a variable NAV setting, MMFs would experience outflows during debt ceiling crises."

In their conclusion, they write, "In both 2011 and 2013, the U.S. faced the very real prospect that a legislative impasse on the federal debt ceiling could lead to a federal default. During both crises, short-term market participants reacted. Treasury yields and repo rates moved upward while corporate bond spreads fell. Investors also reduced their investments in prime and government money market funds.... Our study, the first of its kind, focuses on U.S. debt ceiling crises and evaluates the factors motivating investors to redeem from both prime and government MMFs during these periods."

Finally, Gallagher and Collins add, "Our results illustrate how uncertainties generated by U.S. debt ceiling crises drive investors with substantial liquidity needs to redeem from MMFs. These redemptions cannot be fully explained by differences in fund portfolio holdings, fund market values, or by other contemporaneous macro-financial changes. Thus, our findings are consistent with the theory that investors are primarily motivated to redeem by concerns that a Treasury default might temporarily limit access to their liquid balances. Large institutions with the greatest liquidity needs appear to gravitate toward those investment types they perceive to be most liquid. Evidence suggests that these results are not unique to stable value short-term investments pools, like MMFs. Since MMF investors must essentially choose each day whether to rollover their shares (i.e., continue to invest in the fund) or not (i.e., redeem), the reactions of MMF investors may speak to the broader behavior of short-term market participants."

Below is the second half of our interview with Jerome Schneider, Managing Director and Lead Portfolio Manager for Short Term Strategies at PIMCO. (We ran part I of our article, "PIMCO's Jerome Schneider Looks at 2a-7 and Beyond" on Friday; it originally appeared in the August issue of our Money Fund Intelligence newsletter.) In part II, Schneider talks about portfolio strategies, the transformational period that MMFs are about to go through, new products, and the outlook for money market funds.

Q: Are you wary of Commercial Paper? Schneider: I wouldn't necessarily say that. What people often misunderstand about PIMCO is they think that we're overly conservative by steering clear of CP entirely. Rather, what we strive to avoid are situations where we don't find value. It's not that we think there are unforeseen default risks everywhere in Commercial Paper-land, rather, the hurdle is high and we don't always find good value. It's not that we don't think it's a good asset class -- obviously it's money good in many regards -- it's more about the value proposition to our clients.

Together with our team of over 60 credit research analysts who routinely review the entire capital structure of issuers, we find many opportunities that other managers may overlook. We want to find the best value from the perspective of liquidity, price stability, and risk-adjusted returns. That's the framework that we operate in and, as such, we typically steer clear of traditional financial commercial paper that other 2a-7 funds might find attractive. Instead we find value in short-term instruments which may offer better returns with similar risk.

Q: Your MMFs are now 100% Repo. Why? Schneider: For PIMCO, Repo is an invaluable asset. It offers both attractive yield and excellent liquidity, given that we typically are looking for very short dated offerings. Our clients like the liquidity, they like the profile. Sure, there are other things we could do to help increase the yield, but we've got to do what offers a good liquidity and risk profile. We have run longer average maturities. But I'm being a little more defensive ahead of the Fed hikes than most by being beholden to the short term repo, whose yields have been attractive of late.

Q: How have fee waivers impacted you? Schneider: Fee waivers are something that all investors have to be cognizant of. As we evolve to higher rates those fee waivers might come into play the opposite way.... Managers might choose to manage their fees based on a net yield. That goes hand in hand with a larger discussion of money market fund yields. Net yields will remain low for a long time and there are two components to that. First, is supply and demand. You have a huge amount of demand for assets with limited supply, and that will keep yields low. Second, managers may take the opportunity to recapture some of the fees that they've been waiving for the past few years. Net yields are something that investors' need to [watch].

Q: What concerns are you hearing? Schneider: I just spent a week on the road visiting with clients from universities, health care systems, pension funds, state plans, retail investors -- we run the entire gamut. [We're] having a discussion with clients about how this is a transformational period, how they need to think about managing liquidity in a much different paradigm than before. Money market funds as they existed, a $1.00 par NAV without gates and fees, won't exist anymore beyond 2016. Investors have to become educated that there are more options for them.... Money market funds are one element of that. However, liquidity investors need to have other short-term options in their quiver as well, and we see many current and prospective clients moving actively in this direction.

Q: Will you be making any changes? Schneider: It's more of a 'stay tuned'-type of situation. PIMCO is obviously cognizant of the deadlines and we'll be compliant at that point. We're using this time right now to work with existing and new clients about matching their interest with existing product offerings and what the team at PIMCO might be developing. What we're thinking about is simply expansion of access to many existing strategies that we have had for years -- the floating NAV, step outside of the money market space. PIMCO has been doing it very successfully in all different types of markets and we're finding that clients want these alternatives in different formats -- funds, ETFs, separate accounts.

Our discussions are on how to build upon those building blocks of capital preservation, income, and liquidity management. Depending on which of those variables clients weigh more or less, we'll emphasize those in that portfolio. What PIMCO's doing is creating a suite of products so investors can go down the shopping aisle of front end offerings and pick from the shelf what they find most attractive.

Q: What is your outlook for money funds? Schneider: Money market funds will be utilized as one viable tool for managing immediate cash needs -- there's very little doubt about that. What we're going to have to think about though is the simple constraints that we're seeing evolve -- supply constraints, overwhelming demand, regulatory changes and the new structure where you could potentially have floating NAV or gates and fees. We think investors will move assets from Prime to Government funds, as many others do.

But we think the secondary shift will see investors moving assets from money market funds to other short term strategies. It's not going to happen overnight, it's going to happen over quarters. These conversations have been fairly slow in developing. We've had many clients, call it 20% or 30%, who have asked about these types of strategies <b:>`_. But there's a tremendous number of people who are either getting educated or remain undecided about how to approach this new regime. So the shift is underway, but not in any way, shape, or form complete. We are in a transitory period where the structures are being redefined and should be reevaluated.

The August issue of our flagship Money Fund Intelligence newsletter features an interview with Jerome Schneider, Managing Director and Lead Portfolio Manager for Short Term Strategies at PIMCO. Schneider oversees not only money market funds, but all short duration strategies. In that role, Schneider and his team have positioned PIMCO to compete in an evolving marketplace, "focusing on actively managed strategies which offer liquidity management, capital preservation, and income." As he tells us, investors are now dealing with a "different set of cards" that will change the game going forward. Schneider discusses those changes and PIMCO's strategy of creating opportunities in 2a-7 and beyond. The first half of our article follows.

Q: How long has PIMCO managed cash? Schneider: PIMCO has been involved in managing cash for more than 40 years. Our evolution emanated from the growth of the initial 2a-7 fund and the launch of our low duration strategies in the late 1970s. While we aren't the biggest money market fund manager out there, it's always been at the forefront of our thoughts as one avenue to protect our clients' capital. Through all of the different stress points in the market, our goal has always been to provide liquidity, income, and capital preservation in nominal and in some cases, inflation-adjusted terms. We seek to constantly adapt to the changing market conditions with our strategies in order to sidestep pockets of illiquidity and to take advantage of market dislocations. Ultimately we need to be cognizant of evolutionary changes in the marketplace and educate our investors on the impact of these dynamics on liquidity and capital preservation.

Q: What's your background? Schneider: I came to PIMCO in 2008. I worked initially with my predecessor Paul McCulley, who ran the desk for many years. Together, we were the perfect marriage in a lot of ways. We blended monetary policy and the 'wonkish' side of economics, if you will, with the practical side of understanding the plumbing of the front end. When Paul departed in 2010, I took charge of our money market, short term, and low duration strategies, and we've continued to grow our capabilities. More importantly, as we embark upon the first rate hike in many years, we're dealing with a different set of cards that is going to make the game entirely different going forward.

Q: Tell us about PIMCO's money funds. Schneider: Our true regulated 2a-7 money market fund segment is relatively small -- right now it's between $1 and $2 billion. However, we believe there is value in looking beyond the typical confines of money market funds to find attractive risk-reward profiles for our clients. For years we've been using short-term, floating NAV-type strategies that limit duration, provide liquidity, and add value while still preserving client's capital.

Our desk manages over $200 billion of short term assets in these various strategies across the front-end. Some investors value investing across the entire spectrum of front end dollar and non-dollar opportunities, so we've created a suite of strategies that provide an array of liquidity solutions. So while our footprint in traditional 2a-7 space is limited, our capacity in terms of strategies that are very similar to 2a-7 is actually very creative and robust, and is probably often understated by the marketplace.

Q: What changes do you see in the marketplace? Schneider: Obviously, the shift from Prime to Government is going to be more of a strategic shift for many investors who want to maintain that $1 par NAV and avoid fees and gates. We have money funds that are going to remain available and we have the capacity to continue to grow those funds. But over the next 2 years or so, we think we will see an evolution out of the liquidity management paradigm that we've had for the past 40 years into a new one that is continuing to be defined.

It's not completely formed, and in fact it's in the embryonic stages. As things change -- such as regulations, banks, intermediaries, monetary policies, and even monetary tools such as the reverse repo facility -- all of these things are going to impact how we think about capital preservation and liquidity going forward. Investors are going to have to understand these changes and rely on partners who can help them. Most importantly, we suggest that investors should not limit themselves to the historic frameworks that the industry has used for the past forty years to manage liquidity. Liquidity management will evolve and investors will benefit if they are flexible enough to adapt to these changes.

Q: What else can you tell us about the new paradigm? Schneider: When you think about previous Fed hiking cycles, you typically have seen money market fund yields rise. This time is different. With the overwhelming demand outstripping supply, you could potentially see yields on money market funds stay relatively low for a hike of 25, 50, or even 75 basis points. It is important for investors to understand this as they need to think about the opportunity cost of remaining in money market funds yielding near zero and not taking incremental steps slightly outside of those confines. Investors could use a blended approach, which often requires thinking about how to tier liquidity.

We're not saying go entirely out of money market funds. Money market funds can be a key component in the portfolio, but the overall footprint might be reduced in this new paradigm. What investors can do is implement a 2- or 3-tier strategy for cash management. How much cash do you need for same day purposes? How much do you need in immediate cash? How much do you need in longer term cash? If you take this approach, you're able to close that "opportunity cost" gap of earning relatively little yield and earning more income to cushion against the threat of rising rates.

The second point is the opportunity cost isn't just a nominal "expense." There's actually now a higher real cost as you may be battling inflation which could erode your capital. Within our DNA is the whole notion of active management; that requires us to be continually evaluating changes in the marketplace, including inflation's impact. (Note: Watch for Part II of our interview with PIMCO's Schneider in coming days, or see the August issue of MFI.)

The Investment Company Institute released a report on defined contribution plans, "The Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2014," which shows that money market mutual funds represent just 3% of the $2.9 trillion in 401(k) plan mutual fund assets, or roughly $87 billion. We also report on a story published by Plan Sponsor magazine entitled "Clearing Up Money Market Fund Reform Misunderstanding" which looks at the need to educate 401(k) plan sponsors and participants on the SEC money market reforms. Finally, we examine trends in US Dollar, Euro, and Sterling money markets from Moody's "Prime Money Market Funds 2Q Review."

The 32-page ICI 401k report is mostly focused on equities, and to a lesser extent bond funds, but there was some information related to money funds. Mutual funds make up 63% of the $4.6 trillion in 401(k) plans, and money funds represent just 3% ($87 billion) of this $2.9 trillion. It explains, "Only 3 percent of 401(k) mutual fund assets were invested in money market funds at year-end 2014. 401(k) participants holding money market funds had an asset-weighted average expense ratio of 0.16 percent in 2014, down from 0.19 percent in 2013. (In 2012 it was 0.21%). The decline in money market fund fees over the past few years has been largely because of investment advisers waiving advisory fees in the current low interest rate environment."

The Plan Sponsor article says, "Some qualified retirement plan sponsors and service providers are misinterpreting the likely impact of the Securities and Exchange Commission's (SEC) money market fund reforms, opining the rulemaking will necessarily drive defined contribution (DC) plans away from retail money market funds. The SEC is focusing on educating the retirement planning industry about the likely impacts of money market fund reforms adopted in 2014."

It continues, "The passage contains helpful discussion of what it takes to qualify as a retail money market fund, and how floating NAVs will be calculated and applied, along with guidance about the fees and redemption gates that have caused some Employee Retirement Income Security Act (ERISA) fiduciaries to doubt whether they’ll still be able to offer retail money market funds. This is a common misconception -- that retirement plan fiduciaries will be flat out required to start using government-sponsored money market funds, which will not gain the use of liquidity fees and/or redemption gates. In fact this is not the case, and the rules provide important exceptions for investing in retail money market funds that could ease plan sponsors' fiduciary concerns."

The Plan Sponsor piece goes on, "Critical for plan sponsors to understand is the fact that there is an exception for the floating NAV requirement for any money market fund that is a retail fund -- and retail funds are defined under the new rulemaking as funds in which only natural persons can invest. The money market fund rulemaking generally understands DC retirement plans as collections of natural persons, rather than as a distinct class of institutional investors. This, in turn, means most DC plans will be able to continue to invest in retail money market funds."

On fees and gates, it adds, "A big question for plan sponsors will be whether they feel comfortable, considering their fiduciary duty, with the prospect of plan participants potentially facing liquidity fees and gates within retail money market funds.... It could be distressing for a plan participant to face a liquidity fee or redemption gate, but plan sponsors can protect themselves from liability by educating participants about this possibility, and coaching them to stick with their long-term investing goals even during short-term periods of market stress.... Something else to consider is that it will be harder, if not impossible, for defined benefit (DB) plans to qualify as natural person investors. Therefore DB plans are probably likelier to have to switch to government money market funds, or another similar asset class."

Moody’s 2Q review of the US money fund market finds maturities tightening, liquidity increasing, and credit quality improving. On the latter point, it says, "Changes in rating reference points for certain bank obligations leads to improvements in funds' credit quality.... This change resulted in a sizeable quarter-over-quarter jump in exposure to securities rated Aa2 or better. `For US prime funds, the percentage of assets invested in Aa2 or better securities rose to 50% from 41%, while the percentage in European and offshore prime funds increased to 46% from 35%."

It also comments on liquidity and maturities, "The percentage of overnight maturities to total assets reached its highest point in a year in Q2, with 34% of assets invested in overnight securities, on average, up from an already elevated 32% in Q1. Although new US MMF reforms, which introduce floating net asset values (NAVs) and liquidity fees and redemption gates, do not go into effect until Q4 2016, prime fund managers have begun to increase immediate liquidity in portfolios in preparation for potentially large asset flows out of prime funds."

Also, Moody's says, "Prime fund managers continued to shorten portfolio WAMs in anticipation of a possible September Fed rate hike. Average WAMs for both US and European and offshore prime funds reached a low for the last twelve months of 31 days and 37 days, respectively. Moody's expects managers to maintain shorter portfolio WAMs to prepare for a period of potentially rising short-term rates."

Furthermore, they comment, "Assets under management in Moody's-rated US prime funds fell 5% to $623 billion in the quarter, a low point for the year. AUM in Moody's-rated US prime funds were down 8% through the first six months of the year. These funds have experienced 1H net outflows in each of the last four years, though this has typically been followed by net inflows in the second half of the year. This trend is already repeating in Q3, with funds reporting net inflows in July."

Regarding Euro Prime Money Funds in 2Q, it says, "Assets under management fell to their lowest level in 12 months, falling 21% in Q2 to EUR54 billion. The advent of net negative yields in the middle of 2Q affected all euro prime funds, as it prompted investors to limit their cash balances denominated in euros and/or to invest directly in higher yielding instruments (short-dated bond funds, segregated mandates, commercial paper, etc)."

Finally, Moody's review of Sterling MMFs <b:>`_ says, “Exposure to European financial institutions remains historically low. Aggregate exposure to European financial institutions dropped 1 percentage point to 32% of total investments (or L31.4 billion) at quarter-end, the second lowest level in twelve months. This drop was mainly driven by the reduction (-L3.1 billion) in holdings of UK bank paper. AUM fell to the lowest level since the beginning of the year. Prime fund balances are back below the L100 billion mark following a 6.4% quarterly drop." (Note: Crane Data will be hosting its 3rd annual European Money Fund Symposium next month in Dublin, Sept. 17-18. Visit www.euromfs.com for more details or to register.)

Add T. Rowe Price to the list of money market fund complexes that are converting Prime fund assets to Government fund assets. However, bucking recent trends, the 21st largest money fund manager with $14.6 billion in assets (all classified as "Retail" by Crane Data), is also launching a new Prime Institutional fund, according to a story published in Ignites, "T. Rowe Tinkers with Money Fund Lineup." T. Rowe officials say they want to be prepared for growth in the new money market fund landscape. The ignites article says, "T. Rowe Price will convert its largest money market fund -- the $6.4 billion Prime Reserve -- to a government fund and launch a new prime institutional fund as part of its moves to comply with the SEC's 2014 reforms, the firm announced last week." In other news, we also report on ICI's and "J.P. Morgan Securities' latest "Money Fund Holdings" reports.

The ignites piece tells us, "T. Rowe, like other money fund managers, says it wants to be sure to have a product line in place that will satisfy its current clients -- and ideally attract new ones. The changes to the firm's money fund lineup are primarily aimed at better serving existing investors, says Joe Lynagh, portfolio manager for T. Rowe's money funds. There is a "real possibility," however, of getting new shareholders, Lynagh adds. "The whole industry is being repainted ... so you want to be in a position to serve shareholders who are being shaken out because of these changes," he says.

The article explains, "T. Rowe has a total of about $36 billion in money fund assets overall. In addition to the eight money funds, it also manages $21 billion in two internal, cash sweep funds and $17 million in cash strategies distributed through variable annuity portfolios offered by insurance companies, according to a firm spokesman." It continues, "The firm currently offers a Treasury fund, two prime funds and five tax-exempt funds." (Note: These funds include: T Rowe Price Prime Reserves (PRRXX, $6.4B), T Rowe Price Summit Cash Res (TSCXX, $4.7B), T Rowe Price US Treasury Money (PRTXX, $2.1B), T Rowe Price CA Tax-Free MF (PCTXX, $68M), T Rowe Price MD Tax-Free MF (TMDXX, $135M), T Rowe Price NY Tax-Free MF (NYTXX, $73M), T Rowe Price Summit Muni MF (TRSXX, $197M), and T Rowe Price Tax-Exempt MF (PTEXX, $998M).)

Further, ignites explains, "T. Rowe has determined that investors in the funds are predominantly retail, but some institutional investors do hold shares. The new prime institutional fund ensures those investors have a "home for those assets," Lynagh says. "So launching a fund specifically tailored to institutional investors gives T. Rowe Price entry into a space we've never been in before." Or, as Peter Crane, CEO of Crane Data, says, "If you don't have a bucket for some investors, you have to make one."

The article adds, "An institutional prime fund also sets the firm up for investors who desire greater yield than they would get from government funds, despite the possibility that gates and fees could be imposed on prime institutional products. "As we go forward in time, if there is a significant yield differential, investors may decide that they are not as concerned about liquidity fees and gates," Lynagh says, adding he does not expect a big yield differential until after 2016."

In other news, the Investment Company Institute released its latest "Money Market Fund Holdings" summary (with data as of July 31, 2015), which tracks the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds. (See also Crane Data's August 12 "News", "MF Port Holdings: Repo Plunges; Time Deposits, CDs, CP Jump in July.")

ICI's "Prime and Government Money Market Funds' Daily and Weekly Liquid Assets" table shows Prime Money Market Funds' Daily liquid assets at 26.1% as of July 31, up from 26.4% on May 31. Daily liquid assets were made up of: "All securities maturing within 1 day," which totaled 21.8% (vs. 22.5% last month) and "Other treasury securities," which added 4.4% (down from 3.9% last month). Prime funds' Weekly liquid assets totaled 38.8% (vs. 39.6% last month), which was made up of "All securities maturing within 5 days" (32.9% vs. 33.7% in June), Other treasury securities (4.3% vs. 3.6% in June), and Other agency securities (1.6% vs. 2.3% a month ago).

The ICI holdings report says Government Money Market Funds' Daily liquid assets totaled 62.0% as of July 31 vs. 59.5% in June. All securities maturing within 1 day totaled 26.5% vs. 23.6% last month. Other treasury securities added 35.5% (vs. 35.9% in June). Weekly liquid assets totaled 82.9% (vs. 82.2%), which was comprised of All securities maturing within 5 days (39.8% vs. 40.1%), Other treasury securities (33.4% vs. 33.7%), and Other agency securities (9.8% vs. 8.4%).

ICI's "Prime and Government Money Market Funds' Holdings, by Region of Issuer" table shows Prime Money Market Funds with 42.0% in the Americas (vs. 50.6% last month), 19.2% in Asia Pacific (vs. 20.5%), 38.6% in Europe (vs. 28.6%), and 0.3% in Other and Supranational (vs. 0.4% last month). Government Money Market Funds held 84.3% in the Americas (vs. 93.9% last month), 0.6% in Asia Pacific (vs. 0.2%), 15.0% in Europe (vs. 5.9%), and 0.1% in Supranational (vs. 0.1%).

The table, "Prime and Government Money Market Funds' WAMs and WALs" shows Prime MMFs WAMs at 37 days as of July 31, same as last month. WALs were at 73 days, same as last month. Government MMFs' WAMs was at 40 days, up from 30 days last month, while WALs were at 76 days, up from 75 days.

JP Morgan Securities also commented on WAMs in its "Prime MMF Holdings Update for July" last week. JPM writes, "With a Fed tightening cycle on the horizon, prime MMFs continued to maintain short portfolios during July. Fund managers continued to prepare for a September liftoff by keeping WAMs incredibly short. At 33 days, prime fund WAMs are currently near their all-time lows. Indeed, holdings data shows that prime funds have been focused on building liquidity year-over- year, with more holdings in the 0-30d maturity bucket and less beyond 30d. As the beginning of the tightening cycle draws nearer, we expect WAMs to come in even further, with issuance concentrated in short tenors for fixed rate paper."

On holdings, they write, "Prime fund exposures to banks snapped back post quarter-end, increasing by $147bn. The increase was due in large part to rebounds in time deposit and CD holdings, which rose by $77bn and $28bn respectively.... While prime funds increased their exposures to banks, they decreased their usage of the Fed RRP facility. Usage of the Fed RRP fell by $139bn month-over-month, as banks tapped the short-term wholesale funding markets after scaling back for quarter-end.... As another means to protect against a Fed move, prime funds have become larger buyers of floating rate product over the past few months.... Buying floaters from these high quality issuers has allowed funds to get invested while protecting against a rate hike all while minimizing their WAMs."

Finally, JPM commented on the four large money market fund complexes that initiated MMF lineup changes in July -- Deutsche, State Street, Goldman Sachs, and BlackRock. They say, "With these latest announcements, about $160bn currently invested in prime MMFs is now scheduled to be converted into government fund status. Of this amount, approximately $120bn is invested with banks. As this paper begins to roll off, other funds potentially announce similar prime to government fund conversions, and MMF reform-related outflows begin to occur, bank borrowing rates may begin to be pressured higher. Consequently, LIBOR/OIS spreads could be biased wider towards the end of the year and into 2016. However, since the timing of these factors remains unclear, it is hard to tell exactly how much widening could occur. Also, banks may choose not to replace this funding, abating such a widening bias."

One of the most controversial, and in some cases misunderstood, components of the SEC money market reforms are the "liquidity fees and redemption gates" provisions. In a new white paper entitled, "Break Glass Only in Case of Emergency," BofA Global Capital Management's Jeffrey Coleman, Head of Fund Operations, and Nitin Mehra, Head of Strategy and Product, analyze this portion of the new rules and explain why "Liquidity fees and redemption gates are valuable shareholder protections that would be used only under dire circumstances." They write, "With its latest money market fund reforms, the Securities and Exchange Commission (SEC) seeks to mitigate the impact of runs on money market funds by giving fund boards the option to impose temporary liquidity fees and redemption restrictions or "gates" to protect shareholders should liquidity fall below certain thresholds." (Note: Crane Data also released the August issue of its new Bond Fund Intelligence publication yesterday. Watch for excerpts from our "profile" with Fidelity Conservative Income's Kim Miller later this month, or e-mail us to request the latest issue.)

BofA's piece explains, "To take effect in October 2016, the new rules are as follows: Fund boards will have discretion to either impose a temporary liquidity fee of up to 2% of the value of the redemption or to suspend redemptions temporarily should a money market fund's level of weekly liquid assets fall below 30% of its total assets and if the board determines that the fee or gate is in the best interests of the fund and its shareholders. Fund boards will be required to impose a liquidity fee of 1% of the value of the redemption if a money market fund's level of weekly liquid assets falls below 10% of its total assets if they determine that imposing a fee is in the best interests of the fund and its shareholders. If a board decides to impose a fee, it can choose to levy a fee that is higher or lower than 1%. Liquidity fees and redemption gates must be lifted as soon as weekly liquid assets meet the 30% minimum. A redemption gate may be imposed for no more than 10 business days in any 90-day period."

It tells us, "With the exception of the 1% liquidity fee that could be levied if weekly liquidity falls below 10% of a money market fund's total assets, none of the above rules would be triggered automatically (and as noted above, fund boards can opt not to levy that fee or adjust the amount of the fee). It is up to each fund board to determine the appropriate response to a liquidity crisis. Faced with similar liquidity pressures, one board might implement a 2% liquidity fee; another might impose a 0.5% fee; a third might levy no fee at all, choosing instead to implement a redemption gate until the fund met the SEC's minimum liquidity requirements; and a fourth might not impose a fee or a gate at all. Ultimately, the fund board has total discretion to apply a fee or gate based on the best interests of the fund and its shareholders, taking into account the particular facts and circumstances confronting the fund at the time."

Coleman and Mehra continue, "Investors likely are questioning whether the fees-and-gates provision will deprive them of one of the core benefits of money market funds -- ready access to their cash. When assessing the likelihood of a given fund imposing a liquidity fee or gating redemptions, investors should keep in mind that fund boards must exercise reasonable care before taking such actions. Put simply, a fund's board must ensure that the imposition of liquidity fees or the gating of redemptions is in the best interests of the fund and its shareholders before implementing either measure."

They state, "It may surprise liquidity investors that measures intended to raise the cost of redeeming shares -- or halt redemptions altogether -- could be in their best interests. However, these actions could prove beneficial by protecting investors from losses that stem from panic selling and contagion -- the spread of a run on one money market fund to others. By allowing funds to mitigate the impact on nonredeeming shareholders of significant redemption activity, whether due to a market crisis or a credit event affecting a particular fund, fees or gates potentially buy time for a portfolio manager to generate liquidity without having to sell securities at prices that could have a negative impact on the fund's NAV. Indeed, given the reputational damage that would result from the imposition of a fee or gate, these clearly are "break-glass-only-in-case-of-emergency" measures"."

The BofA paper continues, "Liquidity fees were approved by the SEC to offset the "first-mover" advantage that otherwise might be afforded to shareholders who exit early from a fund. Early redeemers might make remaining shareholders more vulnerable to losses if the portfolio manager needed to sell securities at inopportune times or at unfavorable prices to pay early redeemers. Liquidity fees are intended to deter shareholders from exiting money market funds en masse during crisis periods, ideally preventing the NAV deterioration that threatened some money market funds during the global financial crisis. It is imperative that investors see these potential liquidity fees for what they are -- payments that go directly to the fund (not the fund advisor). Liquidity fees serve first to deter investors from exiting the fund, while also helping to minimize the potential negative impact of redemptions on shareholders remaining in the fund."

On gates, it says, "The SEC's redemption gate provision gives a fund's board the option to suspend, on a temporary basis, redemptions if the board determines that doing so would be in the best interests of the fund and its shareholders. Essentially, gates serve as a braking mechanism that buys time for portfolio managers to conduct price discovery and formulate an orderly plan to raise liquidity and to try to avoid or minimize losses on the sale of securities -- losses that could pressure funds' NAVs. It is important to remember that money market funds typically do not liquidate securities before they mature at par.... The new liquidity gate measure merely gives fund boards the option to halt redemptions temporarily without requiring that a fund be liquidated."

They explain, "Some critics of the fees and gates measures have hypothesized that investors might exit a fund en masse should its liquidity even approach the 30% minimum on concerns that the imposition of fees and/or gates could be imminent. Because it is impossible to know exactly how investors would react should a money market fund's weekly liquidity approach the 30% minimum, fund managers likely would be even more diligent about meeting or, in most cases, exceeding the minimum liquidity requirements. The level of liquidity maintained by each fund will depend on the investment philosophy of the fund manager, its shareholders' liquidity requirements and redemption histories and, importantly, the type of fund. A municipal money market fund, for example, typically will maintain higher weekly liquidity than a prime money market fund due to the nature of the instruments in which it invests. Indeed, it's not at all uncommon for a municipal money market fund to maintain weekly liquidity of 70% to 80% of total assets. Exceeding the 30% weekly liquidity requirement by such a large margin would make the imposition of fees or gates very unlikely."

Further, BofA writes, "Money market fund managers generally can keep their liquidity levels stable by managing their portfolios' durations, tracking inflows and outflows over time; and by knowing their shareholders' liquidity requirements. One wild card that can disrupt funds' liquidity-management efforts, however, is a credit default, which can trigger liquidity crises by unleashing runs on money market funds as investors hope to redeem before the valuation impact of a defaulted security is reflected in a fund's NAV. Fortunately for investors, the money market fund industry is better positioned to withstand highly disruptive credit events like the collapse of Lehman Brothers in part because of the SEC's 2010 reforms and those to be implemented in 2016."

They add, "In addition to the new rules providing for liquidity fees and redemption gates, the SEC's 2016 Rule 2a-7 reforms introduced enhanced disclosure requirements mandating daily website reporting of daily and weekly liquid assets, net fund flows and market-based NAVs. These provisions are designed to give investors increased visibility into funds' liquidity positions well in advance of events that could trigger the implementation of fees and gates."

BofA comments, "For investors in prime and municipal money market funds, the fees-and-gates reforms raise an important question: "Can I get my money if I need it?" We believe that in a normal market environment, the answer to that question is "Yes." First and foremost, money market fund portfolio managers would make every effort to avoid imposing fees or gates because, absent an industry-wide crisis or credit event that causes panic selling, the reputational damage a fund sponsor would incur by implementing either measure could be irreparable."

Finally, they add, "As a practical matter, fund shareholders and the market would be unlikely to tolerate a redemption restriction absent an emergency. For this reason, fund boards would think very carefully about the ramifications of such an action, as they determine whether imposing fees or gates is in the best interests of the fund and its shareholders. Indeed, given the price funds would pay were they to impose fees and gates, the most important benefit presented by these emergency measures might be the incentives they create for funds to manage their portfolios such that fees and gates need never be employed."

There has been a steady stream of money market fund liquidations over the past year, with many occurring in the Tax Exempt, or Municipal, sector. The latest of these comes from Western Asset Management, which recently merged its $570 million Western Asset Institutional AMT Free Municipal Money Market Fund into the $1.1 billion Western Asset Institutional Tax Free Reserves Fund. The prospectus supplement filing says, "The Board of Trustees, on behalf of the fund, has approved a reorganization pursuant to which the fund's assets would be acquired, and its liabilities would be assumed, by Western Asset Institutional Tax Free Reserves, a series of the Trust, in exchange for shares of the Acquiring Fund. Your fund and the Acquiring Fund are both money market funds with substantially similar investment objectives and investment strategies. After the reorganization, the fund would be liquidated, and shares of the Acquiring Fund would be distributed to fund shareholders. The fund will be closed ... on or about July 24, 2015." According to the August Money Fund Intelligence XLS, there are currently 379 Tax-Exempt MMFs, down from 397 in August 2014. Below, we recap a number of recent and pending MMF liquidations.

Regarding pending liquidations, in July, we reported that BlackRock was liquidating 3 Muni MMFs as part of its reorganization plan. The firm filed with the SEC to close three state funds -- 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. The filing says, "On or about December 15, 2015 ... 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 currently have about $110 million in total.

In June, Federated also announced plans to streamline its MMF lineup by merging 7 funds into similar funds, including the Federated Municipal Cash Series ($249M) into Federated Municipal Obligations ($2.3B). Other pending mergers include: Federated Automated Cash Management Trust ($1.3B) and Federated Prime Cash Series ($2.9B) into Federated Prime Cash Obligations ($15.3B); Federated Treasury Cash Series ($1.6B) into Federated Trust for US Treasury Obligations ($130M); Federated Government Cash Series ($818M) into Federated Government Obligations ($26.1B); Federated Liberty US Govt ($93M) into Federated Government Reserves ($11.2B), and Federated Automated Government Cash Reserves ($230M) into Federated Government Obligations Tax Managed ($5.1B). Also, Federated acquired the assets of the Touchstone Ohio Tax Free MMF and merged it into the Federated Ohio Municipal Cash Trust.

Federated also recently acquired Reich & Tang's MMFs. Specifically, several former Reich & Tang funds were merged into similar Federated funds, including 2 Tax-Free funds -- Municipal Portfolio and California Daily Tax Free Income Fund. Other Reich & Tang funds merged into Federated funds include Daily Income Fund -- Money Market Portfolio; U.S. Government Portfolio; U.S. Treasury Portfolio; and Daily Dollar International, Ltd., a Cayman Islands-domiciled money market fund.

Among other recent liquidations, Touchstone sold the assets of its Touchstone Tax Free MMF to Dreyfus. That fund was merged into Dreyfus General Municipal MMF. Also, Touchstone Institutional Money Market Fund was reorganized into Dreyfus Cash Management and Touchstone Money Market Fund was reorganized into Dreyfus General Money Market Fund.

In March, Alpine said it was liquidating its Alpine Municipal Money Market Fund. The filing reads, "On March 19, 2015, the Board of Trustees of the Alpine Municipal Money Market Fund, a series of the Alpine Income Trust determined that it is in the best interests of the Fund and its respective shareholders to liquidate the Fund on or about April 28, 2015." The fund had about $90 million in assets.

Also in March, Fidelity announced plans to merge away 6 funds, including Fidelity AMT Tax-Free Money Fund, which will be merged into CMF Tax-Exempt. They are also merging Select Money Market (into Fidelity Money Market), CMF Prime Fund Daily Money Class (into Fidelity Government Money Market), CMF Prime Fund Capital Reserves Class (into Fidelity Government Money Market), US Government Reserves (into Fidelity Government Money Market), CMF Government Daily Money (into Fidelity Government Money Market), and CMF Government Capital Reserves (into Fidelity Government Money Market).

In January, Huntington liquidated 2 of its Muni MMFs, Huntington Tax-Free MMF and Huntington Ohio Municipal MMF. And in December, JP Morgan Asset Management liquidated two Muni funds, JPM Michigan Municipal Money Market and JPM Ohio Municipal Money Market Fund. Also in December, BlackRock liquidated its BlackRock Cash Funds: Government. The filing states: "On November 19, 2014, the Board of Trustees of BlackRock Funds III approved a proposal to close BlackRock Cash Funds: Government to new investors and thereafter to terminate the Fund. BlackRock also liquidated Select and Trust share classes of its BlackRock Cash Inst, Prime and Treasury funds last year.

Going back to late 2014, two firms got out of the MMF business, Williams Capital and Virtus Investment Partners. Virtus liquidated 3 funds -- Virtus Insight Government Money Market Fund, Virtus Insight Money Market Fund, and Virtus Insight Tax‐Exempt Money Market Fund. Williams Capital liquidated its Williams Capital Government Money Fund and outsourced the management of its MMF to Northern Trust.

Regarding the closing of international MMFs, Western Asset Management also recently liquidated two of its "offshore" funds -- Western Asset Euro Liquidity Fund and Western Asset Sterling Liquidity Fund. A letter to clients said, "As a result of the continued low interest rate environment and recent redemptions that have significantly reduced the Fund's net asset value, the Directors have decided that the Fund is no longer economically viable and that it would be in the best interest of the Shareholders of the Fund to terminate the Fund." Also, Federated UK liquidated its Federated Short-Term Euro Prime Funds.

On June 19, JP Morgan also recently got rid of the "B" shares in three funds -- JP Morgan Prime Money Market Fund, JP Morgan Liquid Assets Money Market Fund, and JP Morgan US Treasury Plus Money Market Fund -- and merged them into other share classes of the same funds. PIMCO also merged 'B' share classes into A share classes for a number of funds, including PIMCO Money Market Fund.

SEI also filed with the SEC to liquidate share classes of several 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. Finally, in March, RBB liquidated 2 funds, the $9 million RBB Bedford Money Market Fund and the $1 million RBB Sansom Street MMF.

A panel of experts discussed the findings of the Association for Financial Professionals' "2015 AFP Liquidity Survey last week during a webinar hosted by AFP and survey sponsor State Street Global Advisors. The webinar, called "2015 Liquidity Survey Highlights," featured Tom Hunt, Director of Treasury Services, AFP; Matt Steinaway, Global Head of Cash Management, SSgA; Jim Gilligan, Assistant Treasurer, Great Plains Energy/Kansas City Power & Light Company; and Crane Data President Peter Crane. Much of the focus centered on money market funds and their place within an evolving cash investment landscape. (See too our July 9 News, "AFP Liquidity Survey 2015 Shows Safety Still First, Record Deposits.")

Hunt began with an overview of the results, saying, "The most important objective in cash investment policy for an organization has always been safety first." This year was no exception, he commented, as the survey found that 65% cited Safety as the most important, while 31% said Liquidity and just 4% said Yield. Further, the bulk of cash investments, 56%, remains in Bank Deposits, explained Hunt, while money market funds are a distant second. A total of 15% of assets are in MMFs with 9% in Prime funds and 6% in Government funds. The big question is. How will these percentages change when the new money market fund rules are implemented in October 2016? Will money flow out of Prime to Government? Or, with Bank Deposits facing their own set of regulations, will money migrate into money market funds?

Crane pointed out that yield could come into play. While yield has ranked a distant third, Crane added, "It's important to keep in mind that we're coming out of a period where yield has not mattered at all. We've had seven years of zero yields. The Fed moving, I would argue, may be even more important than the regulatory changes going through the pipeline."

He continued, "Yield is the very reason money funds have $2.6 trillion and why everything's not sitting in banks. Once rates lift off the floor, I think you're going to hear a giant sucking sound as a lot of bank assets try to get into money funds." Crane continued, "There's no doubt that government money market funds and the Treasury bills in general are going to see inflows. The question is: are prime funds going to see outflows? If there's a 40 or 50 basis point spread between Government and Prime, I think a lot of money is going to end up in Prime."

What may result is investors will tier their cash so they have a layer in government and a layer in prime, Crane said. "In the past with money market mutual funds you got your safety, liquidity, and yield all in one place. In the future, you're going to get your safety and liquidity in one place and your yield somewhere else," he told the AFP webinar.

SSgA's Steinaway agreed with the tiering concept, given the evolving landscape. "There is an unnatural mismatch between supply and demand for liquidity products and that is reflected in some of the variance we see in the marketplace. If you look at Crane Data, you'll see a Prime fund yielding 24 basis points and a Treasury fund yielding 8 basis points on a gross basis. Over time as rates increase and the demand mechanics shifts in the marketplace, that spread could potentially widen." The potential for higher demand for Government and Treasury funds could drive liquidity cost up and yields lower. "That needs to be thought of when constructing an Investment Policy," he said.

The best way for treasurers to deal with this is to understand their liquidity needs and consider bucketing their allocations, Steinaway added. Where you have daily liquidity needs, you could put cash into a Government fund. Where the cash might not be needed for 3 or 6 months you could put it into a longer term vehicle. "We think it's very important to strike that balance between the real need for cash and taking duration in the cash that is not needed for immediate use," said Steinaway.

On the topic of Investment Policies, the AFP survey said 70% of treasurers surveyed had an investment policy for cash. "I found that very encouraging," said Steinaway. "In this marketplace cash is a very complex asset class and rapidly changing. Approximately two thirds are looking at their cash investment policies at least once a year and in some cases more frequently than that. We think that's an important takeaway certainly as regulations are changing and we're facing a potential rate hike. We think it is worthy of a frequent review."

The key is to maintain flexibility in cash investment policy statements and be responsive to changes. "Something we've been talking about for a while at State Street is the recognition of cash as an actively managed asset class. The market is evolving and that paradigm has shifted -- it's really is an active investment class. That requires a rigorous cash investment policy that is frequently reviewed and modified to reflect some of the changes in the marketplace."

Kansas City Power and Light Company's Gilligan said corporate treasurers haven't put a lot of focus yet on money fund reforms. "In my conversations with my peers, perhaps shockingly perhaps not so shockingly, a lot of treasurers have just not given much thought to this yet." One reason it's not top of mind is because implementation is still over a year away, he said. Another reason, he added, "is that a lot of investors are not even using money market funds right now primarily due to the higher earnings credit rates they can achieve by leaving their deposits in banks. And that has been substantiated I think by the liquidity survey that showed bank deposits have increased dramatically since the beginning of the financial crisis."

As we get nearer to October 2016, Gilligan said corporate treasurers need to have a better understanding of the money market fund rules and the possible ramifications. He commented, "It's important that corporate treasurers review their investment policies to make sure that their policies allow investments of money market funds under the new rules and new products being developed outside of money market funds." If not, they will need to make adjustments in their investment policies.

Note: AFP will host its Annual Conference, the largest gathering of corporate treasurers in the U.S., Oct, 18-21 in Denver, where money market funds and cash investments will be a big topic of discussion. (Most large institutional money fund managers and many online trading "portals" exhibit at this show too.) Among the sessions involving "cash", Crane Data's Peter Crane will present on "Floating NAV Money Funds and Cash Alternatives" along with Vicki Fiegehen, Sr. Manager Treasury Investments for Qualcomm Incorporated, and Lance Doherty, Director Treasury for Pacific Life Insurance Company, on Monday a.m., Oct. 19.

In preparation for likely interest rate hikes and pending money market fund reforms, money fund managers are reviewing their portfolios with an eye on average maturities and "topping up" shadow NAVs, according to a new report by Fitch Ratings, entitled, "Fund Managers Brace for Rate Hikes and Reform; Shadow NAVs Come into Focus." The piece says, "Anticipated increases in U.S. interest rates are pushing money funds across the board to shorten portfolio maturities to take advantage of higher rates. Furthermore, underlying data indicate that prime funds are adjusting their weighted average maturities (WAMs) more aggressively than government funds due to additional reform-related pressures." In other news, we also revisit the updated "Frequently Asked Questions on Money Market Reform" version that the Securities & Exchange Commission, released last week.

The Fitch report explains, "Many money funds have migrated to shorter WAMs since the beginning of the year and, in doing so, have reduced their duration risk. Between Jan. 15 and July 27, the number of prime and government funds with WAMs between 41 and 60 days decreased to 112 from 192, while the number with WAMs between one and 40 days increased by 81 funds. Prime funds have been more proactive than government funds in reducing portfolio average maturities and building liquidity, as these funds have to contend with potential reform-related redemptions, in addition to rising rates. The number of prime funds with WAMs longer than 40 days declined to 48 from 102, while government funds have been slower to reduce maturities."

It continues, "The looming conversion to floating net asset values (NAVs) for institutional prime and municipal funds is leading fund managers to focus on funds' current shadow NAVs, which reflect market pricing. As money funds currently transact at a stable $1 NAV, a key implication is that funds with a shadow NAV of less than $1 will immediately crystalize losses for investors upon conversion to a floating NAV. To avoid losses for investors, some fund managers have taken steps to bring shadow NAVs up to $1 through capital injections, and others may follow in the coming months."

Fitch writes, "For example, Crane Data reported that Northern Trust took a $45.8 million charge in the second quarter over a capital injection used to top up the shadow NAVs of four funds, citing legacy losses from the financial crisis as the cause of the shortfall. Northern Trust did not specify the affected funds, but Fitch's review of data from Crane shows that the shadow NAV of the Northern Trust Money Market Fund increased from $0.9989 on July 9, 2015 to $1 the next day. If the increase in the fund's shadow NAV was a result of a capital infusion, it would have cost approximately $8 million. Although the fund is considered a retail fund and, therefore, will not convert to a floating NAV like institutional funds, Northern Trust will still have to post the fund's shadow NAV on its website, which may have been one of the reasons for the top up."

On the issue of shortening WAMs, JP Morgan Securities' Alex Roever wrote in the weekly "Short-term Market Outlook and Strategy," "MMFs continued to manage short portfolios, further reducing their maturities to prepare for a potential Fed move. Year-to-date, both prime and government MMFs have shortened WAMs by 9 days. In fact, at 33 days, prime fund WAMs are now at their lowest levels we have on record. With a tightening cycle on the horizon, we look for WAMs to fall even further going into September."

In other news, we continue our coverage of the SEC's updated FAQs. (We mentioned them in our August 7 News and our August 10 Link of the Day, "SEC Updates MMF Reform FAQs." In the SEC's latest update, some new FAQs were added, including FAQ 22, "May a retail money market fund continue to rely on the retail exception where some of its shares have been transferred to state custody under applicable escheatment or unclaimed property laws?

The SEC replies, "State laws may require a retail money market fund or a financial intermediary to transfer escheated or unclaimed shares to a state's treasurer or other administrator. This may be accomplished by transferring the shares into a securities account in the state administrator's name or otherwise turning over the shares to the state. The state administrator maintains custody over such shares until they are reclaimed by the missing owner. Accordingly, so long as the missing owner has the right to reclaim escheated or unclaimed shares, the staff would not object if a retail money market fund or a financial intermediary continues to rely on the retail exception."

FAQ 31 is also new. It asks, "Some money market funds have charters providing that the fund may suspend redemptions only in certain specified circumstances, such as during an emergency. If a money market fund imposes a redemption gate, would it be doing so as the result of an "emergency"? The SEC responds, "Yes. Under rule 2a-7(c)(2)(i), a money market fund is allowed to impose a redemption gate only in extraordinary circumstances, i.e. if the fund's weekly liquid assets fall below 30% and the fund's board of directors determines that imposing a gate is in the best interest of the fund. In the staff's view, such extraordinary circumstances would in effect likely create an emergency for the fund. Accordingly, the staff believes that a suspension of redemptions by a money market fund, as permitted by rule 2a¬7(c)(2)(i), would be because of such an emergency."

Also, FAQ 13 is on Form PF, which relates to Private Funds. The FAQ asks, "The compliance date for the amendments to Form PF is April 14, 2016, which falls during the 15-day filing period for the first quarter ending March 31, 2016. Should a large liquidity fund provide the new portfolio holdings information required under the Form PF amendments in their first quarter 2016 filing? The answer is: No. If filers were to include the new portfolio holding data as of April 14, 2016, it could create disparities, because filers who file before April 14 during the 15-day filing period would not be required to include the new data, but those who filed afterwards, on the deadline date of April 14, would include it. Therefore, staff does not believe that large liquidity funds should include the new portfolio holdings information required under the Form PF amendments in their first quarter 2016 filing. The first Form PF filing with such holdings data should be the second quarter filing, covering the period between April 1, 2016 and June 30, 2016. Having all filers begin to submit portfolio holdings information at the same time will help maintain the integrity and comparability of data filed on Form PF and reduce potential systems issues."

Finally, there was also a new language added to the former FAQ 42, now 45, which asks: "If a state, municipal or foreign government or its agencies or instrumentalities owns (directly, through legislative act or other means) more than 50 percent of an entity's voting securities, is a money market fund required to treat such entity and the state, municipal or foreign government or its agencies or instrumentalities that owns more than 50 percent of that entity's voting securities as a single issuer for purposes of the five percent issuer diversification provision?"

The following passage was added to the answer: "A money market fund also must treat two or more issuers as one single issuer if one issuer is controlled by, or under common control with the other issuer. In the staff's view, a state, municipal or foreign government or one of its agencies or instrumentalities that does not issue voting securities, as is typically the case, is not considered controlled by or under common control with another entity. If a state, municipal or foreign government or one of its agencies or instrumentalities does issue voting securities, however, the above diversification requirements would apply to such issuer."

Crane Data released its August Money Fund Portfolio Holdings yesterday, and our latest collection of taxable money market securities, with data as of July 31, 2015, shows a big drop in holdings of Repo, but sizable increases in Other (Time Deposits), Commercial Paper, and CDs. Money market securities held by Taxable U.S. money funds overall (those tracked by Crane Data) increased by $55.0 billion in July to $2.549 trillion. MMF holdings increased $58.3 billion in June and $31.6 billion in May; assets dropped $49.3 billion in April and $19.2 billion in March. Despite a sharp decline, Repos remained the largest portfolio segment, just ahead of CDs. Treasuries stayed in third place, followed by Commercial Paper. Agencies were fifth, followed by Other (mainly Time Deposits) securities, then VRDNs. Money funds' European-affiliated securities represented 28.6% of holdings, up from 19.3% the previous month, as funds switched out of Fed repo at quarter-end and back into Time Deposits, CDs and CP. Below, we review our latest Money Fund Portfolio Holdings statistics.

Among all taxable money funds, Repurchase agreements (repo) decreased $109.7 billion (16.4%) to $558.3 billion, or 21.9% of assets, after increasing $140.5 billion in June and $10.7 billion in May (and decreasing $113.6 billion in April). Certificates of Deposit (CDs) were up $33.9 billion (6.7%) to $536.1 billion, or 21.0% of assets, in July, after rising $21.8 billion in June, $10.8 billion in May, and $1.7 billion in April. Treasury holdings increased $9.4 billion (2.2%) to $430.7 billion, or 16.9% of assets, while Commercial Paper (CP) jumped $32.2 billion (8.5%) to $412.1 billion, or 16.2% of assets. Government Agency Debt decreased $1.8 billion (0.5%) to $354.0 billion, or 13.9% of assets. Other holdings, primarily Time Deposits, skyrocketed $91.5 billion (62.3%) to $238.4 billion, or 9.4% of assets. VRDNs held by taxable funds decreased by $600 million to $19.2 billion (0.8% of assets).

Among Prime money funds, CDs represent one-third of holdings at 33.7% (up from 32.8% a month ago), followed by Commercial Paper at 25.9%. The CP totals are primarily Financial Company CP (15.0% of total holdings), with Asset-Backed CP making up 5.7% and Other CP (non-financial) making up 5.2%. Prime funds also hold 6.9% in Agencies (down from 7.6%), 4.8% in Treasury Debt (up from 4.2%), 2.9% in Treasury Repo, 4.5% in Other Instruments, 4.7% in Other Instruments (Time Deposits), and 5.6% in Other Notes. Prime money fund holdings tracked by Crane Data total $1.589 trillion (up from $1.541 trillion last month), or 62.3% of taxable money fund holdings' total of $2.549 trillion.

Government fund portfolio assets totaled $465 billion, up from $458 billion in June, while Treasury money fund assets totaled $495 billion, up from $494 billion in June. Government money fund portfolios were made up of 52.6% Agency Debt, 26.4% Government Agency Repo, 4.0% Treasury debt, and 17.0% in Treasury Repo. Treasury money funds were comprised of 67.9% Treasury debt, 31.3% in Treasury Repo, and 0.8% in Government agency, repo and investment company shares. Government and Treasury funds combined total $960 billion, or 37.7% of all taxable money fund assets.

European-affiliated holdings rose $248.0 billion in July to $728.1 billion among all taxable funds (and including repos); their share of holdings increased to 28.6% from 19.3% the previous month. Eurozone-affiliated holdings increased $146.1 billion to $409.5 billion in July; they now account for 16.1% of overall taxable money fund holdings. Asia & Pacific related holdings decreased by $4.0 billion to $301.6 billion (11.8% of the total). Americas related holdings decreased $188.0 billion to $1.516 trillion, and now represent 59.5% of holdings.

The overall taxable fund Repo totals were made up of: Treasury Repurchase Agreements (down $158.0 billion to $280.1 billion, or 11.0% of assets), Government Agency Repurchase Agreements (up $47.5 billion to $189.9 billion, or 7.5% of total holdings), and Other Repurchase Agreements ($88.2 billion, or 3.5% of holdings, up $800 million from last month). The Commercial Paper totals were comprised of Financial Company Commercial Paper (up $16.8 billion to $238.7 billion, or 9.4% of assets), Asset Backed Commercial Paper (up $4.6 billion to $90.7 billion, or 3.6%), and Other Commercial Paper (up $10.9 billion to $82.6 billion, or 3.2%).

The 20 largest Issuers to taxable money market funds as of July 31, 2015, include: the US Treasury ($430.7 billion, or 18.5%), Federal Home Loan Bank ($237.7B, 10.2%), Federal Reserve Bank of New York ($122.3B, 5.3%), BNP Paribas ($80.9B, 3.5%), Credit Agricole ($77.3B, 3.3%), Wells Fargo ($71.8B, 3.1%), JP Morgan ($68.1B, 2.9%), Bank of Tokyo-Mitsubishi UFJ Ltd ($58.1B, 2.5%), Bank of America ($58.1B, 2.5%), RBC ($57.2B, 2.5%), Bank of Nova Scotia ($56.8B, 2.4%), Toronto-Dominion Bank ($48.6B, 2.1%), Credit Suisse ($47.1B, 2.0%), Sumitomo Mitsui Banking Co ($43.9B, 1.9%), Federal Farm Credit Bank ($43.5B, 1.9%), Natixis ($42.9B, 1.8%), Federal Home Loan Mortgage Co. ($39.8B, 1.7%), Societe Generale, ($39.6B, 1.7%), Mizuho Corporate Bank Ltd. ($38.3B, 1.6%), and Bank of Montreal ($37.3B, 1.6%).

In the repo space, the Federal Reserve Bank of New York's RPP program issuance (held by MMFs) remained the largest program with $122.3B, or 21.9% of money fund repo, down from $361.4B a month ago. The 10 largest Fed Repo positions among MMFs on 7/31 include: JP Morgan US Govt ($8.6B), State Street Inst Liq. Res. ($6.3B), Morgan Stanley Inst Lq Gvt ($8.5B), Federated Trs Oblg ($7.0B), Dreyfus Govt Cash Mgmt ($4.6B), First American Govt Oblig ($5.3B), Morgan Stanley Inst Liq Trs ($4.9B), UBS Select Treas ($7.0B), Fidelity Cash Central Fund ($7.4B), and Dreyfus Tr&Ag Cash Mgmt ($4.6B).

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 ($122.3B, 21.9%), BNP Paribas ($50.9B, 9.1%), Bank of America ($44.8B, 8.0%), Wells Fargo ($38.0B, 6.8%), JP Morgan ($35.2B, 6.3%), Societe Generale ($33.0B, 5.9%), Credit Agricole ($31.4B, 5.6%), Credit Suisse ($26.3B, 4.7%), Citi ($23.3B, 4.2%), and Barclays PLC ($18.2B, 3.3%).

The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: Bank of Tokyo-Mitsubishi UFJ Ltd ($47.5B, 4.5%), Credit Agricole ($46.3B, 4.4%), Sumitomo Mitsui Banking Co ($43.9B, 4.2%), Bank of Nova Scotia ($41.1B, 3.9%), RBC ($39.8B, 3.8%), Skandinaviska Enskilda Banken AB ($36.4B, 3.5%) <b:>`_, Toronto Dominion Bank ($35.2B, 3.4%), Natixis ($33.9B, 3.2%), Wells Fargo ($33.8B, 3.2%), and JP Morgan ($32.6B, 3.1%).

The 10 largest CD issuers include: Sumitomo Mitsui Banking Co ($37.2B, 7.0%), Bank of Tokyo-Mitsubishi UFJ Ltd ($35.9B, 6.7%), Toronto-Dominion Bank ($31.2B, 5.9%), Bank of Montreal ($29.0B, 5.4%), Bank of Nova Scotia ($28.7B, 5.4%), Mizuho Corporate Bank Ltd ($28.1B, 5.3%), Wells Fargo ($25.6B, 4.8%), RBC ($20.4B, 3.8%), Canadian Imperial Bank of Commerce ($17.8B, 3.3%), and Sumitomo Mitsui Trust Bank ($17.1B, 3.2%).

The 10 largest CP issuers (we include affiliated ABCP programs) include: JP Morgan ($24.3B, 7.2%), Commonwealth Bank of Australia ($16.8B, 5.0%), Westpac Banking Co ($16.6B, 4.9%), RBC ($15.7B, 4.6%), BNP Paribas ($13.6B, 4.0%), National Australia Bank Ltd ($13.0B, 3.9%), Lloyds TSB Bank PLC ($13.0B, 3.8%), Bank of Nova Scotia ($11.2B, 3.3%), HSBC ($10.4B, 3.1%), and Australia & New Zealand Banking Group Ltd ($9.9B, 2.9%).

The largest increases among Issuers include: Credit Agricole (up $44.4B to $77.7B), BNP Paribas (up $29.0B to $80.9B), Barclays PLC (up $20.6B to $32.3B), Societe Generale (up $20.2B to $39.6B), DnB NOR Bank ASA (up $19.9B to $27.5B), Skandinaviska Enskilda Banken AB (up $19.6B to $36.4B), Natixis (up $17.5B to $42.9B), Swedbank AB (up $11.7B to $27.6B), US Treasury (up $9.4B to $430.7B), and JP Morgan (up $8.6B to $68.1B).

The largest decreases among Issuers of money market securities (including Repo) in July were shown by: Federal Reserve Bank of New York (down $239.1B to $122.3B), Bank of Nova Scotia (down $4.2B to $56.8), Svenska Handelsbanken (down $4.1B to $28.4B), Federal National Mortgage Association (down $3.9B to $29.1B), National Australia Bank (down $3.8B to $20.5B), Federal Home Loan Mortgage (down $2.4B to $39.8B), Sumitomo Mitsui Trust Bank (down $1.7B to $19.2B), Westpac Banking Co. (down $1.6B to $23.2), Commonwealth Bank of Australia (down $1.6B to $18.0B) and UBS AG (down $1.1B to $10.3B).

The United States remained the largest segment of country-affiliations; it represents 59.5% of holdings, or $1.516 trillion (up $66B). France (10.9%, $277.2B) moved up to second place, jumping ahead of third place Canada (9.6%, $244.3B) and fourth place Japan (7.4%, $187.8B). Sweden (4.5%, $115.2B) rose to fifth, while the U.K. (4.4%, $111.4B) jumped to sixth, dropping Australia (3.3%, $83.6B) from fifth to seventh. The Netherlands (2.7%, $68.9B), Switzerland (2.5%, $64.3B), and Germany (2.0%, $49.9B) 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 July 31, 2015, Taxable money funds held 27.7% (up from 26.3%) of their assets in securities maturing Overnight, and another 13.8% maturing in 2-7 days (so 41.5% in total matures in 1-7 days). Another 21.3% matures in 8-30 days, while 13.1% 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 11.6% of taxable securities, while 9.5% 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 Tuesday, 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.

Crane Data's latest Money Fund Intelligence Family & Global Rankings, which rank the market share of managers of money market mutual funds in the U.S. and globally, will be sent out to subscribers later this week. The August edition, with data as of July 31, 2015, shows asset increases for the majority of US money fund complexes in the latest month, as well as over the past 3 months. Assets increased by $49.9 billion overall, or 1.9%, in July; over the last 3 months, assets are up $94.1 billion, or 3.8%. For the past 12 months through June 30, total assets are up $122.2 billion, or 5.0%. Below, we review the latest market share changes and figures. (Note: Crane Data's August Money Fund Portfolio Holdings will be released later on Tuesday, and our August Money Fund Intelligence was released last Friday.)

The biggest gainers in July were Goldman Sachs, JP Morgan, Fidelity, Federated, BofA, and Dreyfus, rising by $10.3 billion, $7.3B, $7.2 billion, $5.6B, $4.9B, and $4.5B, respectively. JP Morgan, Goldman Sachs, Fidelity, BlackRock, Federated, and Morgan Stanley had the largest increases over the 3 months through July 31, 2015, rising by $16.6 billion, $15.8B, $15.6B, $10.2B, $10.2B, and $9.9B, 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 $410.3 billion, or 15.9% of all assets (up $7.2 billion in June, up $15.6 billion over 3 mos., and up $5.6B over 12 months). Fidelity was followed by JPMorgan's $257.2 billion, or 10.0% (up $7.3B, up $16.6B, and up $25.9B for the past 1-month, 3-months and 12-months, respectively). BlackRock remained the third largest MMF manager with $209.5 billion, or 8.1% of assets (up $3.7B, up $10.2B, and up $27.9B). Federated Investors was fourth with $206.3 billion, or 8.0% of assets (up $5.6B, up $10.2B, and up $9.4B), and Vanguard ranked fifth with $174.0 billion, or 6.7% (down $644M, up $1.7B, and up $2.6B).

The sixth through tenth largest U.S. managers include: Dreyfus ($170.9B, or 6.6%), Goldman Sachs ($156.0B, or 6.0%), Schwab ($155.9B, 6.0%), Morgan Stanley ($125.2B, or 4.9%), and Wells Fargo ($110.0B, or 4.3%). The eleventh through twentieth largest U.S. money fund managers (in order) include: Northern ($79.7B, or 3.1%), SSgA ($77.2B, or 3.0%), BofA ($55.7B, or 2.2%) which moved ahead of Invesco, Invesco ($55.3B, or 2.1%), Western Asset ($43.2B, or 1.7%), First American ($41.8B, or 1.6%), UBS ($36.8B, or 1.4%), Deutsche ($30.1B, or 1.2%), Franklin ($24.5B, or 1.0%), and American Funds ($15.0B, or 0.6%). Crane Data currently tracks 69 U.S. MMF managers, down one from last month. (Reich & Tang was liquidated last month.)

Over the past year through July 31, 2015, BlackRock showed the largest asset increase (up $27.9B, or 15.4%), followed by JP Morgan (up $25.9B, or 11.2%), Morgan Stanley (up $23.8B, or 23.5%), Goldman Sachs (up $21.0B, or 15.6%), Dreyfus (up $17.5B, or 11.4%), and Federated (up $9.4B, or 4.8%). Other asset gainers for the year include: BofA (up $7.4B, or 15.3%), Fidelity (up $5.6B, or 1.4%), First American (up $5.2B, or 14.3%), Franklin ($4.8B, 24.3%), and Northern (up $3.8B, 5.0%). The biggest decliners over 12 months include: SSgA (down $4.8B, or -5.9%), RBC (down $4.3B, or -22.8%), Schwab (down $3.6B, or -2.3%), Deutsche (down $3.0B, or -9.2%), American Funds (down $2.9B, or -16.2%), and T. Rowe Price (down $1.3B, or -8.1%). (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 ($416.9 billion), JPMorgan ($382.3 billion), BlackRock ($308.7 billion), Goldman Sachs ($235.4 billion), and Federated ($214.6 billion). Dreyfus/BNY Mellon ($195.3B), Vanguard ($174.0B), Schwab ($155.9B), Morgan Stanley ($143.9B), and Western ($119.4B) 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 August 2015 Money Fund Intelligence and MFI XLS show that yields went up for many indexes in July. Our Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 842), remained at 0.02% for both the 7-Day Yield and the 30-Day Yield (annualized, net) Average. The Gross 7-Day Yield and 30-Day Yield were 0.16% (unchanged). Our Crane 100 Money Fund Index shows an average 7-Day Yield and 30-Day Yield of 0.04%, up from 0.03% last month. Also, our Crane 100 shows a Gross 7-Day Yield of 0.20% (up from 0.19%) and a Gross 30-Day Yield of 0.19% (same as last month). For the 12 month return through 7/31/15, our Crane MF Average returned 0.02% and our Crane 100 returned 0.03%.

Our Prime Institutional MF Index (7-day) yielded 0.05% (unchanged), while the Crane Govt Inst Index was at 0.02% (unchanged). The Crane Treasury Inst, Treasury Retail, and Crane Govt Retail Index Indexes all yielded 0.01%, while Prime Retail yielded 0.02% (up from 0.01%). The Crane Tax Exempt MF Index also yielded 0.01%. The Gross 7-Day Yields for these indexes were: Prime Inst 0.24% (up from 0.23%), Govt Inst 0.13% (same as last month), Treasury Inst 0.08% (same), and Tax Exempt 0.12% (down from 0.13%) in July. The Crane 100 MF Index returned on average 0.00% for 1-month, 0.01% for 3-month, 0.02% for YTD, 0.03% for 1-year, 0.03% for 3-years (annualized), 0.04% for 5-year, and 1.41% for 10-years. (Contact us if you'd like to see our latest MFI XLS or Crane Indexes file.)

The Investment Company Institute, the mutual fund industry's trade association, released its latest "Worldwide Mutual Fund Assets and Flows" data collection, which shows that global money market mutual fund assets decreased in the First Quarter of 2015. The latest report says total worldwide money fund assets dropped $89 billion to $4.458 trillion. (When Australia's approximately $322.1 billion is included, total Worldwide money fund assets stand at $4.859 trillion.) China, Korea, and Mexico were bright spots in Q1, all gaining assets. China moved into third place among the largest money fund markets in various countries (behind the U.S. and Ireland), pushing France to fourth. Globally, MMF assets increased by $64.6 billion, or 1.3%, over the past year (through 3/31/15). (Note: Crane Data's Peter Crane and Standard & Poor's Andrew Paranthoiene will speak on "MMFs in Asia & Emerging Markets next month at European Money Fund Symposium in Dublin, Sept. 17-18. Crane's European MF Symposium is the largest gathering of money fund professionals outside the U.S.)

ICI's latest quarterly release says, "Worldwide regulated open-end fund assets increased 0.8 percent to $37.28 trillion at the end of the first quarter of 2015, excluding funds of funds. Worldwide net cash flow to all funds was $554 billion in the first quarter, compared to $548 billion of net inflows in the fourth quarter of 2014. Bond fund assets decreased 1.1 percent to $8.18 trillion in the first quarter. Balanced/mixed fund assets rose 1.3 percent in the first quarter, while money market fund assets fell 2.0 percent globally."

It continues, "Globally, bond funds posted an inflow of $194 billion in the first quarter of 2015, after recording an inflow of $108 billion in the fourth quarter.... Money market funds worldwide experienced an outflow of $13 billion in the first quarter of 2015 after registering an inflow of $145 billion in the fourth quarter of 2014. The global outflow from money market funds in the first quarter was driven by outflows of $80 billion in the Americas that were partially offset by inflows of $48 billion in Europe and $18 billion in the Asia-Pacific region."

Further, ICI writes, "At the end of the first quarter of 2015, 44 percent of worldwide regulated open-end fund assets were held in equity funds. The asset share of bond funds was 22 percent and the asset share of balanced/mixed funds was 13 percent. Money market fund assets represented 12 percent of the worldwide total."

According to Crane Data's analysis of ICI's "Worldwide" fund data, the U.S. maintained its position as the largest money fund market in Q1'15 with $2.645 trillion (or 54.4% of all global MMF assets). U.S. MMF assets decreased by $79.9 billion in Q1'15, and were up by $13.9B in the 12 months through March 31, 2015. Ireland remained the second largest money market fund country, ending Q1 with $383.2 billion (7.9% of worldwide assets), up $4.3B for the quarter but down $1.7B over the last 12 months. As previously mentioned, China continued its dramatic rise, moving into third place among countries overall. China saw assets grow $13.0 billion (up 3.9%) in Q1 to $349.2 billion (7.2% of worldwide assets). Over the last 12 months through March 31, 2015, Chinese MMF assets up are $114.7 billion, or 48.9%.

France dropped to fourth place with $328.7 billion (6.8% of worldwide assets), down $20.5 billion in Q1 and down a massive $116.1 billion over 1 year. Australia was in 5th place worldwide with $322.1 billion (6.6%). (Note that ICI's data didn't include money fund figures for Australia again this quarter. We continue to estimate these at $322 billion, the same amount as two quarters again. Australia's MMF assets were shifted into the "Other" category two quarters ago but there's been no explanation from Australia's fund association on why.)

Luxembourg remained in 6th place with $298.2B, or 6.1% of the total (down $6.1 billion in Q1 and down $23.2B for 1 year). Korea, the 7th ranked country, had the largest gain of all countries, climbing $16.0 billion, or 21.0%, to $92.3 billion (1.9% of total) in Q1 and $21.9 billion (31.2%) for the year. Mexico moved up to 8th place, jumping $9.9 billion, or 20.2%, to $58.9 billion (1.2% of total assets) in Q1 and $4.6 billion (8.4%) over the previous 12 months. ICI's latest Worldwide statistics also show Brazil ($41.6B, down $3.2B and down $13.5B on the quarter and year, respectively) and India ($26.0B, down $2.3B and up $3.7B) as the 9th and 10th largest money fund markets.

Taiwan ($25.2B, up $1.2B and down $2.5B), South Africa ($19.7B, down $1.1B and down $4.0B), Canada ($19.2B, down $2.0B and down $5.1B), Switzerland ($19.1B, down $512M and up $704M), and Sweden ($18.4B, down $1.9B and up $1.4B) ranked 11th through 15th, respectively. Japan, Chile, Finland, Germany, and United Kingdom round out the 20 largest countries that have money market mutual funds.

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

Crane Data's Money Fund Intelligence International, which tracks the "offshore" or international money fund market (mainly domiciled in Dublin and Luxembourg), shows assets down $69.7 billion year-to-date through July 31, 2015, to $685.0 billion. USD-denominated money funds are down $24.2 billion YTD to $359.5B. GBP-denominated MMFs are up L300 million to L152.7B, while Euro-denominated money funds are up E12.3 billion to E78.4 billion.

The August issue of Crane Data's Money Fund Intelligence was sent out to subscribers Friday morning. The latest edition of our flagship monthly newsletter features the articles: "Going Govt II: More Managers Plan Shifts to 'Govie' Funds," which discusses moves by BlackRock, Goldman, Deutsche and others to change Prime funds into Government funds; "PIMCO's Jerome Schneider Looks at 2a-7 and Beyond," where the head of PIMCO money market funds talks about the "new paradigm" for cash investors; and "MMFs in Disguise? New Ultra-Shorts from SSgA, Others," which reports on the launch of several new money fund-like ultra short bond funds. We have also updated our Money Fund Wisdom database query system with July 31, 2015, performance statistics, and sent out our MFI XLS spreadsheet 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 Tuesday, August 11, and our August Bond Fund Intelligence is scheduled to go out on Friday, August 14. In other news, the SEC updated its "2014 Money Market Fund Reform Frequently Asked Questions" document.

The lead article in MFI says, "As we move into the second half of 2015, money market fund managers are beginning to fine tune their product lineups to prepare for the new rules in 2016. In July, we saw BlackRock, SSgA, Goldman, and Deutsche further evolve with specific and significant fund changes. These latest moves include (in total) another potentially sizable shift of assets (roughly $50 billion) from Prime to Government. We review the latest batch of announcements and filings below."

It continues, "The most notable new changes, perhaps, came from BlackRock. In April, BlackRock announced that it was keeping the TempFund as Prime Institutional and subject to the floating NAV, converting TempCash to a short maturity FNAV fund, and converting several Prime Retail funds to Government funds. In a series of late July filings, they've now outlined which funds are being converted. Specifically, 3 former Merrill Lynch prime retail 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 -- will be converted to Government funds. Also, BlackRock's FFI Premier Institutional, FFI Institutional Fund, and FFI Select Institutional will be converted from Prime Institutional to Government. All totaled, about $18 billion will be changing from Prime to Government funds. BlackRock also announced that it is liquidating 3 Muni money funds, BlackRock New Jersey MM Portfolio, BlackRock Virginia MMP, and BlackRock North Carolina MMP."

In our "profile" this month, we interview Jerome Schneider, Managing Director and Lead Portfolio Manager for Short Term Strategies at PIMCO. It reads, "Schneider oversees not only money market funds, but all short duration strategies. In that role, Schneider and his team have positioned PIMCO to compete in an evolving marketplace, "focusing on actively managed strategies which offer liquidity management, capital preservation, and income." As he told us, investors are now dealing with a "different set of cards" that will change the game going forward. Schneider discusses those changes and PIMCO’s strategy of creating opportunities in 2a-7 and beyond."

One of the questions asks: "Q: What changes do you see in the marketplace? Schneider: Obviously, the shift from Prime to Government is going to be more of a strategic shift for many investors who want to maintain that $1 par NAV and avoid fees and gates. We have money funds that are going to remain available and we have the capacity to continue to grow those funds. But over the next 2 years or so, we think we will see an evolution out of the liquidity management paradigm that we've had for the past 40 years into a new one that is continuing to be defined. It's not completely formed, and in fact it's in the embryonic stages. As things change -- such as regulations, banks, intermediaries, monetary policies, and even monetary tools such as the reverse repo facility -- all of these things are going to impact how we think about capital preservation and liquidity going forward. Investors are going to have to understand these changes and rely on partners who can help them. Most importantly, we suggest that investors should not limit themselves to the historic frameworks that the industry has used for the past forty years to manage liquidity. Liquidity management will evolve and investors will benefit if they are flexible enough to adapt to these changes."

The third article says, "Money market fund managers are not just revamping their money funds, they are also looking to supplement their lineups with ultra-short bond funds or enhanced cash portfolios. Some of these new funds, for the most part, look and act like money market funds with the potential for slightly higher yields. But they aren't subject to 2a-7 regulations, in particular the pending 4 decimal point pricing and the emergency gates and fees. At a time when new regulations, as well as supply concerns, could impact both Prime and Government money market funds, managers are getting prepared to capture possible outflows by offering alternatives just outside the MMF space."

It adds, "State Street Global Advisors is the latest firm to jump into the ultra-short bond fund space. SSgA filed with the Securities & Exchange Commission to launch 3 new short duration bond funds -- State Street Ultra Short Term Bond Fund, State Street Current Yield Fund, and State Street Conservative Income Fund. The Ultra Short Term Bond Fund's average effective duration is expected to be 1 year or less, said the SEC filing."

The issue also has a brief entitled, "Moody's: MFs to Gain $5B. It says, "In a new report entitled, "`Rising Rates to Unleash $5 billion for US Money Fund Sponsors," Moody's Investors Service says U.S. money market fund managers can expect to double MMF revenues in the near future as the industry is poised to recover some $5 billion in fees <b:>`_."

Crane Data's July MFI XLS, with July 31, 2015, data shows total assets rising by $52.4 billion in July, after rising $15.5 billion in June. YTD, MMF assets are down by $62.4 billion, or 2.4% (through 7/31/15). Our broad Crane Money Fund Average 7-Day Yield and 30-Day Yield remained at 0.02%, while our Crane 100 Money Fund Index (the 100 largest taxable funds) ticked up 1 basis point to 0.04% (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 0.20% (Crane 100, up 0.01% from last month). Charged Expenses averaged 0.14% and 0.16% (unchanged) for the two main taxable averages. The average WAMs for the Crane MFA and the Crane 100 were 36 and 39 days, respectively, unchanged from last month. (See our Crane Index or craneindexes.xlsx history file for more on our averages.)

In other news, the SEC released an updated version of its "Money Market Fund Reform Frequently Asked Questions. The updated FAQ includes new information on a number of topics, including Form N-CR, compliance dates for Form-PF, on Retail investors and beneficial ownership, and suspending redemptions, among others. One of the changes is on Question 16 relates to determining beneficial ownership for the purposes of qualifying as a retail money market fund.

The addendum says, "Rule 13d-3 also treats a person as a beneficial owner based on the person having sole or shared voting power over securities. Voting power may be unrelated to the power to redeem securities, and therefore would not be significant when determining beneficial ownership of a retail money market fund. Accordingly, in the staff's view and notwithstanding Rule 13d-3, policies and procedures would be deemed "reasonably designed to limit all beneficial owners of the fund to natural persons" even if they do not use voting power as a basis for identifying beneficial owners of the fund. The staff believes that such policies and procedures may also permit institutional decision makers to share investment power with a natural person. For example, accounts managed by an institutional decision maker on behalf of one or more natural persons may qualify to invest in a retail money market fund, provided that such natural persons have sole or shared investment power over the shares as defined in rule 13d-3."

The Securities and Exchange Commission released its latest "Money Market Fund Statistics" report, which shows assets flat, yields up, and WAMs lower for the month ended June 30, 2015. Government funds gained $23 billion while Prime funds lost $24 billion last month. The report summarizes monthly Form N-MFP data and includes totals on assets, yields, liquidity, WAM, WAL, holdings, and other money market fund trends. The data is produced by the SEC's Division of Investment Management. Overall, total money market fund assets stood at $2.965 trillion at the end of June, down $3.4 billion, after rising $32.2 billion in May, according to the SEC's broad total (which includes many private and internal funds not reported to ICI, Crane Data or other reporting agencies). Below, we also report on the latest meeting of the Treasury Borrowing Advisory Committee, who discussed T-bill issuance and the impact on money markets.

In the SEC's new update, of the $2.965 trillion in assets, $1.707 trillion was in Prime funds (down $24.3B from May 31), $1,007.0B was in Government/Treasury funds (up $23.1B), and $251.0 billion was in Tax-Exempt funds (down $2.3B). Total assets were down $116.2 billion year to date through June 30. Prime assets were down $65.9 billion year-to-date, while Government/Treasury MMF assets were down $31.1 billion year-to-date. Tax exempt assets were down $19.2 billion year-to-date. The number of money funds was 537, same as last month, but down 19 from a year ago and down 39 from 2 years ago.

The Weighted Average Gross 7-Day Yield for Prime Funds on June 30 was 0.23% (up from 0.22%), 0.10% for Government/Treasury funds (unchanged), and 0.10% for Tax-Exempt funds (down from 0.13%). The Weighted Average Net Prime Yield was 0.07% (up from 0.06% last month). The Weighted Average Prime Expense Ratio was 0.16% (unchanged). Gross yields for Prime MMFs are up 3 bps YTD (to 0.23%) and up 4 bps since a year ago, expense ratios for Prime MMFs are up just one bps YTD and over the past year (to 0.16%), and net yields for Prime MMFs are up 2 bps YTD and 3 bps over 1 year (to 0.07%).

The Weighted Average Life, or WAL, was 72.9 days (down from 74.4 last month) for Prime funds, 75.4 days (down from 78.2 days last month) for Government/Treasury funds, and 33.6 days (up from 28.3 days) for Tax Exempt funds. The Weighted Average Maturity, or WAM, was 36.8 days (down from 38.5) for Prime funds, 39.5 days (down from 40.9) for Govt/Treasury funds, and 31.6 days (up from 26.7) for Tax-Exempt funds. Total Daily Liquidity for Prime funds was 26.2% in June (down from 25.7% last month). Total Weekly Liquidity was 41.0% (up from 39.8%).

In the SEC's "Prime MMF Holdings of Bank Related Securities by Country" table, Canada topped the list with $216.7 billion, followed by the US at $190.8 billion. Japan was third with $179.9 billion, followed by France with $111.8 billion, Australia/New Zealand ($97.4B), Sweden ($87.9B), the UK ($67.5B), The Netherlands ($56.8B), Switzerland ($53.4B), and Germany ($44.7B). The biggest gainers for the month were Singapore (up $3.4B), Canada (up $3.2B), China (up $3.1B), and Japan (up $2.9B). The biggest drops came from France (down $52.6B), UK (down $39.3B), Norway (down $30.3B) and Sweden (down $25.4B). For Prime MMF Holdings of Bank-Related Securities by Major Region, Europe had $436.9 billion, while its subset, the Eurozone, had $219.7. The Americas was next with $410.2 billion, while Asia and Pacific had $307.2 billion.

Of the $1.688 trillion in Prime MMF Portfolios as of June 30, $540.9B was in CDs, $451.9B was in Government (including direct and repo), $357.4B was held in Non-Financial CP and Other Short term Securities, $244.9B was in Financial Company CP, and $92.7B was in ABCP. Also, the Proportion of Non-Government Securities in All Taxable Funds was 45.9% at month-end, down from 51.4% the previous month. All MMF Repo with Federal Reserve was $372.2 billion on June 30, up from $149.0B. Finally, the Trend in Longer Maturity Securities in Prime MMFs said 41.7% were in maturities of 60 days and over (up from 41.7% last month), while 10.6% were in maturities of 180 days and over (up from 10.0% last month).

In other news, the Treasury Borrowing Advisory Committee met earlier this week. In its "Report to the Secretary," that followed the meeting, TBAC writes, "The Committee's third charge was to examine whether adjustments to the Treasury's debt issuance schedule were warranted in light of current and projected funding needs.... Given the projected increased funding needs in FY2016 and beyond, which could increase further were the Fed to end reinvestment of Treasury maturities, the Committee recommended that the Treasury maintain its current issuance pattern. While operational cash balances can be adjusted via Treasury bill issuance, it was noted that both bill issuance and the Treasury's operational cash balance may need to be cut dramatically over coming weeks and months if Congress does not raise the debt limit in a timely manner."

It continues, "As discussed in prior letters from the Committee, there is potentially significant risk associated with holding a lower operational cash balance and there are negative implications for bill market functioning associated with large issuance reductions. These risks could be exacerbated by a confluence of events related to the implications of money market reform and the stance of Federal Reserve monetary policy. The Committee also emphasized the importance of smooth market functioning to minimizing the cost of debt issuance over time and was supportive of increasing the stock to T-bills outstanding to aid the proper functioning of the short-term debt markets given the increasing demand for high-quality liquid collateral in light of regulatory changes. The percentage of T-bills outstanding is at a multi-decade low of approximately 11%, with an outstanding stock of $1.4 trillion."

RBC Capital Markets' strategist Michael Cloherty commented, "The TBAC talked about moving to longer issuance (in part to take advantage of low rates).... Treasury did not provide a drop-dead date for the debt ceiling, so the bill curve won't get dramatically disrupted yet. But we would still stay far away from the Dec. 3 bills. They did not take their cash balance target as high as we thought they would (going to a $200bn-225bn target most of the time) -- that means fewer bills than we expected (so extreme richness expected through the money fund reform process), and means a smaller reserve drain from the Treasury cash balance."

As Euro money market fund yields sink further into negative territory, European MMF providers continue to streamline fund lineups and liquidate smaller funds. This week Western Asset Management liquidated two of its "offshore" funds, Western Asset Euro Liquidity Fund and Western Asset Sterling Liquidity Fund, we learned through letters to shareholders. The letters say, "As a result of the continued low interest rate environment and recent redemptions that have significantly reduced the Fund's net asset value, the Directors have decided that the Fund is no longer economically viable and that it would be in the best interest of the Shareholders of the Fund to terminate the Fund." Earlier this month, we wrote about Federated closing its Short-term Euro Prime Fund. (See our July 2 "Link of the Day", "JPM MMFs Abandon B Shares; Federated Liquidates S-T Euro Prime MMF, and see our April 1 LOTD, "Reich & Tang Liquidates Offshore MF.") For the latest on what's going on with money funds in Europe, we also report on Fitch Ratings European MMF Quarterly 2Q '15" below, and we excerpt from a Deutsche Bank Research commentary, "Euro Area Money Market Funds: Turning the Corner?." (Note: These issues will be discussed in detail at Crane Data's 3rd Annual European Money Fund Symposium, scheduled for Sept. 17-18, 2015, at The Conrad Hilton in Dublin. Visit www.euromfs.com for more details and to register.)

Fitch's quarterly report says, "The vast majority of euro MMFs are now delivering negative yields (minus 8bp on average at mid-July), as market rates have continued to decline. Now that the move into negative territory is widespread across euro funds, the net yield decline has accelerated due to fees normalization after months of waivers. Sterling and US dollar-denominated MMFs have continued, in contrast, to see modest yield uptick. European constant net asset value (CNAV) funds' assets declined by 8% to EUR536bn in 2Q15, primarily affecting euro and sterling funds, after they had reached an historical peak at end-March."

It continues, "French VNAV funds, the second largest segment of European MMFs, stabilized at EUR310bn at end-June, with notable intra-quarter volatility. Sovereign, supranational and agency (SSA) of high credit quality and liquidity are an attractive sector for MMFs, which seized the opportunity of slightly higher yields in SSAs this quarter and increased their allocations to new highs (15%)." (Crane's Euro MMF Index shows 7-day yields at -0.11% as of July 31 and 30-day yields at -0.10%. That's down from -0.02% (for both 7- and 30-day yields) at the end of Q1 2015.)

In its quarterly report, Fitch also finalized its review of banks in 2Q leading to rating actions, including downgrades. It explains, "Fitch's downgrades most relevant to MMFs were KA Finanz (to BBB+/F2), Commerzbank (to BBB/F2), RBS (to BBB+/F2), Landesbank Baden-Wuerttemberg (to A-/F1) and Deutsche Bank, ABN Amro Bank and ING Bank (to A/F1 for all three). Certain banks that were at risk of being downgraded, were affirmed (e.g. SG, Bank of America and Morgan Stanley affirmed at A/F1) or upgraded (Lloyds Banking Group to A+/F1)." It continues, "Fitch's bank rating actions did not significantly affect MMFs, which were able to adjust their issuer selection following the agency's rating actions. Maintaining high portfolio liquidity is particularly sensitive for euro funds given current yields that may trigger large, sudden outflows that could pressure portfolio liquidity and ratings."

On "offshore" USD funds, Fitch reports, "Fitch-rated European MMFs denominated in US dollars were invested in 198 issuers or counterparties at end-2Q15, compared with 183 at the end of the previous quarter. Newly added issuers are diverse, spanning corporates, agencies and Asian banks. European banks are still the most largely held issuers across funds with Credit Agricole and BNP Paribas leading the pack, notably as largely used repo counterparties. More exposure to Asia and France: Issuers from the UK, the US and Australia materially declined in 2Q15, primarily to the benefit of Japanese, French and Chinese banks. Exposure to China is mostly achieved through investments in Oversea Chinese Banking Corp., China Construction Bank and Bank of China."

Fitch tells us, "The average portfolio asset mix was more stable for US dollar funds than it was for euro and sterling funds. There was a modest rise in SSA and corporates to 16% and 5% respectively, compensated by a decline in repo and ABCPs. The average WAL and WAM of US dollar funds have remained stable at close to 64 days and 40 days over the quarter respectively. The dispersion across funds however widened over 2Q15 as funds took differing views on when the next Fed rate rise will most likely happen. The average credit quality of US-dollar MMFs showed a gradual decline in F1+ rated assets, or equivalent, to 49% at end-June 2015, compared to 57% a quarter ago. The average credit quality remains high."

The Deutsche Bank commentary says, "Euro area money market funds have returned to growth, according to the latest ECB data. By March 2015, they managed EUR 1,032 bn in assets, up by EUR 120 bn from a year earlier. A similar surge in assets was last seen before the financial crisis, which marked the beginning of a prolonged decline. Amazingly, the upward trend in assets occurred while money market yields hit record lows, especially for the euro. So what is really behind MMF asset growth? Rather, it was mainly the euro's depreciation which inflated foreign currency assets. In the euro area, half of all MMF assets are denominated in foreign currencies. The ECB reports MMF statistics in EUR, though, i.e. half of MMF assets "grow" in line with falling EUR exchange rates."

It continues, "Investors from the euro area placed a net EUR 13 bn in fresh funds with euro area MMFs and their outstanding claims on MMFs grew in the same range. Similarly, foreign investors (i.e. those based outside the euro area) put about EUR 12 bn in new money into euro area MMFs. However, the total value of their investment in MMFs rose by a staggering EUR 95 bn. This mismatch is largely explained by the appreciation (measured in EUR) of the MMF shares issued in USD and GBP that are largely held by foreign investors."

Further, Deutsche writes, "The extremely low EUR money market rates -- below the USD and GBP rates -- are starting to trigger some changes in MMFs' portfolio structure. For instance, it has become attractive even for companies and institutions which are not based in the euro area to raise funds in EUR. Thus, it is not surprising that MMFs increased their investments in EUR-denominated paper issued by foreign debtors."

It concludes, "In sum, it is too early to say that MMFs in the euro area have turned the corner, as most of the recent asset increase reported in EUR was driven by the exchange rate effect. Nevertheless, MMFs' business model has proven to be resilient in the face of low and even negative interest rates. Although below pre-crisis levels, the recent inflow of fresh investor money was encouraging. Cash-rich investors still have to place funds regardless of the interest rate environment. Alternative investments directly in money market instruments or bank deposits do not promise better returns than MMFs, and MMFs still offer risk reduction based on diversified and liquid portfolios."

Finally, Deutsche adds, "Banking regulation might play into MMFs' hands as well, since banks increasingly refuse to accept big sums of short-term deposits from corporates. This promises higher net inflows for the MMF industry. In the medium term, though, the greater challenge may be on the asset side. Pending MMF regulation will redefine what debt MMFs are allowed to invest in, and Basel III will probably induce banks to issue less short-term debt -- hitherto the dominant asset class in MMFs' portfolios. MMFs will have to adjust their portfolios more than they did so far due to the low interest rates."

In a new report entitled, "Rising Rates to Unleash $5 billion for US Money Fund Sponsors," Moody's Investors Service says U.S. money market fund managers can expect to double MMF revenues in the near future as the industry is poised to recover some $5 billion in fees. Written by Neal Epstein, Senior Credit Officer; Robert Callaghy, Senior Analyst; Ram Sri-Saravanapavaan, Associate Analyst; and Marc Pinto, the report finds that money managers are already reducing fee waivers as yields creep up and that trend will continue once interest rates start rising, as is expected later this year. They say that once rates rise 40-50 bps, incremental fee waivers will be all but eliminated. They also discuss the impact of the new money fund regulations on fees once they kick in in October 2016. (Note: Crane Data publishes expense ratios and information, including charged and incurred expenses breakouts and fee waivers in our monthly Money Fund Intelligence XLS.)

The Moody's report explains, "Under the accommodative monetary policy of the past several years, yields on US MMFs, which are required to maintain high levels of liquidity, have trended under 20 bps, but in 2015 rates have begun to rise. At such low levels of return, MMF portfolios have yielded less income than they cost to operate [sic], and fund sponsors have been forced to waive, reimburse, or absorb these costs, to ensure a positive net yield.... The cumulative effect of a negative net yield would be that an MMF's net asset value would eventually fall below the threshold at which it is allowed, under current regulations, to transact at one dollar, i.e., it would "break the buck.""

It continues, "The residual returns that investors in MMFs earn have declined to less than 3 basis points. The difference between a MMF's gross and net returns is its expense ratio, and ... the industry's dollar-weighted average of expense ratios declined to a low point of 13.1 bps in January 2015 from 43.6 basis points at the onset of the financial crisis. Portfolio returns also bottomed out in January, averaging 15.5 bps. Since then, portfolio annualized returns have increased 1.8 bps to 17.3 bps, allowing expense ratios to increase 1.5 bps and net returns to increase 0.3 bps -- an 80:20 division of the increase in performance between fund advisors and investors. Currently, 84% of the funds' gross returns are being paid out as expenses, up from 10% in at the end of 2007."

Moody's writes, "After yields on money market instruments declined in 2008, MMFs found that their historical expense ratios exceeded portfolio returns. As a consequence, they waived fees to maintain positive net yields." To illustrate the impact of fee waivers, Moody's cites Fidelity Cash Reserves as an example. "This retail prime fund is the largest MMF in the iMoneyNet database, with over $110 billion under management as of May 2015. As shown, incurred fees as a percent of average AUM have remained at the current level of 37 bps for five years. Expense reductions have increased to 13 bps currently from zero before 2011, and net (shareholders') returns have declined to 1 basis point in the past two fiscal years."

On the pending waiver unwinding, they say, "On a gross basis, we estimate that MMF sponsors could recover $5.0 billion of foregone revenue when portfolio yields increase 22.1 bps, and the need to reduce fund expenses passes. This compares with current MMF fund revenues of $3.8 billion, based on an average expense ratio of 14.6 bps. We believe that as MMF returns rise, fund income will be used, preferentially at first, to reduce fee waivers and then to increase yields for investors. If fund yields increase 40-50 bps, most incremental waivers should be eliminated, allowing average expense ratios to return to pre-crisis levels."

Moody's adds, "Historically, when MMF yields were much higher, fund managers waived fees as a competitive matter. Even before the financial crisis, MMF boards of trustees authorized fund managers to reduce fees below incurred levels (a benefit to investors) when gross performance lagged competitors, to ensure that net fund performance would remain competitive.... These expense reductions, which equate to foregone revenue to MMF sponsors and distributors, should be largely reversible once money market yields increase -- and presumably they will be reversed when monetary accommodation is unwound, as we have begun to see in 2015."

They explain, "We arrive at our 22.1 bps estimate by evaluating the increase in weighted average waived expense ratios since 2008 and multiplying the increase by the current level of AUM. Waivers were just 5.6 bps in 2007, increasing to 6.6 bps in 2008. After 2008, the waived expense ratio increased to 32.0 bps as of December 2013, and since has declined to 28.6 bps in May 2015... Currently, the incremental increase in the fee waiver since 2008 stands at 22.1 bps.... The incremental waiver based on today's weighted average fee rates and AUM is $5.8 billion, which we have rounded down to $5.0 billion, with the expectation that even with higher rates, expense ratios may not fully return to levels of 2008, given changes in the industry."

The Moody's piece says, "Our $5 billion gross estimate of increased fees is attributable to increases in both operational and distribution revenues, with somewhat more going for operations. Since some portion of fee waiver and expense reduction is borne by other service providers, the gross amount will be shared, leaving less for fund sponsors. It is challenging to estimate the shared amount since in many cases, transfer agents and distribution partners are also affiliated with the fund sponsors. Each element of the expense ratio total may be reduced to manage total expenses, and the manager or the fund distribution partners may bear some component of these reductions accordingly.... In 2015, the 2.2 basis point decline in waivers has been distributed 1.5 bps to operating costs and 0.7 bps to distribution costs, corresponding to $380 million and $220 million of increased revenues for these service categories."

It adds, "[C]ombined operating fee waivers have been the largest component and they have declined the most in 2015. It is here that we expect to see the greatest responsiveness of fee recoverability. Shareholder servicing fee waivers were the largest single component of the total expense waiver. 12(b)-1 (distribution plan) fees are the smallest component and they have varied the least since 2008." Moody's shows operating data from Federated Investors' earnings presentations over the last few years, which show that "distribution fee arrangements with third parties have reduced the revenue impact of waivers from 14 bps to 4 bps, a 71% reduction. Federated may realize less of a benefit from waiver reductions than other managers, who distribute funds through affiliated distributors. In the first half of 2015, Federated's gross annualized fee waivers declined $54 million, or 13%, versus calendar 2014, and on a net basis, annualized wavers declined $23 million, or 18%."

On the impact of new money fund rules, Moody's concludes, "We believe that new money market fund regulations, which take effect in October 2016, will have varying economic effects on fund yields and expenses, and thus on waivers. Of course, these effects would be greatly mitigated in a higher-return environment in any case. Reducing the need for waivers: 1) Floating NAV requirements for institutional prime funds will remove the technical requirement that these funds generate a positive return since they can no longer "break the buck." 2) Institutions' increasing interest in separate managed accounts would give rise to negotiated fees. 3) A broadening view of investors' cash management needs may cause them to use other, "ultrashort term" liquidity products, which could earn greater returns than MMFs, unconstrained by MMF investment requirements."

Finally, the piece adds, "Increasing the need for waivers: 1) The potential for exit fees or gates to be deployed for MMFs other than treasury and government funds (in the eventuality that weekly liquid assets were to fall below 30%) will cause these funds to be managed more conservatively. It follows that yield will decline in these funds, which will put greater pressure on their cost structure, increasing waivers and reducing profitability. 2) Investor substitution of lower-yielding government funds for prime funds would increase the need for operating waivers in a low yield environment, especially as increased demand for government funds, which many analysts anticipate, drives their yields even lower."

Money market mutual fund assets jumped in July for the third month in a row, recording their strongest summer period in a decade, while funds continue to shorten their WAMs, or weighted average maturities in preparation for a rate hike by the Federal Reserve. Below, we review out preliminary July numbers and ICI's latest "Trends in Mutual Fund Investing" for June, which shows that total money fund assets increased by $12.9 billion, or 0.5%, to $2.616 trillion last month. June was the second straight month that assets increased, and the first time MMF assets have gone up in June in almost 10 years. Money market funds jumped $38.0 billion in May after declining $80.0 billion in April, $32.9 billion in March, and $13.9 billion in February.

July appears to be another winning month, according to ICI's latest weekly "Money Market Fund Assets" report and according to Crane Data's Money Fund Intelligence Daily. The weekly asset series shows that MMF assets are up about $33 billion for the month through July 29, while our MFI Daily shows assets up by $43.0 billion through July 30. For the year through July 29, MMF assets are down $85 billion or 3.1%, according to ICI data. We also review ICI's latest "Month-End Portfolio Holdings of Taxable Money Funds" below, which verified our previously reported increase in Fed Repo and drop TDs in June. (See Crane Data's July 13 News, "July MMF Portfolio Holdings Show Jump in Fed Repo, Drop in TDs, VRDNs.")

The Trends report says, "The combined assets of the nation's mutual funds decreased by $179.79 billion, or 1.1 percent, to $16.12 trillion in June, according to the Investment Company Institute's official survey of the mutual fund industry.... Bond funds had an inflow of $8.26 billion in June, compared with an inflow of $5.47 billion in May.... Money market funds had an inflow of $12.67 billion in June, compared with an inflow of $36.16 billion in May. In June funds offered primarily to institutions had an inflow of $9.25 billion and funds offered primarily to individuals had an inflow of $3.43 billion." Money funds represent 16.2% of all mutual fund assets, while bond funds represent 21.8%.

As previously mentioned, the June asset gain is significant in that June is typically one of the worst months of the year for money funds. Assets have decreased each June going back to 2008 by an average of $41 billion. July has also been stronger than usual this year, up about $40 billion (our official monthly numbers will be out Friday with our MFI XLS). Last year, assets dipped $19 billion in July, but over the last 6 years they have averaged a decrease of $20 billion. We believe that some of these inflows are clearly coming from bank deposits, especially from JP Morgan, which reportedly shed $100 billion in bank deposits in the second quarter.

ICI's latest Portfolio Holdings summary shows that Holdings of Repo holdings increased $122.4 billion, or 23.4%, in June to $644.9 billion, jumping ahead of CDs as the largest portfolio segment, representing 27.2% of taxable MMF holdings. CDs (including Eurodollar CDs), the second largest segment, decreased by $97.8B, or 15.4%, in June to $536.6B. (ICI's CD total likely includes Time Deposits, which we, and the SEC, categorize as "Other" -- we reported a sizable drop in Other in June.) CDs make up 22.6% of holdings.

Treasury Bills & Securities remained in third place increasing by $5.5 billion, or 1.4%, in June to $404.1 billion (17.0$ of assets). Commercial Paper stayed in fourth, dropping $18.3B, or 5.1%, to $341.7 billion (14.4% of assets). U.S. Government Agency Securities was fifth after increasing $20.2 billion, or 6.3%, to $339.0 billion (14.3% of assets). Notes (including Corporate and Bank) dropped by $1.7 billion, or 2.5%, to $68.3 billion (2.9% of assets), and Other holdings (including Cash Reserves) stood at $39.5 billion.

The Number of Accounts Outstanding in ICI's series for taxable money funds decreased by 8.8 thousand to 23.357 million, while the Number of Funds fell 3 to 357. Over the past 12 months, the number of accounts fell by 355.7 thousand and the number of funds declined by 18.

The Average Maturity of Portfolios declined by one day to 38 days in June. Over the past 12 months, WAMs of Taxable money funds have declined by 6 days. At 38 days, WAM's are at the lowest level since June 2010, according to our analysis of ICI's data. In July, WAM's appear to continue to trend lower as managers prepare for interest rate hikes, possibly as soon as September. On July 30 the WAM for Crane's Money Fund Average was 34 days, according to our Money Fund Intelligence Daily, down from 36 on June 30.

Note: Crane Data has updated its July MFI XLS to reflect the 6/30/15 composition data and maturity breakouts for our entire fund universe. Note too that we are now producing a "Holdings Reports Issuer Module," which allows subscribers to choose a series of Portfolio Holdings and Issuers and to see a full listing of which money funds own what paper. (Visit our Content Center and the latest Money Fund Portfolio Holdings download page to access our March Money Fund Portfolio Holdings and the latest version of this new file.)