The Federal Reserve released its latest quarterly Z.1 "Financial Accounts of the United States for the Second Quarter, 2015" statistical survey (formerly the "Flow of Funds") last week. The four tables it includes on money market mutual funds show that the Household sector remains the largest investor segment, though this segment declined below the $1 trillion level in the Second Quarter for the first time in a decade. Only State and Local Governments, Nonfinancial Noncorporate Businesses, and State and Local Government Retirement Funds gained slightly. Table L.206 shows the Household sector with $985.4 billion -- or 38.2% of the $2.580 trillion held in Money Market Mutual Fund Shares (down 1.1%) as of Q2 2015. Household shares decreased by $19.4 billion in the 2nd quarter (after dropping $71.2 billion in Q1), and these assets remain well below their record level of $1.581 trillion at year-end 2008.
Nonfinancial corporate businesses were the second largest investor segment, according to the Fed's data series, with $546.3 billion, or 21.2% of the total. Nonfinancial corporate business assets in money funds decreased $2.2 billion in the quarter after falling $13.7 billion in Q1. Funding corporations, which includes securities lending cash, remained the third largest investor segment with $442.0 billion, or 17.1% of money fund shares. They decreased by $8.6 billion in the latest quarter after jumping $2.7 billion in Q1. Funding corporations held over $906 billion in money funds at the end of 2008.
State and local governments held 6.7% of money fund assets ($173.7 billion) -- up $500 million for the quarter. Private pension funds, which held $137.0 billion (5.3%), remained in 5th place. The Rest of the world category was the sixth largest segment in market share among investor segments with 4.2%, or $108.8 billion, while Nonfinancial noncorporate businesses held $89.4 billion (3.5%), State and local government retirement held $54.4 billion (2.1%), Life insurance companies held $24.7 billion (1.0%), and Property-casualty insurance held $18.0 billion (0.7%), according to the Fed's Z.1 breakout.
The Fed's "Flow of Funds" Table L.121 shows "Money Market Mutual Fund Assets" largely invested in Credit market instruments ($1.393 trillion, or 54.0%), which includes: Open market paper ($336.5 billion, or 13.1%; we assume this is CP), Treasury securities ($398.1 billion, or 15.4%), Agency and GSE backed securities ($333.9 billion, or 12.9%), Municipal securities ($257.7 billion, or 10.0%), and Corporate and foreign bonds ($67.2 billion, or 2.6%).
Other large holdings positions in the Fed's series include Security repurchase agreements ($635.1 billion, or 24.6%) and Time and savings deposits ($509.9 billion, or 19.8%). Money funds also hold minor positions in Foreign deposits ($22.1 billion, or 0.9%) and Miscellaneous assets ($15.8 billion, or 0.6%). Checkable deposits and currency ($3.2 billion, 0.1%).
During Q1, only Agency and GSE-Backed Securities (up $10.5 billion), Security Repurchase Agreements (up $9.2 billion), and Checkable Deposits and Currency (up $13.0 billion) showed increases. Time and Savings Deposit (down $2.2 billion), Open Market Paper (down $5.3 billion), Treasury Securities (down $36.4 billion), Municipal Securities (up $15.8 billion), Corporate and foreign bonds (down $300 million), Misc. Assets (down $900 million), and Foreign Deposits (down $2.3 billion) all showed declines.
J.P. Morgan Securities commented on the Z1 report in their last weekly, "Short-Term Market Outlook and Strategy," writing, "Fed funds and repo have historically been two very opaque markets. While they are still not very transparent in the sense of fully knowing their market compositions and transactions, regulators have sought over the years to shed more light into the area. In particular, this year's Financial Accounts of the US report, otherwise known as the Fed's Z.1, for the first time distinguishes Fed funds and repo balances separately according to type of counterparty. As a result, we are able to observe how the Fed funds and repo markets have evolved over the years and how their market compositions have changed."
They write, "Shrinkage in the dealer repo market has been acute. While the pullback in repo balances has been widespread across various types of counterparties, broker/dealers have been hit the hardest. Since 1Q12, dealer repo balances are down a significant $628bn or 30% as dealers scaled back their balance sheets. While the Fed has been able to offset some of this shrinkage, increasing their repo balances by $462bn during this time period, their growth has been limited given the aggregate cap the Fed places on its RRP facility."
Finally, JPM adds, "On the repo investment side, we've seen MMFs and mutual funds take on a greater allocation to repo, increasing their repo balances by $137bn and $143bn respectively. This is to be expected given the scarcity of assets in money markets.... Given changes in both the lending and borrowing sides of the repo market, the repo relationship among MMFs, the Fed, and dealers has evolved. Each quarter, they are increasingly placing more repo with the Fed given the pullback in bank/dealer repo. While this could be interpreted as a negative from a policy perspective, it's also worth noting that MMFs currently provide only 13% of repo funding to banks and broker/dealers. Said another way, banks and dealers have substantially curtailed their repo exposure to MMFs. This compares to 18% in early 2012 and likely even more pre-crisis."
The Securities and Exchange Commission released its latest "Money Market Fund Statistics" report, which shows assets and yields up for the month ended August 31, 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. Also, law firm Ropes & Gray released an alert entitled, "SEC Removes Credit-Rating References and Amends Issuer Diversification Requirements in Money Fund Rules."
In the SEC's new statistical update, total money market fund assets stood at $3.026 trillion overall at the end of August, up $20.9 billion after rising $40.9 billion in July, 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 $3.026 trillion in assets, $1.750 trillion was in Prime funds (up $22.6B from July 31), $1.020T was in Government/Treasury funds (down $4.0B), and $256.6 billion was in Tax-Exempt funds (up $2.2B). Total assets are down $54.4 billion year to date through August 31. Prime assets are down $22.7 billion year-to-date, while Government/Treasury MMF assets are down $18.1 billion year-to-date. Tax exempt assets are down $13.6 billion year-to-date. The number of money funds was 523, down 8 from last month and down 37 from a year ago.
The Weighted Average Gross 7-Day Yield for Prime Funds on August 31 was 0.25% (up from 0.24% the previous month), 0.12% for Government/Treasury funds (up from 0.11%), and 0.07% for Tax-Exempt funds (unchanged). The Weighted Average Net Prime Yield was 0.08% (unchanged). The Weighted Average Prime Expense Ratio was 0.17% (up from 0.16%). Gross yields for Prime MMFs are up 5 basis points YTD (to 0.25%) and up 6 bps since a year ago, expense ratios for Prime MMFs are up 2 bps YTD and over the past year (to 0.17%), and net yields for Prime MMFs are up 3 bps YTD and 4 bps over 1 year (to 0.07%).
Further, the Weighted Average Life, or WAL, was 67.7 days (down from 72.6 last month) for Prime funds, 78.4 days (up from 76.8 days last month) for Government/Treasury funds, and 33.6 days (down from 34.3 days) for Tax Exempt funds. The Weighted Average Maturity, or WAM, was 32.3 days (down from 36.6) for Prime funds, 38.6 days (down from 40.6) for Govt/Treasury funds, and 31.2 days (down from 32.2) for Tax-Exempt funds. Total Daily Liquidity for Prime funds was 27.7% in August (up from 26.4% last month). Total Weekly Liquidity was 41.6% (up from 40.0%).
In the SEC's "Prime MMF Holdings of Bank Related Securities by Country" table, the US topped the list with $215.6 billion, followed by Canada at $209.8 billion. France was third with $190.0 billion, followed by Japan with $175.5 billion, Sweden ($120.2B), the UK ($97.5B), Australia/New Zealand ($85.2B), The Netherlands ($53.3B), Germany ($49.4B), and Switzerland ($46.6B),. The biggest gainers for the month were Norway (up $7.1B), France (up $5.1B), UK (up $4.1B), and Germany (up $3.1B). The biggest drops came from Switzerland (down $5.9B), Australia/New Zealand (down $4.5B), US (down $2.5B) and China (down $2.4B). For Prime MMF Holdings of Bank-Related Securities by Major Region, Europe had $607.5 billion (up $10.3B from last month), while its subset, the Eurozone, had $306.8 (up $6.8B). The Americas was next with $428.2 billion (down $1.5B), while Asia and Pacific had $288.6 billion (down $9.2B).
Of the $1.752 trillion in Prime MMF Portfolios as of August 31, $573.4B was in CDs (up from $572.6B), $366.2B was in Government (including direct and repo) (up from $338.1B), $461.5B was held in Non-Financial CP and Other Short term Securities (up from $459.6B), $252.3B was in Financial Company CP (down from $261.6B), and $99.4B was in ABCP (up from $95.8B). Also, the Proportion of Non-Government Securities in All Taxable Funds was 49.8% at month-end, down from 50.8% the previous month. All MMF Repo with Federal Reserve was $143.9 billion on August 31, up from $129.4B. Finally, the Trend in Longer Maturity Securities in Prime MMFs said 36.9% were in maturities of 60 days and over (down from 41.4% last month), while 9.6% were in maturities of 180 days and over (down from 10.9% last month).
The Ropes & Gray alert focuses on the SEC decision to remove references to credit ratings in MMF reform. (See our Sept. 18 News, "SEC Removes References to Credit Ratings in Final Money Fund Rules.") The piece says, "In a September 16, 2015 Release (the "Release"), the SEC completed its obligations under Section 939A of the Dodd-Frank Act by removing references to credit ratings from Rule 2a-7. Most notably, the Release removes credit ratings from Rule 2a-7's definition of "eligible security." In the process, the Release creates a uniform credit quality standard -- "presents minimal credit risks to the fund" -- for each security acquired by a money market fund. The Release also requires money market funds to adopt written procedures requiring a fund's adviser to provide ongoing review of the credit quality of each portfolio security to determine that the security continues to present minimal credit risks.... The compliance date for all of the Release's changes is October 14, 2016."
The Alert says, "In its current form, Rule 2a-7 imposes two credit quality requirements with respect to the securities that a money market fund may acquire. First, an objective standard requires that each acquisition must be an eligible security, which is defined by reference to credit ratings provided by "nationally recognized statistical rating organizations" (each, an "NRSRO"). Second, a subjective standard requires that each acquisition, as determined by the fund's board (or its delegate), presents "minimal credit risks" to the fund. Minimal credit risks is not defined in Rule 2a-7."
It explains, "As revised, an eligible security is a security that "presents minimal credit risks to the fund." Because minimal credit risks is undefined, the Release codifies earlier SEC staff guidance regarding the credit quality factors that may be used to determine that a security presents minimal credit risks. Thus, with the Release's revisions, an eligible security is a security: "that the fund's board of directors [or its delegate] determines presents minimal credit risks to the fund, which determination must include an analysis of the capacity of the security's issuer or guarantor (including for this paragraph the provider of a conditional demand feature, when applicable) to meet its financial obligations, and such analysis must include, to the extent appropriate, consideration of the following factors with respect to the security's issuer or guarantor: (A) Financial condition; (B) Sources of liquidity; (C) Ability to react to future market-wide and issuer- or guarantor-specific events, including ability to repay debt in a highly adverse situation; and (D) Strength of the issuer or guarantor's industry within the economy and relative to economic trends, and issuer or guarantor’s competitive position within its industry.""
Ropes & Gray writes, "Currently, Rule 2a-7 requires a money market fund's board (or its delegate) to reassess promptly whether a security that has been downgraded by an NRSRO continues to present minimal credit risks, and to take such action as it determines is in the best interests of the fund and its shareholders. In the Release, this requirement has been eliminated. In its place, money market funds must adopt written procedures that require a fund's adviser to provide ongoing reviews of the credit quality of each portfolio security to determine that the security continues to present minimal credit risks."
Finally, on Form N-MFP, they state, "In 2010, the SEC staff issued a no-action letter to the effect that the staff would not object if a fund did not designate NRSROs (and did not make related disclosures in its statement of additional information) before the SEC had modified Rule 2a-7 in accordance with Section 939A of the Dodd-Frank Act. The Release marks the completion of these SEC's modifications. Therefore, money market funds will be required to disclose the NRSRO ratings that the fund's board (or its delegate) considered, if any, in making its minimal credit risks determination for a given security, along with the name of the agency that provided the rating."
As the US money market fund industry braces for Floating or Variable NAV funds, it can look to fourth largest money market fund country in the world, France, for some insights into VNAV funds. France, with $329 billion in MMF assets, is almost entirely made up of VNAV funds, so it has a track record that the US, and the rest of Europe, can learn from. At Crane's European Money Fund Symposium earlier this month in Dublin, a panel of French money fund experts discussed this market in a session called, "French Money Market Funds and VNAV." The segment featured Charlotte Quiniou of Fitch Ratings; Vanessa Robert of Moody's Investors Service; Thierry Darmon of Amundi; and, Yann Marhic of Credit Agricole-CIB. In her presentation, Robert summed up how the attitude toward French money funds is changing. Ten years ago she was at a meeting with an American who told her if it's not a CNAV fund, it's not a money fund. "Here we are 10 years later, with the US about to adopt, if not the French model, at least part of it, and I must say that for me, it is a small taste of revenge."
Quiniou provided an overview, saying France the second largest money fund market in Europe behind Ireland and ahead of Luxembourg. The three countries combined make up 94% of the total MMFs assets in Europe. The French market is made up almost entirely of VNAV funds, unlike Ireland, which is almost entirely CNAV, and Luxembourg, which is a mix of CNAV and VNAV. France has two classes of VNAV funds -- Short-term MMFs and Standard MMFs. In June 2014, about 65% was in Standard MMFs, 30% was in Short-term MMFs, and around 5% was unclassified. But in the past year there has been a shift. Short-Term assets are at 25%, while Standard assets are closer to 70%, said Quiniou. This is most likely driven by the low yield environment in Europe as investors are seeking the higher yields from the longer dated instruments of Standard funds.
The French Short-Term funds have some of the same attributes as European CNAV funds, she said. Short-Term funds have a median WAM of 46 days, a maximum of 60 days, a median WAL of about 90 days, and a maximum WAL of around 120 days. The Standard funds have a median WAM of 70 days, a maximum of 170 days, a median WAL of about 250 days, and a maximum WAL of over 300 days. "There's a wide range of different profiles," she said. About 50% of Short Term funds are made up of high quality, A or higher assets, while 50% are made up of BBB or lower.` About 72% of Standard funds have assets that are BBB or lower <b:>`_. Further, the four largest players in the French money fund market -- JP Morgan, Amundi, BlackRock, and Goldman Sachs AM -- manage 40% of the overall assets.
Moody's Vanessa Robert discussed the key differences between CNAV and VNAV funds. The key similarities between French Short-Term MMFs and European CNAV funds is both have to comply with ESMA guidelines and both provide same day settlement to their investors. Further, they are similar in terms of the key ratings factors as the same ratings methodology applies to CNAV and VNAV funds. "They have the same investment objectives -- to provide daily liquidity and preserve capital," said Robert. However, French MMFs tend to have a lower credit quality and higher concentration of assets than CNAV funds. There is also no evidence that VNAV funds are less prone to run risk, she said. "In times of crisis, VNAV investors are as likely to race for cash as CNAV investors." Further, Short-Term VNAV funds have very limited volatility, even in times of stress, said Robert. The daily NAVs are very much in line with what you would see with a CNAV fund.
Among the key differences between the French VNAV and European CNAV markets is there is the potential for more credit, market, and liquidity risk in France. Also, French MMFs are not rated. "Why? Because investors do not require funds to be rated. French clients do not have in their guidelines to invest in triple A rated investment vehicles." Further, valuations are different as France doesn't have CNAV funds, and instruments are different. French funds hold securities you don't typically see in CNAV funds, including interest rate swaps, currency swaps, futures, fixed rate bonds, putable bonds, and derivatives.
Assets in the Short-Term MMF market have declined by about 70% over the last 3.5 years, while assets of Standard MMFs have been growing. "This is clearly a search for yield," she said. While the French Short-Term MMF market has dropped, the European CNAV market has increased slightly over that same period. Why? One key reason is that almost all French funds are denominated in euros while the CNAV market is more diverse with US dollar, sterling, as well as euro denominated funds.
Amundi's Darmon commented on the heterogenous nature of the French money fund industry. He said, "It is a scaled down model of the fixed income management industry ... meaning, money market funds in France are not a single category or style of management. You will find a continuum of strategies along the risk curve in the money market fund industry. Whether it's today with negative yields or positive yields, you always have a continuum of offerings -- from the very low end of the risk scale to the frontier border between money market fund management and bond management."
There is also a variety of investment horizons, from 1 day, to 1 week, to 1 year and even more -- "using all the means and instruments that are provided by the fixed income universe, on the very short end of it of course. But using this capability in order to achieve the risk return objectives as described," added Darmon, whose company, Amundi, is the second largest MMF manager in France with E157 billion in assets through the end of August.
Finally, there was discussion of the impact of European money market reforms on French funds. While the big concern throughout much of Europe, moving to VNAV or Low Volatility VNAV, is of no concern in France, there could be other impacts, said Robert. "One key change to expect for investors is the liquidity requirements will definitely affect French funds. If enacted, based on the European Parliament's proposals, they will have to increase their liquidity buckets." Second, some of the requirements in the proposal -- independent research processes, know your clients etc. -- will require more resources for the smaller players and that could lead to consolidation, she told the Dublin audience.
On the subject of European MMF reforms, Rudolf Siebel, Managing Director of Germany's fund association, BVI, and Chairman of the European Fund Asset Management Association's Money Market Funds Working Group, laid out EFAMA's position on reforms. On the Low Volatility NAV (LVNAV) proposed option, he said, "EFAMA members accept a 20 basis point threshold for the permissible deviation between constant and shadow NAV on condition that the sunset clause is deleted. We should ensure that the threshold is not reduced below 20 bps."
On the Retail CNAV MMF proposal, Siebel commented, "[The] definition should be extended to natural persons (meaning individual investors) in line with the MiFID definition." On the Public Debt CNAV proposal, he added, "European companies should have options to meet their global cash flow needs in different currencies, including USD." Also, he said, "Assuming high-quality government securities will be included in the weekly liquidity calculations, fees and gates will never be implemented. Having such a requirement in place would only be an operational and legal burden for investors and fund managers."
Finally Siebel told us, "EFAMA stands behind its long established position regarding liquidity requirements for MMFs: 10% daily for short-term and standard MMFs and 20% and 15% for weekly levels for short-term and standard respectively." It also supports a 24-month transition period for any new European regulations, up from the proposed 9 months.
Fitch Ratings has released a new report that examines trends in a number of emerging money market fund markets, including Korea, Mexico, Brazil, and India, among others. The report, "Paths Diverge for "Second Tier" Money Fund Domiciles," shows that money market funds play a major role in some of these smaller markets. We also report on a session from last week's European Money Fund Symposium called, "MMFs in Asia and Emerging Markets," that takes a closer look at some of these markets, as well as the hottest money market fund market in the world, China. (See also our previous story on our Dublin conference, "European Money Fund Symposium: Kooy, Lardner Push Viable Solutions," and see our August 10 News, "China Surpasses France as 3rd Largest Money Fund Market: ICI World.")
The Fitch report says, "Money market fund assets are concentrated in the US and Europe with 60% and 25%, respectively, of the global total of USD4.5trn invested in European or US funds as of end-2014. However, the US and Europe do not have a monopoly on money funds. Money funds are represented in many different countries. Fitch understands that money funds may operate in more countries than those represented in the ICI data, such as Nigeria, among others. The top-three global money fund domiciles -- the US, Europe and China -- comprise around 93% of total money fund assets under management. These money fund domiciles are experiencing profound change -- for different reasons."
It continues, "But Fitch believes that some of these changes -- notably regulatory ones -- will eventually influence smaller money fund jurisdictions. Specifically, money fund reform is underway in the US and Europe. New regulations have been approved in the US. In Europe, regulatory reforms and a negative interest rate environment in euros have pushed money funds into uncharted territory. In China, the substantial growth of e-commerce related money funds has driven assets under management in Chinese money funds -- and the Chinese asset management industry more broadly -- to record highs."
Fitch explains, "The enormous scale of the developments in -- and the sheer size of -- the largest global money funds jurisdictions overshadow that of their smaller counterparts. Nonetheless, important developments are underway in these jurisdictions. This report focuses on the "second tier" of money fund domiciles: Korea, Mexico, Brazil, India, Taiwan, Canada and South Africa that are in the top-10 list after the US, Europe and China as of end 2014, per ICI data. Money fund assets under management in other jurisdictions are extremely low, and accordingly, Fitch has excluded them from this analysis."
The report says global money fund AUM has shrunk 14% in the last five years with the US down 18% and Europe money funds down 3%, according to ICI data. However, explains Fitch, "Defying the developed market downtrend are the emerging markets, where money fund assets have shown strong growth momentum. Brazil is the fastest-growing market with money fund AUM having almost tripled to BRL129.4bn, from BRL47.6bn, in the last five years. The Indian market has rapidly expanded as well, with total assets reaching INR1.8trn as of end-December 2014, from INR0.8trn five years ago. These two markets have seen their shares double in the global market to 0.6% and 1.0%, respectively. Strong growth in Brazil was mainly driven by high yields, themselves a result of high interest rates, which dwarf the performance of other asset classes."
The report tells us, "Korea has been surpassed by China and become the fourth-largest money fund market after the US, Europe and China, representing 1.7% of the global market; that is despite the AUM in Korean money funds having increased 16% to KRW84trn in 2014, from KRW72trn in 2009. An important challenge for money fund managers in these markets is the supply of eligible assets. Bank regulation is forcing banks to fund longer, thus broadly limiting the availability of short-term paper typically held by money funds."
It adds, "The AUM of Mexican and South African money funds has barely changed since 2009. Canada and Taiwan have seen their money fund markets shrink, while Canada experienced a severe decline of over 50% to CAD25bn at end-2014 to account for 0.5% of the global market, compared with 1% five years before. In these cases, money fund managers have needed to manage to outflows, which, all else being equal, typically equates to running more liquid portfolios."
Fitch adds, "Brazil and India top the market with nominal yield of over 10% and 8%, respectively, although the high yields are linked to the high inflation in these two markets. Nonetheless, real yields after inflation still dwarf other markets. Taiwanese money funds had, in fact, generated a real yield above 1% as of May 2015, despite a nominal return of only around 0.5%, given the island's deflation environment with a yoy CPI of -0.7%5 as of May 2015. Canadian money funds generate low real yields, slightly above zero, more in line with the typical yield of US money funds."
Further, they write, "The AUM share of money funds relative to total mutual fund assets has decreased across most jurisdictions over time. Korea is the only country among Fitch's sample of "second tier" markets to have seen its money fund share expand since 2011.... The proportional exposure to money funds varies in different countries. Money funds dominate and represent over 40% of total mutual fund AUM in Mexico and Taiwan, as the equity fund market in Mexico and the bond market in Taiwan are comparatively less developed.... Money funds represent less than 5% of the mutual funds market in Brazil (end-2014 AUM: USD45m); the ratio increases to about 20% after adding DI-linked funds. Brazilian money funds and DI funds have similar objectives, portfolio composition and investment policies."
Finally, Fitch tells us, "Money funds are less utilized in the "second tier" domiciles in terms of broad money. In India, Canada, Taiwan and Korea, these funds represent less than 5% of their respective country money supply (M2), which is far behind the over 20% in the US. Except for Korea and Brazil, growth in money fund AUM in all other domiciles covered in this report is slower than growth in the supply of broad money. This may be a reflection of the level of banking disintermediation and short-term capital markets development in these respective markets. That the penetration rate of money funds is lower in all jurisdictions other than the US suggests potential for growth."
Also, at our European MF Symposium last Friday, Crane Data's Peter Crane and Standard & Poor's Andrew Paranthoiene presented on "MMFs in Asia and Emerging Markets." Paranthoiene said most assets of emerging market MMFs have remained flat since 2008, apart from China, which has seen explosive growth to E324 billion through Q1 2015. China became the third largest MMF market, jumping ahead of France and Luxembourg and trailing only the US and Ireland. Since December 2010, China's MMF assets have spiked an incredible 1,769%.
Currently, MMFs account for 41.3% of China's mutual fund industry AUM, said Paranthoiene. There are 180 public MMFs in China with 72 launched this year alone. Further, 69 of the 72 launches are MMF-styled, internet based products, like the largest money fund in China, Yu'e Bao, which is owned by e-commerce giant Alibaba and run through its Alipay, an online payment service. Alipay users are allowed to put their money in the Yu'e Bao money fund.
Yu'e Bao launched in June 2013 and has over 80 million investors and over E100B in assets under management. Its rate of return has dropped from 7% in 2013 to 4.3% at the end of Q1 2015, due to a decrease in interest rates. Paranthoiene explained that Tencent, another e-commerce company, has a money fund called Licaitong, which has 272 million customers/potential investors.
"The flow of funds is phenomenal," said Paranthoine, but it's a transaction method that totally new and unlike anything in the US or European markets. "Smartphone apps provides instant withdrawals and potentially threatens traditional asset management along with funding sources for banks," Paranthoiene said. Chinese regulators have taken notice and are considering new rules for money funds, such as lowering the WAMs from 180 days, daily and weekly liquidity, among other measures.
The September issue of Crane Data's Bond Fund Intelligence newsletter features an interview with Brett Wander, Chief Investment Officer, Fixed Income, at Charles Schwab Investment Management (CSIM). In the article, entitled, "Schwab CIO Brett Wander on Bond Funds, Chasing Yield," Wander discusses a range of issues, including the risks of chasing yield, the liquidity challenges in the bond fund space, and why rising interest rates could be a good thing for short-term bond funds. As he tells us, "There's a significant distinction between the Fed raising rates slowly versus the Fed raising rates quickly." We reprint our interview below, which originally was published on Sept. 15. (Contact us if you'd like to see an issue of our new Bond Fund Intelligence product.)
BFI: How long have you been in the world of fixed income? Wander: I've been in the fixed income world for more years than I could even count -- about three decades -- and I joined Charles Schwab Investment Management four years ago. CSIM has run both money funds and bond funds since the early 1990s, so has a lot of experience in Fixed Income. Whether we're talking about money funds, long or short term bond funds, our experience goes back a number of years.
BFI: Tell us about your bond funds. Wander: Outside of money funds, CSIM manages two categories in the bond fund area: fixed income ETFs and fixed income mutual funds. With regard to our ETFs, these are all passive strategies that are benchmarked to indexes and our goal is to meet the index on those strategies. We have four fixed income ETFs and they basically cover the U.S. investment grade portion of the fixed income universe. We have a Treasury based ETF, an Aggregate-based ETF, a short-term Treasury based ETF, and a TIPs ETF. So they are all high quality government and corporate-based strategies. In terms of fixed income mutual funds, we have taxable and tax exempt funds, including both active and passive strategies, so it covers quite a range.
BFI: Are you looking at expanding your roster of bond funds? Wander: We're always mindful of new products that we can offer that can be helpful to our clients. We're certainly aware of changing market dynamics with money fund reform, so I'm sure that at some point we'll be talking more about it. Changing regulations and changing market dynamics certainly plays into our thinking as it relates to the potential need for new products.
BFI: What kind of growth have you seen in the bond fund segment? Wander: We've seen some pretty significant growth in fixed income, and we believe it's a very important asset class for our clients. It's important to keep in mind that when equity markets are volatile, fixed income strategies can be a stabilizing counter balance. Also, as we see interest rates start to rise, fixed income could become a much more interesting place for investors.
BFI: What are the biggest challenges for bond funds? Wander: There are three significant challenges in the marketplace related to fixed income. The first is the low yield environment, and the second is the changing regulations that impact our marketplace. Connected to this is the third aspect, which relates to liquidity in the fixed income marketplace. I'll touch on each. We've been in this incredibly low yield environment for a number of years now, and we find that yield-oriented investors get very discouraged about this. We've been advising our clients that even in a low yield environment, we don't recommend making significant changes to the risk profile of their strategies. While investors can always get more yield by taking on more risk, that's something that we want to discourage investors from doing without a lot of careful thought and consideration.
Anecdotally, six or seven years ago if you had a 5% yield target, you could accomplish that with Treasuries. A couple of years ago you could achieve that with investment grade corporate bonds. Today, you need to go into the high yield space to get a 5% yield. So the punch line is -- if you just simply maintain your yield targets, you would find yourself taking on a pretty significant increase in risk which we strongly discourage. A lot of investors employ fixed income strategies as a way to offset the risks in the equity markets. But the more you stretch for yield, the more you're becoming equity-like, and that can mitigate some of the benefits associated with investing in fixed income. The second challenge, changing regulations, raises all kinds of potential concerns -- dislocations in the marketplace, liquidity, and investor confusion.... You find a lot of unintended consequences due to the regulations. The third challenge relates to liquidity, which connects back to changing regulations.
BFI: What about the liquidity concerns? Wander: The liquidity conditions in the fixed income marketplace have changed meaningfully over the last several years. When I started in this industry, you could trade a $100 million corporate bond with very little market impact. Today you'd have to chop that trade up into ten or twenty smaller trades in order to accomplish that level of liquidity. Fixed income liquidity is definitely an issue. However, not all bond funds are the same as it relates to fixed income liquidity. There's this tendency to think, well if it's fixed income, it automatically means it's illiquid or potentially problematic. But the reality is there's a huge spectrum. It's important to realize that the higher quality parts of the fixed income market, even in the liquidity crisis, are likely to maintain a greater degree of liquidity than the lower credit, more structured products in this market. In short, the higher the credit quality, the greater the liquidity. Our products, by and large, are investment grade. We are willing to forgo a little bit of yield in order to maintain better risk characteristics and better liquidity characteristics. We think that's an advantage to investors.
BFI: What kind of diversification do you have in the portfolio? Wander: We have internal guidelines in all of our Fixed Income products that often go well beyond what the prospectuses require. One of the most significant aspects to managing fixed income is attention to risk management -- that's key to our investment process. No matter how attractive, no matter how high a yield, no matter how compelling an individual sector or security is, it's always critical to be highly diversified. Consequently, we have very strict guidelines in our strategies in terms of the percentage that we would own in a given credit or a given issuer. As you move from the triple-A part of the marketplace down to single-A and into the triple-B, the lower the credit quality becomes, then the more diversification we require.... [Y]ou never want any one security or sector to dominate the investment results of your portfolio.
BFI: What are your thoughts on the regulatory environment? Wander: We are entering uncharted waters here -- these are completely unprecedented events in terms of the degree that reform and regulation can impact the marketplace. We are mindful of the fact that companies are changing their product offerings -- some in response to money fund reform -- in the midst of an extremely low interest rate environment. We could see some unusual dislocation in the front end of the yield curve, not just in the money funds space but even in the longer part of the marketplace, which typically isn't the money fund space but is the short term bond space. You could see some interesting market dynamics where the relative demand for government securities could create some interesting opportunities and relative value in the credit space.
BFI: Do you expect we'll see higher rates? What are the risks and rewards? Wander: First off, thank you for not asking me to predict when the Fed is going to raise rates (laughs). So let's talk about the prospect of rising rates -- there are a couple of key thoughts I would emphasize here. Number 1, there's a significant distinction between the Fed raising rates slowly versus the Fed raising rates quickly. It creates a completely different dynamic in the marketplace. If the Fed were to raise rates quickly, meaning faster than what the market is expecting, you could see price declines in fixed income and that could possibly lead to outflows.
But if the Fed were to raise rates slowly, which they certainly seem to be on track to do, it significantly reduces the potential volatility in the fixed income market place. The vulnerability of short term fixed income funds to significantly underperform in a gradually rising rate environment is very different than in a fast moving rate rising environment. Look at what's happening today. In short term bond funds, we've started to see yields rise slowly as the market priced in expectation for future rate hikes. But because it happened so gradually, we've seen very little in terms of negative price performance. That's an important thing to keep in mind. Furthermore, there is a huge distinction between short term and long term rates. Long term rates are primarily driven by growth and inflation expectations. It's certainly conceivable that long term rates could fall even as the Fed begins to raise short term rates. The Fed cannot control long term rates.
BFI: What is your outlook for bond funds? Wander: The strong bull market for bonds that we have seen over the past thirty years is not likely to be repeated, because we're starting from a level in which yields are lower. Back in early '80s, you had double digit yields so those outsized returns aren't likely to be repeated. However, the likelihood of rates rising significantly in the very near term is not terribly high, and I think the market expects that. We're in a very low inflationary environment and as long as inflation remains contained, it's not likely that yields are going to skyrocket. Bond fund returns are likely to be pretty close to expectations and as long as that's the case, they offer good diversification against the stock market. Here's the ultimate irony, if rates do start to rise, as long as it's gradual, that will entice more investors into the fixed income marketplace. So we could actually see an increase in demand for bond funds.
Our 3rd Annual European Money Fund Symposium took place late last week in Dublin, Ireland, with an audience of about 110 attendees. Crane Data President Peter Crane, who served as the moderator and host, said of the conference, "With our European event, we've alternated between Dublin and London the last 3 years, and we enjoyed returning to Ireland, the largest money fund marketplace outside the U.S." The conference featured two days of discussions on the European money market fund industry, with pending reform regulations and negative yields receiving the most attention. Yet, the tone of the conference was not doom and gloom; rather it was optimistic as the industry remains resilient in the face of major challenges. Below, we briefly recap of two of the keynote sessions, specifically, "State of Money Market Funds in Europe and IMMFA Update," and "Money Market Funds in Ireland."
In the opening "State" session, Reyer Kooy, new IMMFA Chair and Head of Institutional Liquidity Management, EMEA and Asia, Deutsche Wealth and Asset Management, provided an overview of the key issues and regulations. He says, "This is a time of intense change in the capital markets and the European money market fund industry -- in fact change is the new norm. Some of it is disruptive, but some of this change is definitely needed so adaptation will be required. But I am fundamentally optimistic about the future of our industry. This sentiment starts with the belief that there is a need for a strong money market fund industry in Europe and this need has never been greater. Investors need the services that we provide and money market fund sponsors will continue to be of great use to investors in the future." (See too Thursday's "Sept. MFI Profile: New IMMFA Chair Reyer Kooy on European MMFs.")
Kooy adds, "However, the industry does face a number of challenges -- the low interest environment is clearly one and Europe has clearly gone to negative territory." On negative yields, Kooy states, "IMMFA members have actually been very well prepared, broadly implementing share cancellation strategies." So while there has been a degree of outflows as a result of negative yields in Europe, many investors have remained in these funds. Speaking of other challenges, he added, "We're increasingly seeing a paucity of supply of assets for money market funds to purchase and whilst this is a problem for us, one can only imagine how much more of a problem this is for our clients."
He continues, "It [regulatory reform] has been slow, but this has been okay, as it has allowed the stakeholders and the lawmakers to better understand the filings implications. I think the fact that the filing has been moving slowly has been a positive aspect of the debate.... Clearly one of the most glaring original proposals from the European Commission, which has since been softened, is the requirement for capital NAV buffers. So the good news is this seem to be off the table for now."
But he said there are a couple of areas where IMMFA does not support the current proposal. "We are very convinced that the differentiation of risk between CNAV and VNAV funds is misplaced. These two classifications of money market funds should not be treated differently under these regulations. We also believe there should not be a restriction on the use of amortized cost accounting. It is a reliable and accepted principle for short-term assets across the financial markets, so why should that not be the case for money market funds."
Kooy concludes, "Changes due to regulatory reform will, I believe, create opportunities, although we, as an industry, will need to remain nimble to be able to adapt." One of IMMFA's ongoing objectives is to "engage in the regulatory debates with decision makers and stakeholders to push for the best possible outcomes for ourselves, but more importantly, our investors."
Day two kicked off with a talk from Irish Funds' Chief Executive Pat Lardner, who gave an overview of the money fund industry in Ireland, the largest market in Europe (and second largest in the world) with $400 billion. Irish Funds' Regulatory Affairs Head Patrick Rooney went deeper into regulations, pointing out areas where the proposal could be improved.
Lardner says, "Net assets in Irish-domiciled money funds, notwithstanding some of the challenges that we've seen, have actually witnessed a growth in assets. Even over the course of the last 12 months through the end of June, we've actually seen a 4% rise. It's notable that the assets of MMFs are now beyond their previous peak in 2010." With two-thirds of the issuers located outside the Eurozone, Lardner says, "This is an international industry in its own right. When you look at the issuers, this is a key point to take away, a very significant portion (67%) of those are banks. It's been our suggestion in this reform package that you have to have something that allows the banks to get funding -- that's why there is a very much a joining at the hip of the interest of CNAV and VNAV parts of the industry when it comes to funding underlying entities."
Lardner continues, "Who are the investors? The investors in Irish domiciled money funds are typically in the financial intermediaries sector (67%) so there is a very institutional nature and feel to what we have here. There is virtually nothing in terms of a retail investment in the funds. The nature of the industry here is large, it's sophisticated, and it's very diverse."
He adds, "We have a very steadfast view that we must preserve the features of CNAV money market funds because they are valued by investors. If they are valued by investors, and they provide a source of funding into the economy, they have a legitimate reason to exist and continue. We think that a vibrant and a well-structured money market fund segment that continues to provide for CNAV is important. There have been difficult decisions and I do think those discussions have been moved to the point of pragmatism." He hopes that the outcome is a "viable solution."
Rooney dove deeper into the reform proposal, highlighting where they'd like to see changes. He comments, "The money market fund file has been highly controversial and there have been many twists and turns. Currently, we have 3 proposed alternatives to CNAV, the Low Volatility NAV (LVNAV) money market fund, the Public Debt MMF, and the Retail CNAV MMF. The problem is there something with each of those that needs to be addressed, so we're still in a difficult position. But if we look back to the Commission proposal -- the capital buffer proposal, which would kill CNAV funds -- I'd like to think that the debate is shifting to one around viable solutions for CNAV. So the road ahead is still very challenging."
He ran through the European Parliament's current proposal and the Irish Funds industry's positions on them, which, he pointed out, are aligned with IMMFA's positions. Rooney states, "Looking at the LVNAV, I think there are some appealing features here for existing CNAV managers -- the NAV may be rounded to 2 decimal places, amortized cost accounting may be used for assets with a residual maturity of less than 90 days, assets greater than 90 days must be valued at mark-to-market. There have indications to us from several promoters that they could live within those parameters if other aspects of the LVNAV could be addressed." If so, he said, "This could be where a large chunk of CNAV might go -- but that has to be heavily caveated."
Rooney says, "We certainly would like to see a higher basis point threshold [on the "shadow" NAV deviating by 20 bps]. I think 20 bps is already rock bottom -- below that you will get the fund flipping into VNAV far too easily. You can't have a situation where it's flipping back and forth; it's operationally just not feasible. We very much hope that we can come up with a reasonable number." The other caveat is the sunset clause. He adds, "An automatic termination of the product after five years is unacceptable. It sends the wrong signal to the marketplace -- we're going to tell the market that it's a product that's going to be phased out. We don't think that's appropriate."
On the Public Debt CNAV fund proposal, he comments, "First there is a lack of availability of sufficiently high quality EU government securities in the market. We need to include US securities in particular, given the makeup of assets in Irish MMFs.... We need a product that can invest in all types of high quality, eligible, government securities." Another challenge is the application of fees and gates on the Public Debt CNAV funds. "We see them as superfluous given the highly liquid nature of government securities."
Where does it go from here? The EP's proposal must be agreed to by the Council of Ministers then it goes to the "trilogue" phase. Rooney concludes, "So we have some road to travel yet on this and some very entrenched views to overcome. It's all about striking the right balance and the onus is on the industry to demonstrate to regulators how we have addressed the key risks and how far we have moved. We will continue to engage with all of the key stakeholders." (Note: Next year's European Money Fund Symposium is scheduled for Sept. 19-20 2016, in London.)
With implementation just one year out, a couple of new reports indicate a lack of readiness for money market reform, which takes effect in October 2016. Simcorp, a provider of investment management software and services, along with consultant KPMG, conducted a survey of asset managers and fund administrators, and the results show most still have a long way to go to get ready for implementation. Also, Pensions & Investments came out with a story called, "Don't Delay Moves on Money Market, Investors Warned," which discusses how consultants are pushing clients to prepare for reforms.
The Simcorp/KPMG report was based on a survey of 100 individuals from 58 asset management firms across North America. The press release, "SimCorp Survey Reveals Lack of Preparedness for Compliance with the SEC's Money Market Fund Reform Regulations says "There is a large amount of uncertainty and lack of preparedness for the pending Money Market Reform, due for compliance by Q3 2016. MMR will affect the U.S. and global fund managers holding U.S. funds."
It explains, "The amendments of key rule 2a-7 will mostly affect floating NAV, liquidity fees and redemption gates, diversification, stress testing, and disclosure and reporting, all of which will have technological and strategic impact on money market funds. The survey was conducted during a recent webinar hosted by SimCorp and KPMG, titled "Money Market Reform: The implications for your firm and the available technology solutions to help you comply.""
The release tells us that some of the survey highlights include: "85% claim to have limited or no understanding of the SEC's final ruling 2a-7; Only 23% are currently able to strike multiple NAVs during the day; Only 19% receive online alerts when daily liquidity is reduced to 10% or less; and 75% state that their organizations are not completely prepared for MMR to go into effect."
Marc Mallett, a SimCorp Vice President, comments in the release, "Stakeholders rely on their firm to make wise investment decisions on their behalf based on accurate numbers. Without them, the entire process becomes compromised. By design, SimCorp Dimension is inherently built to handle the parameters set forth by the SEC for MMR, offering full integration front-to-back, with real-time access to portfolio positions and P/L. It allows fund managers to quickly apply liquidity fees or redemption gates, to strike NAVs and to run stress tests and shock scenarios while offering customized reporting that meets the new requirements."
The P&I article explains, "New rules requiring floating net asset values and potential withdrawal restrictions on institutional prime money market funds won't take effect until October 2016, but some money managers and consultants are warning the time to move out of them is now. Among the issues with delaying, they warn, are the potential for investment losses and reduced liquidity from a last-minute rush to the exits that could negatively affect the nearly $1 trillion of assets now in institutional prime funds."
The story quotes Kimberly Gillett of Towers Watson & Co. LLC, "I understand why some people might have the perspective that it's too early.... But it's not too early to have these conversations Decisions will need to be made, and if you can already make the change to Treasury and government money market funds, it's an easy change to make."
It continues, "Brandon Swensen, senior portfolio manager, co-head of fixed income at RBC Global Asset Management(U.S.), Minneapolis, argued that now's the time to make the change as the maximum allowable maturity for securities in prime funds is 13 months. "We're at 13 months before the regulations take effect, so the composition of prime funds means that people should act now," Mr. Swensen said."
P&I also quotes BlackRock's Thomas Callahan on how the Fed Funds rate could affect the spread between Prime and Govie funds, "Right now that spread is about 12 basis points.... Is that enough premium to move from a (constant NAV) government fund to a (fluctuating NAV) prime fund? Probably not. But if rates go up, is 20 basis points enough compensation? 30? 50?" It adds, "Those uncertainties, not any foot-dragging, are the real reason asset owners aren't acting, Mr. Callahan said. They again quote Callahan, "Those concerns make institutions uncertain, and when they're uncertain, they watch and wait. That's what you're seeing now."
Finally, the article says, "Peter Yi, senior vice president and head of short-duration fixed income, Northern Trust Asset Management, Chicago, said he expects institutions to make the move from prime funds starting early next year. "It all depends on what's the right liquidity solution," Mr. Yi said. "If a balanced solution exists today, then we encourage them to move when they are ready. If not, we want to start working with them now to think about all the enhancements they think they need to improve their liquidity management experience.... I'd say in early to mid-2016, we think that's a good time frame to conclude our final discussions and put this all together with thoughtful recommendations.""
The Investment Company Institute released its latest "Money Market Fund Holdings" summary (with data as of August 31, 2015) late last week, which tracks the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds. We also review JP Morgan Securities' "Prime Money Market Fund Holdings Update" for August. In addition, in response to the late August stock market swoon, Fitch Ratings issued an update entitled, "`US Money Market Funds' Exposure to China Slowing." (Note: Thanks again to those who spoke, sponsored and participated in last week's European Money Fund Symposium in Dublin! Next year's European Symposium will be Sept. 21-22, 2016, in London, and the next Crane conference will be our Money Fund University, which will take place Jan. 21-22, 2016, in Boston.)
ICI's "Prime and Government Money Market Funds' Daily and Weekly Liquid Assets" table shows Prime Money Market Funds' Daily liquid assets at 26.8% as of August 31, up from 26.1% on July 31. Daily liquid assets were made up of: "All securities maturing within 1 day," which totaled 23.2% (vs. 21.8% last month) and "Other treasury securities," which added 3.6% (down from 4.4% last month). Prime funds' Weekly liquid assets totaled 39.4% (vs. 38.8% last month), which was made up of "All securities maturing within 5 days" (33.8% vs. 32.9% in July), Other treasury securities (3.6% vs. 4.3% in July), and Other agency securities (2.0% vs. 1.6% a month ago). (See also Crane Data's September 11 News, "Portfolio Holdings Show Jump in Agencies; Prime to Govt Shift Starts.")
The ICI holdings report says Government Money Market Funds' Daily liquid assets totaled 61.7% as of August 31 vs. 62.0% in July. All securities maturing within 1 day totaled 25.5% vs. 26.5% last month. Other treasury securities added 36.2% (vs. 35.5% in July). Weekly liquid assets totaled 82.7% (vs. 82.9%), which was comprised of All securities maturing within 5 days (38.6% vs. 39.8%), Other treasury securities (34.1% vs. 33.4%), and Other agency securities (10.0% vs. 9.8%).
ICI's "Prime and Government Money Market Funds' Holdings, by Region of Issuer" table shows Prime Money Market Funds with 42.5% in the Americas (vs. 42.0% last month), 18.6% in Asia Pacific (vs. 19.2%), 38.5% in Europe (vs. 38.6%), and 0.5% in Other and Supranational (vs. 0.3% last month). Government Money Market Funds held 85.4% in the Americas (vs. 84.3% last month), 0.7% in Asia Pacific (vs. 0.7%), 13.9% in Europe (vs. 15.0%), and 0.1% in Supranational (vs. 0.1%).
The table, "Prime and Government Money Market Funds' WAMs and WALs" shows Prime MMFs WAMs at a low of 33 days as of August 31, down from 37 days last month. WALs were at 68 days, down from 73 days last month. Government MMFs' WAMs was at 38 days, down from 40 days last month, while WALs was at 78 days, down from 76 days. ICI's release explains, "Each month, ICI reports numbers based on the Securities and Exchange Commission's Form N-MFP data, which many fund sponsors provide directly to the Institute. ICI's data report for June covers funds holding 94 percent of taxable money market fund assets." Note: ICI publishes aggregates but doesn't publish individual fund holdings.
In other news, JP Morgan Securities Short Duration Strategy team also released its "Prime MMF Holdings Update for August." They write, "Taxable money market fund flows were flat throughout the course of August. Prime fund AuM increased by $5bn or +0.36%. Prime fund assets now stand at $1,441bn, down $18bn or -1.2% YTD. Government fund AuM increased by $6bn or +0.64% during August. Government fund assets now register $969bn, down $13bn or -1.3% YTD. Historical data shows that the outflows experienced YTD are seasonal, and not reform-driven. At the end of the month, prime WAMs stood at their lowest level that we have on record at 30 days. Government funds also further pulled their WAMs in to an average of 36 days."
They explain, "Total prime bank holdings decreased by a total of $3bn, led by a $5bn reduction in repo and $6bn decrease in CP/CD balances. Conversely, time deposit holdings increased by $17bn, mostly across Norwegian and Swedish banks. Sector allocations also went relatively unchanged during August. Prime funds used $37bn of Fed RRP, a $9bn increase from July month-end. Furthermore, holdings of agency securities increased by $20bn, while UST holdings dropped $12bn. This drop isn't surprising, as the available supply of T-bills and Treasury coupons fell $33bn over the same period."
JPM's update continues, "At the time of this publication, $207bn in prime fund AuM is currently scheduled for conversion into government status.... Before MMFs are required to comply with the final rules next October, we think that it is possible for an additional $200-$250bn to leave the prime fund universe -- either via additional conversions or by investor outflows.... We expect the fund conversion process to be relatively orderly, at least on the credit side.... As mentioned above, $125bn in demand for bank product will eventually be lost as these funds begin to shift into government assets. This amounts to 12% of total prime bank holdings by prime MMFs -- a fairly sizable amount."
Fitch's report, "US Money Market Funds' Exposure to China Slowing," says the "recent stresses striking the Chinese capital markets do not pose an immediate credit threat to Fitch-rated money market funds holding Chinese-backed paper." It explains, "As of the end of July, 16 of 125 US prime money funds had exposure to Chinese issuers, based on data from Crane Data LLC. The median exposure among the 16 was 2.9% of each respective fund's total assets. The highest exposure among the 16 funds was 10.3% held by the $6.1 billion HSBC Prime Money Market Fund, which is not rated by Fitch."
Note: Crane Data's Aug. 31 Money Fund Portfolio Holdings show $5.1 billion in China-related holdings with China Construction Bank Co ($1.3B), CNPC ($0.7B), Agricultural Bank of China Limited ($0.6B) and Industrial & Commercial Bank of China Ltd ($0.6B) being the largest holdings. Wells Fargo Adv Hrtg ($2.2B), JP Morgan Prime MM ($0.9B), HSBC Inv Prm MMkt ($0.7B), and Wells Fargo Adv Cash Inv MMkt ($0.5B) were the largest holders of China-affiliated debt.
Fitch adds, "So far, the short-term tenors of holdings help mitigate the risks US money funds take investing in China, with 63% of all Chinese securities in US prime money fund portfolios maturing within seven days and 96% maturing within two months (as of July 31). Only about 3% of securities mature in more than six months. The short maturities generally allow portfolio managers to respond to market developments quickly and limit the impact of volatility on funds."
They write, "Indeed, a number of funds have reduced their exposure to Chinese issuers following the recent volatility, generally by allowing positions to mature or roll down the maturity curve. Most of the Chinese short-term paper in US money funds is issued from major state-controlled or affiliated banks, such as China Construction Bank, whose credit strength is based on an assumption of support from the Chinese government. However, a few funds have recently invested in bank-guaranteed commercial paper issued by private industrial firms, such as Midea Group. The limited supply of short-term debt from US and European issuers in the US market, and the increasingly global reach of some large Chinese issuers, until recently made investments in Chinese paper attractive for certain money funds."
Fitch concludes, "However, the recent volatility points to the risks inherent when investing in China and other emerging economies. These investments may be less liquid and more thinly traded, presenting heightened spread risk and making it harder to exit positions as credit conditions deteriorate.... The Chinese bond market is now the third largest in the world, with about $4.4 trillion as of the end of September 2014. US money funds only invest in dollar-denominated paper, including from issuers whose home domicile is China."
The Securities and Exchange Commission issued its final "Removal of Certain References to Credit Ratings and Amendment to the Issuer Diversification Requirement in the Money Market Fund Rule," one of two remaining supporting rules for its July 2014 Money Fund Reforms (the other final, which involves IRS and Treasury tax issues, is still pending). A press release, entitled "SEC Removes References to Credit Ratings in Money Market Fund Rule and Form," explains, "The Securities and Exchange Commission adopted amendments to remove credit rating references in the principal rule that governs money market funds and the form that money market funds use to report information to the Commission each month about their portfolio holdings. The Commission also adopted amendments that would subject additional securities to issuer diversification provisions in the money market fund rule." Thus, as expected, money funds' old "First Tier" and "Second Tier" credit regime, which required A-1, P-1, F-1 ratings (or A-2, P-2, F-2), will be replaced by a new "minimal credit risk" test that doesn't reference ratings. Note that the new does not prohibit securities ratings and does not involve fund AAA ratings, but just removes rating mandates from the rules. (For more, see our initial July 24, 2014, News, "SEC Adopts MMF Reforms; Chair White on Rule's Fundamental Changes," and the SEC's "Money Market Funds" page.) Finally, thanks to those who participated in our European Money Fund Symposium in Dublin (which concludes today)!
SEC Chair Mary Jo White said of the new rule, "Reducing reliance on credit ratings to determine which securities money market funds can hold is an important part of our efforts related to these funds. These amendments also remove credit ratings from one of the last areas of the Commission's rules where they are referenced."
The release says, "The money market fund rule 2a-7 currently requires money market funds to invest only in securities that have received one of the two highest short-term credit ratings or, if they are not rated, securities that are of comparable quality. The rule also requires a money market fund to invest at least 97 percent of its assets in securities that have received the highest short-term credit rating. The amendments will eliminate these requirements. Instead, a money market fund is limited to investing in a security only if the fund determines that the security presents minimal credit risks after analyzing certain prescribed factors."
It adds, "The amendments will implement section 939A of the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 which requires the Commission to review its rules that use credit ratings as an assessment of credit-worthiness and replace those credit-rating references with other appropriate standards. With today's action, the Commission has removed references to credit ratings from 32 rules and forms. The rules adopted today will be effective 30 days after their publication in the Federal Register and the compliance date will be October 14, 2016."
SEC Commissioner Daniel Gallagher says in a statement, "I am happy to support today's amendments removing references to nationally recognized statistical organizations from our rules and forms governing money market funds. These amendments implement the congressional mandate in Section 939A of the Dodd-Frank Act to eliminate such references from all of our rules. Since the passage of Dodd-Frank, I have been a strong proponent for Commission action to satisfy this mandate given that Section 939A is one of the very few provisions of the statute that directly addresses a cause of the financial crisis. And so, although I lament that it took over five years, I applaud the Commission for adopting these amendments."
Money fund attorney Stephen Keen, Senior Counsel at Perkins Coie, posted commentary about the rule on his firm's Asset Management Advocate. The post, entitled, "It's a Miracle: Rule 2a-7 Gets Shorter." Keen says, "Yesterday, the SEC adopted what I hope will be the final amendments to Rule 2a-7 made during my career. For the first time in the history of Rule 2a-7, the SEC cut more than it added, reducing the length of the rule by over 12%. The amendments relate primary to credit and diversification requirements, but also incorporate some of the staff's FAQs on the 2014 reforms."
Keen provides some background, writing, "The amendments were prompted by Section 939A of the Dodd-Frank Act, which required the SEC to "to remove any reference to or requirement of reliance on credit ratings and to substitute in such regulations such standard of credit-worthiness as each respective agency shall determine." The SEC has complied by removing all references to NRSROs and "rated securities" from Rule 2a-7, which is why the amended rule is shorter."
He writes, "The amended rule retains the minimal credit risk standard that dates back to the original money market fund exemptive orders. Thus, an "eligible security" is now defined as a security that presents minimal credit risk. The amended rule also codifies the following general factors to be considered in assessing credit risk: Financial condition; Sources of liquidity; Ability to react to future market-wide and issuer- or guarantor-specific events, including ability to repay debt in a highly adverse situation; and Strength of the issuer or guarantor's industry within the economy and relative to economic trends, and issuer or guarantor's competitive position within its industry."
Keen continues, "Generally speaking, Rule 2a-7 has two diversification limits: a 5% limit for issuers and a 10% limit for guarantees and demand features. When the limits were added to the rule in 1991, securities subject to third-party guarantees needed to comply with only the 10% limit and did not count towards the 5% limit on the underlying issuer. The amendments remove this exclusion."
He concludes, "The amendments also codify Questions 45 through 48 of the FAQs, which interpreted the revised diversification requirements of the 2014 amendments. The SEC concluded that Section 939A did not prohibit regulations requiring the disclosure of ratings information, and amended Form N-MFP to disclose "each rating assigned by any NRSRO that the fund's board of directors (or its delegate) considered in determining that the security presents minimal credit risks." This is probably the most burdensome change made by the amendments."
The September issue of our flagship Money Fund Intelligence newsletter features an interview with the new Chair of the Institutional Money Market Funds Association, Reyer Kooy. Kooy, the Head of Institutional Liquidity Management, EMEA and Asia business for Deutsche Asset & Wealth Management, replaces Jonathan Curry, who served as IMMFA Chair for the past three years. Kooy comes aboard in a challenging environment for money funds in Europe, as the industry faces negative yields and the likelihood of substantial reforms. But he remains optimistic about the future. We excerpt from our interview below. (Note: Kooy will also give the opening speech at this morning's European Money Fund Symposium, which takes place Thursday and Friday in Dublin, Ireland at the Conrad Hotel.)
MFI: When did you become Chair? Kooy: I was elected to become Chairman of IMMFA in June of this year for a two year term. Previously I was an IMMFA board member and Treasurer of the association for the preceding three years. IMMFA has been around for more than 15 years and is focused on the European CNAV money market fund industry specifically. I've personally been involved with the money fund industry twelve years.
MFI: What has been IMMFA's main focus? Kooy: Regulation has been the main focus of the association over the last two to three years. We focus on making the case for money market funds in general, but also for constant NAV. We are keen to share our knowledge and insights with the decision makers of the European regulatory process. Regulations will be a prime focus going forward as well as the yield environment. These two key items are of crucial importance to our members and therefore to IMMFA.
MFI: Given the potential for regulatory changes, will IMMFA expand its focus? Kooy: For now the focus of the association is on constant net asset value money market funds and, hopefully, carving out a future for constant net asset value money market funds in Europe. That's really the sole focus at this point. As the regulation becomes clear, we can start to speculate about what that means not only for money market funds but also their users, the providers, and IMMFA. But at this point it's too early to say. Currently, European providers of constant NAV money market funds are members of IMMFA as are service providers, which include fund administration companies, rating agencies, and accounting firms. There are about thirty members in total. It's very much a committee based structure. The elected board is the main driving force, along with our full time staff, of the association's activities.
MFI: How are members dealing with negative yields? Kooy: Negative yield is a challenge for our clients as well as our members. IMMFA money market funds are highly transparent in their holdings and in their activities, so if the short term euro money markets are negative then money market funds must be too. So clients are accepting that to be invested in highly secure, highly liquid Euro denominated securities comes at a cost. The negative yield in a money market fund may be better than what's on offer in banks in the same liquidity bucket. Even though we have seen some reduction in the assets under management in euro CNAV money market funds, we still see actually quite a strong demand for euro denominated money market funds. Providers have been able to operate in this negative yield environment. Most if not all providers have implemented a share cancellation structure whereby a very small number of shares is cancelled on a daily basis to reflect the negative yield in the fund. We are also seeing a broadening of use of accumulating share classes, which gives the same economic gap impact but just in a different format.
MFI: What is the status of money fund regulations in Europe? Kooy: The regulatory debate in Europe continues. It has been rightly identified as a very important and technical file. The general consensus on the European side of things is still to be reached. The European Commission and the European Parliament have made their recommendations, and now it's time for the Council of Ministers also to review the file. Progress depends also on the presidency. The Latvians didn't look at this file because of resource constraint, and Luxembourg is under some pressure to do so. But it is not clear yet whether the file will progress under their presidency. Whatever the timing, as an industry we are hoping for a healthy transition timeframe to allow the clients, ourselves as providers, but also the whole European money markets to prepare themselves fully for whatever changes may ensue. All the parties need to look at the file and there is then a "tri-logue" process which effectively draws together the European Commission, the European Parliament, and the Council of Ministers to agree at final compromise. Until all of the steps are taken, it's unclear what the final outcome will be.
MFI: What's the position on fund ratings? Kooy: The most recent drafts we have seen do not specifically address the point <b:>`_. It seems like the banishment of fund ratings have been withdrawn, so it looks as though there will be a possibility to continue to use ratings. It's important to point out that in general terms, the rating agencies are actually very important to the users of money market funds perhaps more so than the providers of money market funds. A good money market fund house will be in the business of providing independent and primary research to support its investment decision process. It is an additional comfort to the users of money market funds to see the outcome of that process results in the purchasing of highly rated securities, which allow the fund to get an AAA rating.
MFI: Who are the users of IMMFA money market funds? Kooy: The answer actually is anyone who has cash. The nice thing about money market funds and IMMFA-style money market funds is that the user base is extremely broad. Corporates, insurance companies, pension plans, local governments, hedge funds, asset managers, private wealth, and, in some cases, possibly even retail through intermediaries are all making use of money market funds. As far as what they are looking for, capital preservation and liquidity are the key drivers for the users and often yield is a lesser consideration.
MFI: Bank deposits are facing challenges, too, right? Kooy: This is a very important point. If you ask money market fund investors what they worried about today, they will talk about regulation and they will talk about yield. But these issues are not only prevalent in money market funds, because bank regulations are impacting, in some cases, the ability for these banks to take balances from customers and impacting their ability to pay yields. Banks and investors therefore have a keen interest in solutions to help them with their liquidity needs. The European Commission's Capital Markets Union initiative is actually discussing promoting alternative sources of financing to the economy and money market funds should be an important part of the story.
MFI: Are providers facing fee pressures? Kooy: In general I would say that there is still an element of fee waiving taking place in most AAA-rated euro-denominated funds. This has been the case during the ultra-low yield environment which preceded the now negative yield environment. But waiving is less prevalent in the other currency funds to which we alluded, namely Sterling and U.S. dollar, where the rates are a little higher.
MFI: Have U.S. MMF reforms had an influence on European regulations? Kooy: Of course. There's a lot of activity on fund restructuring in the U.S. arena as providers prepare themselves and their clients for the effective date of S.E.C. reforms in October of 2016. However, money market fund reform and European money market fund reform are quite different, mainly because these are very different markets and quite different client bases. I hope and expect the European process will take account of the unique perspectives of the European market. For example retail uses of constant net asset value funds in the U.S. would have been a big consideration in the setting of U.S. rules. In Europe, it should not be as big a factor, so I'd expect this to be taken less into consideration in any final law making in Europe.
MFI: What's your outlook in general for CNAV money market funds? Are you optimistic about the future? Kooy: Yes, I'm fundamentally optimistic. Regulation and low yields are posing some challenges for investors and providers of money market funds alike, but I do believe that there is a strong role for CNAV funds, specifically. I'm hopeful that this will be recognized in the final lawmaking in Europe. But more generally, money market funds have a vital role to play in the capital preservation of liquid balances through diversification and it is important that the services remain accessible to investors, particularly in the context of more broad based banking regulation.
MFI: Has IMMFA had an influence in the regulatory debate? Kooy: We certainly think that we have. We have maintained an extremely consistent story throughout the entire process in terms of feeding the process with information to help with the decision making process. We're also very proud as an association to have been able to get a good consensus around those positions within the membership. I think those two items have allowed us to be very strong in informing the regulatory debate.
There's been some activity recently related to "amalgamated" FDIC-insurance bank deposit products. Reich & Tang, one of the players in the space, will be spinning itself off of its parent company, Natixis Global Asset Management, the firm confirmed recently in a press release, "Reich & Tang Announces Management Buyout Agreement. Reich & Tang exited the money fund business earlier this year when it sold the business to Federated, citing the challenging regulatory environment for money funds. (See our News, Federated Finalizes Deal with R&T). Instead, the company will focus on growing its FDIC-insured deposit program and it believes this buyout will help them do that. Another player in the "structured" FDIC-insured bank deposit space, TCG Financial, was acquired by alternative mutual fund company, Catalyst Funds, just this week. We examine the two deals and report on the FDIC's 2Q "Quarterly Banking Profile" below.
The Reich & Tang press release says, "As of August 12, 2015, the ownership of Reich & Tang transitioned from being a wholly owned subsidiary of Natixis to a privately held partnership/ownership structure of several key persons at the firm, all of whom are longstanding Reich & Tang executives. Michael Lydon will maintain his role as President and Chief Executive Officer and oversee the organization."
Lydon comments, "Reich & Tang began its longstanding business in 1974 as a privately held company, which is strategically where we have decided to return it. Having recently liquidated our money fund business we believe that the new structure fosters a leaner, more nimble, and keenly focused organization that will carry forward Reich & Tang's stellar reputation in product innovation and superior client service in the many markets it serves. This is an opportunity for Reich & Tang to grow as a major provider of FDIC programs rather than as a smaller money fund provider facing an uncertain regulatory landscape."
The release says, "All of Reich & Tang’s infrastructure remains unchanged (IT, operating systems, sales, marketing, service, finance, etc.) and will continue to operate business as usual." Lydon adds, "Our focus is on growing our FDIC insured investment solutions and bank funding programs. FDIC programs continue to be in high demand as money market mutual fund reform takes hold and diminishes the allure of money funds for many intermediaries and investors."
Amalgamated FDIC-insurance products invest in a series of electronically linked bank deposit accounts, which allows investor to virtually insure millions with FDIC insurance. Each bank can offer $250K in FDIC insurance at one bank, but through some of these offerings an investor can get FDIC insurance at much higher levels. According to the 2015 AFP Liquidity Survey, 24% of corporate treasurers use these products to invest in bank deposits, down from 26% in 2014.
TCG Financial Services tried to put a new twist on this space last September when it announced the launch of money funds that invest in FDIC-insured deposits. (See our Sept. 12 News, "TCG Launches Govt MMFs With FDIC Insured Blocks.") Earlier this week, website FIN Alternatives reported, "Catalyst Funds Acquires TCG Financial Series Trust Money Funds." The release says, "Liquid alternative mutual fund specialist Catalyst Funds has acquired the TCG Financial Series Trust funds, a group of 10 alternative money market funds that invest primarily in bank deposits. The TCG funds generally offer a higher yield than traditional money market funds, as well as FDIC insurance for the funds’ investors [sic]. They will initially only be offered to institutional investors. Terms of the acquisition were not disclosed."
The SEC filing says, "Effective September 3, 2015, Catalyst Capital Advisors LLC ("Catalyst") replaced TCG Financial Services, LLC ("TCG") as investment advisor of the Fund. Accordingly, all references to TCG are hereby replaced with Catalyst."
TGC initially filed for 10 FDIC-insured institutional funds: TCG Cash Reserves MMF (CRIXX), TCG Daily Liquidity Government Money Market Fund (DLIXX), TCG Liquid Assets Government Money Market Fund (LSIXX), TCG Liquidity Plus Government Money Market Fund (LPIXX), TCG US Government Advantage Money Market Fund (GAIXX), TCG US Government Primary Liquidity Money Market Fund (GQIXX ), TCG US Government Max Money Market Fund (GXIXX ), TCG US Government Premier Money Market Fund (GRIXX ), TCG US Government Select Money Market Fund (GLIXX), and TCG US Government Ultra Money Market Fund (GUIXX). The funds have yet to gain more than minimal seed money in assets though (and are not tracked by Crane Data).
In other news, the FDIC's "Quarterly Banking Profile, Second Quarter 2015” says, “Total deposit balances fell by $25.8 billion (0.2 percent), as at least one large bank reduced its non-operational deposits (wholesale funds in excess of the level needed to provide operational services to wholesale customers) to avoid a regulatory capital surcharge. Deposits in foreign offices declined by $34.1 billion (2.5 percent), and domestic office deposits rose by $8.3 billion (0.1 percent). Domestic deposits in interest-bearing accounts fell by $37.1 billion (0.5 percent), while noninterest-bearing deposits increased by $45.4 billion (1.5 percent). Nondeposit liabilities declined by $34.1 billion, as trading liabilities fell by $57.9 billion (18.9 percent)."
JPM Securities' weekly "Short Term Market Outlook and Strategy" also mentions deposits, writing, “While we believe a large portion of the displaced money will rotate into government MMFs, up until now, this has not been the case. In fact, government MMF’s assets under management are down $36bn in 1H15, consistent with seasonal outflows typical this time of year. Instead, based on the most recent quarterly FFIEC data, so far, the deposit shift has largely stayed within the banking system, rotating from large banks to mid-sized institutions. [B]anks with assets greater than $250bn saw their total deposit balances fall by $71bn quarter-over-quarter. However, nearly 60% of that was absorbed by banks with assets between $50bn and $250bn. Unlike large financial institutions that face significant capital and liquidity costs, mid-size banks are less impacted (both because they face less stringent regulations, their business models are less complex, as well as the fact their regulatory implementation date is usually later than US G-SIBs'), allowing them to gain market share to the extent possible."
They continue, "Looking ahead, as banks continue to optimize their balance sheets to comply in the new regulatory regime, more deposits are expected to be removed. While the initial shift has been towards smaller banks, we believe eventually these deposits will be funneled into the money markets, either through sweep accounts, government MMFs, and/or bills. The magnitude and pace of this shift will depend on a variety of factors – one of which is how long mid-sized institutions are willing to sustain a low return on assets (ROA) for those non-operational deposits.... Given the Fed's message that the pace of tightening will likely be a very gradual one, it may not be long before bank equity shareholders pressure management to increase their ROAs. When that happens, we believe those deposits will likely find their way into the money markets."
Standard & Poor's Ratings Services released two papers last week on the current realities in the European money market fund industry. One is called, "European Money Market Funds Display Resilience in Tough Times," while the other is on "What the Evolving Regulatory Landscape for Banks Means for European Money Market Funds." The former looks at how the industry is surviving the challenges it has faced in Europe. S&P writes, "In the first half of 2015, managing short-term money market funds (MMFs) became that much harder. Obstacles for fund managers in Europe include low or negative yields, declining net assets, a shrinking supply of investments that offer high credit quality, and ongoing uncertainty regarding regulation in the future. In response, many MMF managers have increased their weighted-average maturity and geographic diversification. Despite the difficult environment, the managers of Europe-domiciled MMFs have maintained the 'AAAm' rating." (Note: S&P and experts on European money funds will present on many of these topics at this week's Crane's European Money Fund Symposium in Dublin, which takes place Sept 17-18 in Dublin, Ireland.)
The first piece explains how investors are adapting, saying, "Faced with such low fund yields, liquidity investors are reassessing their options. If they can, they are increasing their allocation to higher-yielding assets. Most of those who invest in MMFs in Europe are institutional clients -- primarily insurance companies and pension funds -- who use MMFs to meet their investment cash needs. These investors can choose to reallocate some of their assets and invest in longer-dated assets that provide a higher yield. However, MMF managers cannot. MMFs are short-duration in nature due to a weighted-average maturity restriction of sixty days, limiting the amount that can be invested in longer-dated securities. Corporate treasurers are also known to invest in short-term MMFs for their operational cash needs. However, we understand from our rated fund sponsors that corporate treasurers are re-evaluating their cash requirements by segmenting their cash balances into those for immediate use and those for later use, in an attempt to mitigate the impact of negative yields. This means that they are making less use of liquidity funds as a short-term cash investment."
S&P adds, "Most short-term MMF managers started to cancel shares in April 2015, affecting investors in constant net asset value (CNAV) EUR MMFs further, with many investors looking for alternative investment options. The industry has been able to absorb negative yields and still maintain a E1.00 constant NAV per share by cancelling shares that an investor holds. CNAV EUR MMFs that were able to incorporate this feature in their prospectuses have passed on the negative yields and, in many cases, fees to investors. As a result, most CNAV EUR MMF investors will end up with fewer shares than originally received."
The paper continues, "Since the end of January 2015, low yields, asset reallocation, changes in business strategy, fund liquidation, and the withdrawal of fund ratings have led to a decline in the net assets of 'AAAm' rated MMFs in the three major currencies, especially EUR MMFs. The primary reason for the large decline in EUR MMFs is the rating withdrawal of a large fund that represented 18% of total net assets. Excluding this large fund, net assets declined by 15% instead of the 32%. Similarly, the rating withdrawal of a large fund caused net assets to decline by an additional 8% for USD MMFs. Excluding this fund, net assets declined by 7%, instead of 15%. The recent net asset trend of GBP MMFs was not subject to significant fund additions or withdrawals and reflects general market demand. Despite the above challenges, our ratings on the MMFs managed in Europe have remained stable."
On MMF regulations, it says, "Although the final shape of the European MMF reforms remains unclear, some details have emerged. According to the proposal that was voted on in the European Parliament in March 2015, the final proposal is unlikely to require MMFs to hold a 3% capital buffer. Requiring a buffer would have made short-term CNAV MMFs, which currently offer negative yields or yields of only a few cents per E1.00, economically unsustainable. Instead, we expect regulators to implement liquidity fees and redemption gates that would be activated during times of stress. It is hoped that these measures would address the risk of an investor run on an MMF. They are similar to the rules the U.S. Securities and Exchange Commission (SEC) plans to adopt for regulated U.S. MMFs in October 2016. More importantly, short-term CNAV MMFs will be allowed to coexist with variable net asset value (VNAV) MMFs as long as CNAV MMFs are provided under the banners of public debt MMF and retail CNAV MMF or low-volatility NAV short-term MMFs. CNAV MMFs would continue to exist for a predetermined period of time and reassessed for future risk."
On banking regulations, S&P writes, "In Europe, the supply of highly rated eligible investments has declined since 2012 as several regions in the Eurozone fell back into recession. Furthermore, regulatory developments in the banking sector may continue to affect the supply of high credit quality issuers, especially highly rated global commercial banks, which are an important source of investment for European MMFs. This segues into the second S&P release, "What the Evolving Regulatory Landscape for Banks Means for European Money Market Funds."
This report begins, "How important are financial institutions, banks in particular, to European MMFs as an investment option? At the end of June 2015, 75% of sterling-denominated, 67% of U.S. dollar-denominated, and 55% of euro-denominated MMFs' portfolio holdings were in bank-related short-term investments such as bank deposits, certificates of deposit, cash held with a custodian bank, bonds, floating-rate notes, and reverse-repurchase agreements (repos). In our view, the predictability of extraordinary government support for banks' senior creditors is likely to diminish across Europe.... In June and July, we took various rating actions on systemic banks in these countries to reflect the removal of ratings uplift for government support, as well as, in many cases, the recognition of ALAC (the additional bail-in capacity that banks already hold or that we expect them to build up in the future)."
Standard & Poor's Ratings explains, "We have lowered a number of long-term bank ratings over the last three years, but the number of banks with the highest short-term ratings of 'A-1' or 'A-1+' has declined only slightly, indicating their resilience to changing market conditions and regulatory environment. This is especially important to European MMFs, which rely on and use the short-term rating, a key part of our principal and stability fund ratings criteria, when determining credit quality and investment strategy."
It concludes, "We still see pressure on bank ratings in many of the remaining European jurisdictions that have yet to implement the BRRD or equivalent legislation, and in North America and Canada as global bank regulation evolves. Banks continue to adjust to the evolving regulatory landscape that has emerged since the financial crisis, as market conditions remain unsupportive and sometimes volatile in certain regions. As a result, we expect that European MMFs will continue to invest cautiously, seeking to maintain the extremely high quality and liquidity of their investments, and we anticipate further changes in bank creditworthiness."
In other news, both Fitch and Moody's also announced European money market fund ratings actions. Fitch assigned 'AAAmmf' ratings to two short-term money market funds managed by BlackRock -- BlackRock ICS Institutional Euro Liquidity Fund and BlackRock ICS Institutional Euro Government Liquidity Fund. The press release says the funds are "sub-funds of the Irish-domiciled umbrella fund, BlackRock Institutional Cash Series plc." Fitch says the key drivers of the ratings are, "The portfolios' overall credit quality, diversification and short maturity profile; Minimal exposure to interest rate and spread risks; Overnight and one-week liquidity profiles consistent with Fitch's rating criteria; The capabilities and resources of BlackRock as investment manager."
Also, Moody's withdrew the Aaa-mf money market fund rating of Federated Short-Term Sterling Prime Fund. The Fund is managed by Federated Investors (UK) LLP. The release says, "Moody's has withdrawn the rating for its own business reasons."
Crane Data's latest Money Fund Intelligence Family & Global Rankings, which rank the market share of managers of money market mutual funds in the U.S. and globally, were sent out to shareholders last week. The September edition, with data as of August 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 $7.4 billion overall, or 0.3%, in August; over the last 3 months, assets are up $74.1 billion, or 3.0%. For the past 12 months through August 31, total assets are up $92.2 billion, or 3.0%. Below, we review the latest market share changes and figures. (Note: Crane Data's September Money Fund Intelligence and our latest Money Fund Portfolio Holdings were released last week too.)
The biggest gainers in July were Fidelity, Schwab, BlackRock, SSgA, and Morgan Stanley, rising by $6.8 billion, $4.8B, $2.7B, $2.5B, and $2.5B, respectively. Fidelity, Federated, Morgan Stanley, BlackRock, and JP Morgan had the largest increases over the 3 months through August 31, 2015, rising by $18.9 billion, $12.1B, $11.0B, $8.0B, and $7.8B, 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 increased its lead as the largest money fund manager with $417.1 billion, or 16.1% of all assets (up $6.8 billion in August, up $18.9 billion over 3 mos., and up $7.1B over 12 months). Fidelity was followed by JPMorgan with $257.3 billion, or 9.9% market share (up $106M, up $7.8B, and up $18.8B for the past 1-month, 3-months and 12-months, respectively). BlackRock remained the third largest MMF manager with $212.2 billion, or 8.2% of assets (up $2.7B, up $8.0B, and up $23.8B). Federated Investors was fourth with $205.7 billion, or 7.9% of assets (down $602M, up $12.1B, and up $3.3B), and Vanguard ranked fifth with $174.7 billion, or 6.7% (down $668M, up $1.5B, and up $2.7B).
The sixth through tenth largest U.S. managers include: Dreyfus ($167.5B, or 6.5%), Schwab ($160.8B, 6.2%), which moved ahead of Goldman Sachs ($151.6B, or 5.9%), Morgan Stanley ($127.7B, or 4.9%), and Wells Fargo ($108.4B, or 4.2%). The eleventh through twentieth largest U.S. money fund managers (in order) include: Northern ($80.8B, or 3.1%), SSgA ($79.7B, or 3.1%), Invesco ($52.7B, or 2.0%) which moved ahead of BofA ($49.5B, or 1.9%), Western Asset ($43.5B, or 1.7%), First American ($41.8B, or 1.6%), UBS ($37.0B, or 1.4%), Deutsche ($30.4B, or 1.2%), Franklin ($24.7B, or 1.0%), and American Funds ($15.2B, or 0.6%). Crane Data currently tracks 68 U.S. MMF managers, one fewer than last month.
Over the past year through August 31, 2015, BlackRock showed the largest asset increase (up $23.8B, or 12.6%), followed by Morgan Stanley (up $21.5B, or 20.3%), JP Morgan (up $18.8B, or 7.9%), Goldman Sachs (up $18.3B, or 13.7%), and Dreyfus (up $10.5B, or 6.7%). Other asset gainers for the year include: Fidelity (up $7.1B, or 1.7%), First American (up $5.7B, or 15.9%), Northern (up $4.6B, 6.0%), Franklin ($4.0B, 19.4%), and Federated (up $3.3B, or 1.7%). The biggest decliners over 12 months include: Invesco (down $6.7B, or 11.3%), Wells Fargo (down $3.6B, or 3.2%), SSgA (down $3.5B, or 4.2%), RBC (down $3.3B, or 18.0%), Deutsche (down $1.9B, or 5.8%), and BofA (down $1.2B, or 2.5%). (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 ($424.1 billion), JPMorgan ($382.3 billion), BlackRock ($309.8 billion), Goldman Sachs ($235.6 billion), and Federated ($213.9 billion). Dreyfus/BNY Mellon ($191.5B), Vanguard ($174.7B), Schwab ($160.8B), Morgan Stanley ($146.9B), and Western ($121.8B) 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.
Finally, our September 2015 Money Fund Intelligence and MFI XLS show that yields went up for many indexes in August. Our Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 840), 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 of 0.04%, same as last month, and a 30-Day Yield of 0.05%, up a basis point from last month. Also, our Crane 100 shows a Gross 7-Day and 30-Day Yield of 0.20% (same as last month). For the 12 month return through 8/31/15, our Crane MF Average returned 0.02% and our Crane 100 returned 0.03%.
Our Prime Institutional MF Index (7-day) yielded 0.06% (up a basis point), while the Crane Govt Inst Index was at 0.02% (unchanged). The Crane Treasury Inst, Treasury Retail, Crane Govt Retail Index, and Prime Retail Indexes all yielded 0.01%. The Crane Tax Exempt MF Index also yielded 0.01%. The Gross 7-Day Yields for these indexes were: Prime Inst 0.24% (same as last month), Govt Inst 0.12% (down from 0.13%), Treasury Inst 0.08% (same), and Tax Exempt 0.11% (down from 0.12%) in August. 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 1.39% for 10-years. (Contact us if you'd like to see our latest MFI XLS or Crane Indexes file.)
Crane Data released its September Money Fund Portfolio Holdings yesterday, and our latest collection of taxable money market securities, with data as of August 31, 2015, shows a big gains in holdings of Agencies (much of which was due to Fidelity Cash Reserves increasing its Agencies by $9.4 billion) and gains in Time Deposits and small decreases in Commercial Paper and Repo. Money market securities held by Taxable U.S. money funds overall (those tracked by Crane Data) increased by $35.0 billion in August to $2.584 trillion. MMF holdings increased $55.0 billion in July, $58.3 billion in June and $31.6 billion in May. Despite a minor 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 28.1% of holdings, down slightly from the previous month's 28.6%. Below, we review our latest Money Fund Portfolio Holdings statistics.
Among all taxable money funds, Repurchase agreements (repo) decreased $2.5 billion (0.4%) to $555.8 billion, or 21.5% of all assets, after decreasing $109.7 billion in July and increasing $140.5 billion in June. Certificates of Deposit (CDs) were up $1.1 billion (0.2%) to $537.2 billion, or 20.8%, after increasing $33.9 billion in July and $21.8 billion in June. Treasury holdings increased $3.3 billion (0.8%) to $434.0 billion, or 16.8%, while Commercial Paper (CP) dropped $5.4 billion (1.3%) to $406.7 billion, or 15.7% of assets.
Government Agency Debt increased $29.8 billion (8.4%) to $383.7 billion, or 14.8% of assets. As we mentioned, Fidelity Cash Reserves, the largest money fund with $111.5 billion, increased its holdings of Agencies from 19% ($21.3 billion) last month to 26% ($30.7 billion), an increase of $9.4 billion. (Fidelity Cash Reserves is in the process of converting to Fidelity Government Cash Reserves -- see "Fidelity Announces Major Changes to MMFs; Staying Stable, Going Govt." The fund is one of the first of many expected to do so under the pending Money Fund Reforms, and Fidelity plans to complete the shift in the 4th quarter of 2015.) Other holdings, primarily Time Deposits, jumped $10.6 billion (4.5%) to $249.0 billion, or 9.6% of assets. VRDNs held by taxable funds decreased by $1.9 billion (9.6%) to $17.7 billion (0.7% of assets).
Among Prime money funds, CDs represent one-third of holdings at 33.4% (down from 33.7% a month ago), followed by Commercial Paper at 25.3%. The CP totals are primarily Financial Company CP (14.3% of total holdings), with Asset-Backed CP making up 5.7% and Other CP (non-financial) making up 5.3%. Prime funds also hold 8.0% in Agencies (up from 6.9%), 4.1% in Treasury Debt (down from 4.8%), 3.2% in Treasury Repo, 5.8% in Other Instruments, 4.1% in Other Instruments (Time Deposits), and 4.1% in Other Notes. Prime money fund holdings tracked by Crane Data total $1.607 trillion (up from $1.589 trillion last month), or 62.2% of taxable money fund holdings' total of $2.584 trillion.
Government fund portfolio assets totaled $468 billion, up from $465 billion in July, while Treasury money fund assets totaled $509 billion, up from $495 billion in July. Government money fund portfolios were made up of 54.4% Agency Debt, 26.1% Government Agency Repo, 4.4% Treasury debt, and 14.6% in Treasury Repo. Treasury money funds were comprised of 68.4% Treasury debt, 30.8% in Treasury Repo, and 0.9% in Government agency, repo and investment company shares. Government and Treasury funds combined total $977 billion, or 37.8% of all taxable money fund assets.
European-affiliated holdings fell $1.6 billion in August to $726.5 billion among all taxable funds (and including repos); their share of holdings decreased to 28.1% from 28.6% the previous month. Eurozone-affiliated holdings decreased $2.9 billion to $406.6 billion in August; they now account for 15.7% of overall taxable money fund holdings. Asia & Pacific related holdings decreased by $8.1 billion to $293.5 billion (11.4% of the total). Americas related holdings increased $41.0 billion to $1.557 trillion, and now represent 60.3% of holdings.
The overall taxable fund Repo totals were made up of: Treasury Repurchase Agreements (down $3.1 billion to $277.0 billion, or 10.7% of assets), Government Agency Repurchase Agreements (up $9.4 billion to $199.3 billion, or 7.7% of total holdings), and Other Repurchase Agreements ($79.6 billion, or 3.1% of holdings, down $8.7 billion from last month). The Commercial Paper totals were comprised of Financial Company Commercial Paper (down $9.6 billion to $229.1 billion, or 8.9% of assets), Asset Backed Commercial Paper (up $1.4 billion to $92.2 billion, or 3.6%), and Other Commercial Paper (up $2.8 billion to $85.4 billion, or 3.3%).
The 20 largest Issuers to taxable money market funds as of August 31, 2015, include: the US Treasury ($435.4 billion, or 18.4%), Federal Home Loan Bank ($253.1B, 10.7%), Federal Reserve Bank of New York ($128.7B, 5.4%), Wells Fargo ($74.9B, 3.2%), Credit Agricole ($74.2B, 3.1%), BNP Paribas ($71.6B, 3.0%), JP Morgan ($67.4B, 2.9%), RBC ($57.0B, 2.4%), Bank of Tokyo-Mitsubishi UFJ Ltd ($56.1B, 2.4%), Bank of Nova Scotia ($55.3B, 2.3%), Bank of America ($54.6B, 2.3%), Natixis ($52.1B, 2.2%), Toronto-Dominion Bank ($51.0B, 2.2%), Federal Home Loan Mortgage Co. ($46.0B, 1.9%), Sumitomo Mitsui Banking Co ($44.4B, 1.9%), Federal Farm Credit Bank ($43.2B, 1.8%), Credit Suisse ($42.6B, 1.8%), Societe Generale ($42.2B, 1.8%), Federated National Mortgage Association ($37.8B, 1.6%), and Mizuho Corporate Bank Ltd. ($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 $128.73B, or 22.2% of money fund repo, up from $122.3B a month ago, but down from $361.4B 2 months ago. The 10 largest Fed Repo positions among MMFs on 8/31 include: Fidelity Cash Central Fund ($10.2B), UBS Select Treas ($7.4B), JP Morgan US Trs Plus ($7.3B), Morgan Stanley Inst Lq Gvt ($7.0B), Federated Trs Oblg ($5.9B), Morgan Stanley Inst Liq Trs ($5.8B), JP Morgan US Govt ($5.6B), Dreyfus Govt Cash Mngt ($5.5B), First American Gvt Oblg ($5.2B), and Fidelity Inst MMkt Gvt ($4.8B).
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 ($128.7B, 23.2%), BNP Paribas ($42.6B, 7.7%), Wells Fargo ($41.9B, 7.5%), Bank of America ($40.6B, 7.3%), Societe Generale ($35.1B, 6.3%), JP Morgan ($34.6B, 6.2%), Credit Agricole ($28.7B, 5.2%), Credit Suisse ($24.1B, 4.3%), Citi ($20.7B, 3.7%), and RBC ($18.0B, 3.2%).
The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: Credit Agricole ($45.6B, 4.3%), Sumitomo Mitsui Banking Co ($44.2B, 4.2%), Bank of Tokyo-Mitsubishi UFJ Ltd ($44.3B, 4.2%), Natixis ($42.2B, 4.0%), RBC ($39.0B, 3.7%), Toronto Dominion Bank ($37.8B, 3.6%), Bank of Nova Scotia ($37.7B, 3.6%), DnB NOR Bank ASA ($34.8B, 3.3%), Skandinaviska Enskilda Banken AB ($34.8B, 3.3%), and Wells Fargo ($32.9B, 3.1%).
The 10 largest CD issuers include: Sumitomo Mitsui Banking Co ($38.6B, 7.2%), Bank of Tokyo-Mitsubishi UFJ Ltd ($34.2B, 6.4%), Toronto-Dominion Bank ($32.8B, 6.1%), Mizuho Corporate Bank Ltd ($27.3B, 5.1%), Bank of Nova Scotia ($26.7B, 5.0%), Bank of Montreal ($26.0B, 4.9%), Wells Fargo ($24.8B, 4.6%), RBC ($20.2B, 3.8%), Canadian Imperial Bank of Commerce ($19.5B, 3.7%), and Sumitomo Mitsui Trust Bank ($19.5B, 3.7%).
The 10 largest CP issuers (we include affiliated ABCP programs) include: JP Morgan ($24.5B, 7.4%), Commonwealth Bank of Australia ($17.1B, 5.1%), Westpac Banking Co ($16.6B, 5.0%), Lloyds TSB Bank PLC ($15.0B, 4.5%), RBC ($14.8B, 4.4%), BNP Paribas ($14.3B, 4.3%), HSBC ($10.3B, 3.1%), National Australia Bank Ltd ($10.2B, 3.1%), Bank of Nova Scotia ($9.7B, 2.9%), and Australia & New Zealand Banking Group Ltd ($9.6B, 2.9%).
The largest increases among Issuers include: Federal Home Loan Bank (up $15.4B to $253.1B), Natixis (up $9.2B to $52.1B), Federal National Mortgage Association (up $8.7B to $37.8B), DnB NOR Bank ASA (up $7.4B to $34.8B), Federal Reserve Bank of New York (up $6.4B to $128.7B), Federal Home Loan Mortgage Co. (up $6.2B to $46.0B), US Treasury (up $4.6B to $435.4B), Canadian Imperial Chamber of Commerce (up $3.1B to $23.8B), Wells Fargo (up $3.0B to $74.9B), and Rabobank (up $2.9B to $23.2B).
The largest decreases among Issuers of money market securities (including Repo) in August were shown by: BNP Paribas (down $9.3B to $71.6B), Credit Suisse (down $4.6B to $42.6B), Bank of America (down $3.5B to $54.6), Credit Agricole (down $3.5B to $74.2B), National Australia Bank (down $3.1B to $17.4B), ABN Amro Bank (down $2.6B to $10.1B), ING Bank (down $2.3B to $23.5B), Nordea Bank (down $2.2B to $20.4), Bank of Tokyo-Mitsubishi (down $2.0B to $56.1B) and Barclays PLC (down $1.8B to $30.4B).
The United States remained the largest segment of country-affiliations; it represents 50.7% of holdings, or $1.309 trillion (down $40.0B). France (10.7%, $275.8B) stayed in second place, just ahead of third place Canada (9.5%, $246.2B) and fourth place Japan (7.3%, $187.4B). The U.K. and Sweden (4.4%, $113.9B) tied for fifth, while Australia (3.1%, $79.4B) placed sixth. The Netherlands (2.5%, $65.3B), Switzerland (2.2%, $56.9B), Germany (2.0%, $52.5B), and Norway (1.4%, $34.8B) 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 August 31, 2015, Taxable money funds held 28.3% (up from 27.7%) of their assets in securities maturing Overnight, and another 10.3% maturing in 2-7 days (so 38.6% in total matures in 1-7 days). Another 27.3% matures in 8-30 days, while 13.5% matures in 31-60 days. Note that more than three-quarters, or 79.4% of securities, mature in 60 days or less, the dividing line for use of amortized cost accounting under the new pending SEC regulations. The next bucket, 61-90 days, holds 8.8% of taxable securities, while 9.6% matures in 91-180 days, and just 2.4% matures beyond 180 days.
Crane Data's Taxable MF Portfolio Holdings (and Money Fund Portfolio Laboratory) were updated Thursday, and our MFI International "offshore" Portfolio Holdings and Tax Exempt MF Holdings will be released early next week. Visit our Content center to download files or visit our Portfolio Laboratory to access our "transparency" module. Contact us if you'd like to see a sample of our latest Portfolio Holdings Reports or our new "Holdings Reports 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.
Federated Investors, the fourth largest money fund manager, announced that it is acquiring the money market fund assets of Huntington Asset Advisors, the 43rd largest money fund family with about $1.1 billion. This is the third money market fund acquisition that Federated has made this year, following the purchase of Reich & Tang's MMF business back in April, and the acquisition of the Touchstone Ohio Tax Free MMF in March. As many predicted, money market fund reforms are leading to consolidation within the money fund spaces as small firms exit the space rather than deal with the new regulations. Earlier this week we also reported on two other small shops getting out of the money fund business, Eaton Vance and Forward Funds. After these new departures, Crane Data will track 67 money fund managers, down from 75 in July 2014. In other news, American Century filed with the SEC to convert its $1.4 billion American Century Premium MMF to a Government fund.
The press release, entitled, "Federated Investors' Money Market Funds to Acquire Approximately $1.1 Billion in Assets from Huntington Money Market Funds," says, "Federated Investors, Inc., one of the nation's largest investment managers, today announced that it has reached a definitive agreement with Huntington Asset Advisors, Inc. and The Huntington National Bank for the acquisition by Federated of certain assets of Huntington Asset Advisors relating to its management of two money market funds. In connection with the proposed acquisition, approximately $1.1 billion of Huntington money market fund assets would be transitioned to two Federated money market funds with comparable investment objectives and strategies."
Federated explains, "In relation to the transition of money fund assets, approximately $236 million in prime money market assets will be reorganized from the Huntington Money Market Fund into Federated Prime Cash Obligations Fund, and approximately $870 million will be reorganized from the Huntington U.S. Treasury Money Market Fund into Federated Treasury Obligations Fund."
J. Christopher Donahue, Federated's president and CEO, comments, "As a leading provider of liquidity-management services, Federated regularly works with organizations of many types and sizes to find the best solutions for their cash-management needs. The acquisition builds on Federated's long-term relationship with Huntington by providing current Huntington liquidity-management clients access to Federated's experienced money managers and proven credit process."
The company adds, "Federated's board of directors and the board of trustees of the Federated mutual funds and The Huntington Funds board of trustees have approved the transaction. The reorganizations are expected to be tax free and are anticipated to be completed in the fourth quarter of 2015. The completion of the transactions [are] subject to shareholder approval and certain other contingencies. The financial terms of the agreement were not disclosed. Federated Investors, Inc. is one of the largest investment managers in the United States, managing $349.7 billion in assets as of June 30, 2015."
In our September 7 Link of the Day, "Forwards Funds Liquidates US Govt MMF; Eaton Vance Liquidating US Govt MMF," we reported on two other firms exiting the money fund business. Forward Funds is liquidating its only fund, Forward US Government Money Market Fund. The SEC filing says, "On June 9, 2015, the Board of Trustees of Forward Funds, including all of the Trustees who are not "interested persons" of the Trust (as that term is defined in the Investment Company Act of 1940, as amended), approved the liquidation of the Forward U.S. Government Money Fund, a series of the Trust. The Fund will be liquidated pursuant to a Board-approved Plan of Liquidation on or around August 26, 2015."
We also learned from MutualFundWire.com that Eaton Vance will liquidate its Eaton Vance U.S. Government Money Fund. Its filing says, "Eaton Vance U.S. Government Money Market Fund is no longer offered for sale or exchange and the Fund will be liquidated on or about October 29, 2015." Also, Dreyfus recently liquidated its Dreyfus Basic Municipal Money Market Fund, and reported that its $95 million Dreyfus Basic New York Municipal MMF and the $92 million Dreyfus New York AMT-Free Municipal MMF will be liquidated on October 28, 2015. (See also our story from August 17, "Another Muni Money Fund Liquidates: A Recap of Recent Expirations.")
Earlier this year, Touchstone exiting the MMF space, selling most of its assets to Dreyfus, as we detailed in the story from March 5, "Touchstone Rescinds Liquidations, Moves to Dreyfus; MFS Goes Govt ." (Touchstone sold all of its assets to Dreyfus except the Ohio Tax Free MMF, which it sold to Federated. We also reported on Reich & Tang selling its MMF assets to Federated. Also, in April Alpine liquidated its only fund, the $90 million Alpine Municipal Money Market Fund, effectively exiting the MMF space.
In other news, American Century, the 29th largest MMF manager, is converting its $1.4 billion Premium Money Market Fund to a government fund, the US Government Money Market Fund. A recent SEC filing says, "On June 16, 2015, the Board of Trustees of American Century Investment Trust approved changes to the Premium Money Market Fund's (the "fund") fundamental concentration policy and investment objective. Both changes require shareholder approval. A special meeting of shareholders of the fund will be held at 10:00 a.m. Central Time on October 5, 2015 at 4500 Main Street, Kansas City, Missouri 64111 to consider the following proposals: 1. To approve a change in the fund's concentration policy so that the fund "may not concentrate its investments in securities of issuers in a particular industry (other than securities issued or guaranteed by the U.S. government or any of its agencies or instrumentalities); and 2.To approve a change in the fund's investment objective to "the fund seeks current income while maintaining liquidity and preserving capital."
The filing continues, "Last year, the Securities and Exchange Commission approved new rules that impact money market funds. To comply, the Board proposes converting the fund into a government money market fund. Conversion will allow the fund to continue seeking to maintain a stable net asset value ("NAV"), operate without imposing liquidity fees or suspending shareholder redemptions (also known as a redemption gate), and permit all current fund shareholders to continue investing in the fund. A government money market fund must invest at least 99.5% of its assets in cash, government securities, and/or fully collateralized repurchase agreements. Currently, the fund concentrates its investments in securities of issuers in the financial services industry. These types of investments do not qualify as government securities, so the fund will no longer be able to hold them. Changing the concentration policy will allow the fund to comply with the new definition of a government money market fund."
It concludes, "Assuming that shareholders approve the proposals, we currently expect to complete the conversion by December 1, 2015. Pending shareholder approval, the fund currently intends to change its name to "U.S. Government Money Market Fund"." It's worth noting that there was no similar filing related to converting the $1.8 billion American Century Prime Money Market Fund, so it appears American Century will continue to have a Prime offering.
The U.K.-based Treasury Today magazine profiles BlackRock's Bea Rodriguez, Managing Director, Co-Head of International Cash Management and Chief Investment Officer for the Sterling and Euro Cash team, who discusses the challenges facing European money markets. It begins, "With negative rates, increasingly scarce liquidity in the money markets and regulatory upheaval in both Europe and the US, these are very challenging times for the corporate investor." Rodriguez explains "How the liquidity management environment for corporates is changing, and outlines some of the alternative investment opportunities now being explored as a consequence." Also, below, we highlight a new white paper by BofA Global Capital Management called "Adding A-2/P-2 Commercial Paper to Separate Accounts."
In describing the liquidity management environment for corporates, Rodriguez says, "'Challenging' is the word most of our clients are using to describe it. In any other historical period, a negative money market environment would probably have led to the vanishing or the 'gumming up' of that market completely. What negative rates tend to do is take out liquidity in an extreme way and collapse flow. What's different this time around is that we are undergoing enormous change in regulatory architecture with Basel III which is dislocating money from banks and setting money in motion. It is this new dynamic which also means that negative rates may not only be a feature of currencies with negative deposit rates and we are still discovering the new steady state for money markets in general."
When asked what the best strategy is for corporate investors with respect to yield she responds, "Our advice to treasurers is to be very wary of stretching for yield because we think that the risk is asymmetric. Even with the ongoing support of the European Central Bank (ECB) there are many scenarios out there that could throw the market; we have seen a number of such incidents over the past year. Moreover, the volatility attached to these events may be much higher now than it has been in the past. I think conditions will get more challenging from here, not less. Therefore, from a high level perspective, investors need to understand that from here the upside to investing is much harder to achieve than the downside."
Rodriguez continues, "The yield environment has spurred some interest in other types of investment products: separately managed accounts being one example. Interest in these products is not driven purely by the desire to offset negative yield though; for many, capital preservation is still the core of that strategy. Overall, corporates are realising they need to become far better and more targeted at segmenting their cash and finding ways to make it work that little bit harder. Unfortunately, the reality of the environment we are in today is that even if you are doing that, in euros you will probably still end up with a negative yield. It is a really difficult hurdle to get over."
On the regulatory environment and the proposed low volatility (LVNAV) funds Rodriguez says, "On the face of it, we think the proposed LVNAV will be more palatable for our corporate clients, it being much closer to the constant NAV (CNAV) funds many of them use today. Conceptually, it could deliver some of the key CNAV features that investors cherish such as same day liquidity, intraday liquidity and a stable net asset value. We remain somewhat sceptical, however, with respect to the detail of the regulation. How that is mapped out over the coming months will be crucial. At the moment, the proposal has a sunset clause in it, which we do not see as being particularly helpful. The technical and the operational build around creating a product that has the ability to switch to VNAV on a day's notice is actually really complicated. It is expensive to create."
She explains, "But if the sunset clause is not there, then where the trigger threshold is set will be the main determinant for the success of LVNAV. If that ends up at a reasonable place -- and the industry is comfortable with Parliament's proposed 20bps threshold -- then this could be a really workable solution, one which will deliver some of the key features that our corporate investors like. Realistically, from an investment side, the tightness of the trigger threshold will obviously de-risk the proposition, because from a fund manager's perspective there is no incentive to want to be hitting those thresholds, at any point, and the best way to avoid doing so is to de-risk the fund. That is effectively what will happen if the regulators impose a trigger materially south of 20bps."
On how the investment market will develop for the corporate treasurers, she adds, "One trend that we are already seeing a lot of in the post-Basel III environment is an increase in structured paper being offered. We are seeing more structured repo; more term repo; and we are seeing a lot more structured CP being offered. That's existed in the past, of course, but there is more of it being issued."
The BofA paper, "Adding A-2/P-2 Commercial Paper to Separate Accounts", by Robert Piepenburg, Director of Credit Research, and Susan Chevalier, Director and Senior Client Relationship Manager, explores the benefits of looking at A-2/P-2 securities in certain portfolios. It says, "With their strong focus on principal protection, many cash investors limit themselves to securities with gold-plated credit ratings on the assumption that investing in only the highest-rated issues will reduce portfolio risk and thus help insulate their portfolios from market volatility. While it is true that restricting one's investment universe to the highest-quality names typically reduces credit risk, it also makes it more difficult to achieve attractive yields, particularly when interest rates are near historic lows."
It explains, "Fortunately, protecting principal and pursuing attractive risk-adjusted yields are not incompatible. Investors with separately managed accounts -- managed portfolios customized to the needs of each investor -- may be able to achieve both objectives by tapping securities rated A-2/P-2 by Standard & Poor's and Moody's Investors Service, respectively. Rated just one notch lower than short-term securities with top-tier credit ratings (A-1/P-1), credits from the second credit tier may deliver 33 to 46 basis points more yield than A-1/P-1 issues with the same maturities, according to the Federal Reserve. That incremental yield comes at the cost of marginally higher credit risk, but by enhancing portfolio diversification, the addition of A-2/P-2 credits actually may decrease overall portfolio risk, potentially reducing portfolio volatility."
The paper continues, "Including A-2/P-2 paper in a separate-account portfolio presents investment managers with opportunities to enhance yield. Broadening a portfolio's investment universe also gives a manager greater flexibility to invest the account's assets during periods when supply of top-tier paper becomes tight, as during a flight to quality brought on by a financial or geopolitical crisis. To capture these opportunities without adding undue risk, the manager must incorporate A-2/P-2 issues in a strategic way. A strong focus on diversification is central to this task."
It continues, "Of course, investing in securities with slightly lower credit ratings does mean accepting modestly higher credit risk. However, separate-account managers can mitigate that additional risk through thorough credit research and duration positioning. Rigorous credit analysis is central to the effective integration of A-2/P-2 paper into cash portfolios because it can provide a clearer view of a security's credit risk than a credit rating alone. Indeed, while credit ratings provide a useful starting point for investors, they do not substitute for in-depth credit research."
The BofA Global piece concludes, "The investment policies that define allowable securities in organizations' cash portfolios traditionally have excluded A-2/P-2 debt due to concerns about credit risk. However, companies may want to amend their investment policies to allow the inclusion of A-2/P-2 paper with maturities of 120 days or less, because it may offer meaningful yield enhancement without substantially increasing portfolio risk. Assuming sound portfolio construction, the inclusion of specific second-tier issues may help managers capture greater yield in today's challenging interest-rate environment, while maintaining risk levels that are appropriate for investors whose top priority is capital preservation."
The September issue of our flagship Money Fund Intelligence newsletter, which was sent out to subscribers Tuesday morning, features the articles: "Bad News Good News for MFs; More Prime Changing to Govt," which discusses a confluence of forces that may be driving MMF assets higher; "New IMMFA Chair Reyer Kooy on European MMFs," where we discuss regulations, negative yields, and all things euro money funds with the new Chair of IMMFA; and "MFI International Review: Negative Yields, Regs Loom," an annual look at the largest funds and current trends in European money funds. We have also updated our Money Fund Wisdom database query system with August 31, 2015, performance statistics, and sent out our MFI XLS spreadsheet shortly. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our September Money Fund Portfolio Holdings are scheduled to ship Thursday, Sept. 10, and our September Bond Fund Intelligence is scheduled to go out on Tuesday, Sept. 15. (Note: We also look forward to seeing those of you planning to attend Crane's European Money Fund Symposium, which will take place Sept. 17-18 in Dublin.)
The lead "Bad News Good News” article in MFI says, "It was a pretty good summer for money market mutual funds, all things considered. Assets increased for the 4th month in a row, climbing back to almost $2.7 trillion for the first time since January 2015. With the market turmoil, it even felt a little like the pre-crisis good old days, when bad news for the rest of the world was good news for money funds."
The piece continues, "However, changes ahead of next year's Money Fund Reforms continue, as small and even mid-sized fund companies either announce that their prime funds are "going government" or that they're exiting the space entirely. We review flows and the latest fund reform-related changes below. (See our Link of the Day on the latest liquidations, Forward Funds and Eaton Vance.)"
Our latest "profile," "New IMMFA Chair Reyer Kooy," reads, "This month, we profile the new Chair of the Institutional Money Market Fund Association, Reyer Kooy. Kooy, the Head of Institutional Liquidity Management, EMEA and Asia business for Deutsche Asset & Wealth Management, replaces Jonathan Curry who served as IMMFA Chair for the past three years. Kooy comes aboard in a challenging environment for money funds in Europe, as the industry faces negative yields and the likelihood of substantial reforms. But he remains optimistic about the future."
MFI asks, "When did you become Chair?" Kooy responds, "I was elected to become Chairman of IMMFA in June of this year for a two year term. Previously I was an IMMFA board member and Treasurer of the association for the preceding three years. IMMFA has been around for more than 15 years and is focused on the European CNAV money market fund industry specifically. I've personally been involved with the money fund industry twelve years."
We also ask, "What has been IMMFA's main focus?" Kooy says, "Regulation has been the main focus of the association over the last two to three years. We focus on making the case for money market funds in general, but also for constant NAV. We are keen to share our knowledge and insights with the decision makers of the European regulatory process. Regulations will be a prime focus going forward as well as the yield environment. These two key items are of crucial importance to our members and therefore to IMMFA."
The third article, "MFI International Review," says, "The European money market fund industry is in the midst of extreme challenges and major changes as it endures a negative yield environment and braces for a regulatory overhaul. With Crane's 3rd annual European Money Fund Symposium taking place next week (Sept. 17-18) in Dublin, we thought it would be a good time to take a look at the latest trends in Europe -- including assets, largest funds and fund managers, WAMs, yields, and others. The two big themes are -- assets are down and yields have gone negative, and continue to drop, in Europe."
It adds, "Total international or "offshore" money market fund assets in US dollar, euro, and sterling stand at USD $686 billion through August 31, according to our Money Fund Intelligence International -- down $69 billion since the end of 2014. The bulk of that total, $372 billion, is in USD denominated funds, while L147 billion is in Sterling, and E76 billion is in Euros. Year-to-date through 8/31, USD MMFs are down $12B, Sterling MMFs are down $5B, and Euro MMFs are down E15B. In the second quarter, assets dropped sharply among Euro funds. Sterling funds fell 10.3% in Q2, while USD funds were relatively stable."
We also write in MFI's "News" briefs about "Yet More Money Fund Liquidations," saying, "Forward Funds (US Govt MMF) and Eaton Vance are the latest managers to give up on the money fund space. (See today's Link of the Day for details.) Municipal fund liquidations also continue with Dreyfus Basic Muni MMF liquidating and Western Asset Institutional AMT Free Municipal MMF merging into Western Asset Inst Tax Free Reserves. (Dreyfus Basic NY Muni MMF and Dreyfus NY AMT-Free Muni MMF will also liquidate 10/28/15.)
Our September MFI XLS, with August 31, 2015, data, shows total assets rising by $7.2 billion in August, after rising $52.4 billion in July and $15.5 billion in June. YTD, MMF assets are down by $55.2 billion, or 2.1% (through 8/31/15). 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) remained at 0.04% (7-day). On a Gross Yield Basis (before expenses were taken out), funds averaged 0.16% (Crane MFA, same as last month) and 0.20% (Crane 100, unchanged from last month). Charged Expenses averaged 0.14% and 0.16% (unchanged) for the two main taxable averages. The average WAMs (weighted average maturities) for the Crane MFA and the Crane 100 were 33 and 36 days, respectively, both down 3 days from last month. (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
The International Organization of Security Commissions released a paper yesterday entitled, "Peer Review of Regulation of Money Market Funds: Final Report," which reviews the progress of money market fund regulations globally. The Review's "Executive Summary" explains, "This report (Report) sets out the findings of the review (Review) by the International Organization of Securities Commissions (IOSCO) of the progress in adopting legislation, regulation and other policies in relation to money market funds (MMFs) in the following areas (Reform Areas): a. Scope of the regulatory reform -- explicit definition of MMFs in regulation; b. Limitations to the types of assets of, and risks taken by, MMFs; c. Valuation practices of MMFs; d. Liquidity management for MMFs; e. MMFs that offer a stable Net Asset Value (NAV) -- addressing the risks and issues which may affect the stability of MMFs that offer a stable NAV; f. Use of ratings by the MMF industry; g. Disclosure to investors; and h. Repos -- MMF practices in relation to repurchase agreement transactions."
IOSCO writes, "Using the most current data available at the Reporting Date (March 31, 2015), the global MMF market is dominated by 5 jurisdictions (the U.S., France, Luxembourg, Ireland and China) which together account for just under 90% of global assets under management in MMFs. Assets under management in MMFs declined and then have been stable in the U.S. and each of the European jurisdictions since 2009, with dramatic growth evident in China (particularly since 2011)."
On "Background," they explain, "The run on some MMFs during the financial crisis alerted regulators to their systemic relevance. Although MMFs did not cause the financial crisis, the crisis highlighted their potential to spread or even amplify a financial crisis. The G20 expressed concerns regarding the stability of the MMF industry and the risks it may pose to the broader financial system. The Financial Stability Board (FSB) requested that IOSCO undertake a review of potential regulatory reforms of MMFs as part of efforts to strengthen the oversight and regulation of the shadow banking system and to carry out the G20 endorsed objective to mitigate the susceptibility of MMFs to runs and other systemic risks."
IOSCO continues, "In October 2012, IOSCO published its report "Policy Recommendations for Money Market Funds, which contains 15 key policy recommendations relating to the Reform Areas.... In September 2013, the G20 Leaders in St Petersburg called for IOSCO to launch a peer review and to report on progress regarding MMF regulatory reforms in late 2014. Pursuant to the G20 Leaders' request and consistent with the FSB's Coordination Framework for Monitoring the Implementation of Agreed G20/FSB Financial Reforms, IOSCO agreed to conduct a review consisting of an implementation progress report on the current regulatory reform efforts of participating jurisdictions, with the possibility of a separate review being conducted once national or regional implementation of regulatory reform is deemed sufficiently underway."
The 53-page paper comments in its "Key Findings," "Overall, the Review found that as at the Reporting Date, participating jurisdictions had made progress in introducing implementation measures across the 8 Reform Areas. Implementation progress varied between jurisdictions and Reform Areas. For the Largest Jurisdictions, only the U.S. reported having final implementation measures in all Reform Areas, with China and the EU members still in the process of developing and finalizing relevant reforms. For jurisdictions with smaller MMF markets, implementation progress was less advanced, with only four other participating jurisdictions (Brazil, India, Italy and Thailand, the first 3 being FSB members) reported having final implementation measures in all Reform Areas."
It adds, "The Review's main findings by Reform Area are: On Definition of MMFs (Reform Area (a)), almost all participating jurisdictions (including each of the Largest Jurisdictions) reported having introduced an express definition under their CIS regulation. On Limitations to asset types and risks (Reform Area (b)), implementation was generally well progressed.... Further progress was needed in some jurisdictions on requirements about imposing credit limits and defining both limits on the average weighted term to maturity (WAM) and the weighted average life (WAL) of the portfolio of a MMF. On Valuation (Reform Area (c)), implementation is generally well progressed.... Of the Largest Jurisdictions, China is currently in the process of introducing further reforms for their MMFs for this Reform Area. On Liquidity management (Reform Area (d)), implementation progress was less advanced and uneven, perhaps reflecting that pre-crisis, most jurisdictions did not have requirements in this area.... Of the Largest Jurisdictions, only the U.S. reported implementing all measures in this Reform Area."
The findings continue, "On MMFs that offer a stable NAV (Reform Area (e)), further work is needed. Twelve jurisdictions reported continuing to permit stable NAV MMFs, including 4 of the 5 Largest Jurisdictions (China, Ireland, Luxembourg and the US). Participating jurisdictions which continue to permit stable NAV MMFs have generally chosen to progress implementation measures that aim to reinforce a stable NAV MMF's resilience and ability to face significant redemptions.... On Disclosure to investors (Reform Area (g)), implementation was generally well progressed on valuation practices and procedures to deal with significant market stress."
IOSCO will do further monitoring starting in 2016, the paper explains. It says, "This will be an opportunity to report progress jurisdictions have made in their MMF reforms since the Review. This further Review will be limited to the 15 jurisdictions that the Review Team has identified as having a 'significant MMF industry' as set out in Annexure A in which final implementation measures are still to come into force in one or more Reform Areas. It will report on the status of implementation of those remaining measures." (Note: Global regulation of money fund markets will be a big topic of discussion at our upcoming European Money Fund Symposium, which takes place Sept. 17-18 in Dublin. We hope to see you there!)
Repo rates continued their march upwards in August, rising to a 52 week high at month-end. Wells Fargo Securities Strategists Garrett Sloan and Vanessa Hubbard explain in their latest "Daily Short Stuff," "GCF Repo markets over month-end surged higher, but on slightly lower volume in treasury collateral while mortgage repo volume jumped. Treasury repo rates in the GCF market climbed to average 28 basis points, while mortgage repo rose to 30 basis points on the day. In the tri party repo markets, repo rates over month end were 15 basis points." While CD, CP and other money market rates have inched higher ahead of a September Fed move, Repo rates account for the largest percentage of money fund holdings (21.9%). So we should continue to see money funds' gross and net 7-day yields move higher in coming days. In other news, Northern Trust filed recently with the S.E.C. to approve changes to make its Government funds comply with the new regulations.
The DTCC GCF Repo Index shows Treasury repo rates have increased from a low of 0.02% a year ago to 0.27% as of Sept. 1, Agency repo rates have increased from a low of 0.02% a year ago to 0.29%, and MBS repo rates have increased from 0.06% to 0.29%. Repo rates have risen for 4 straight months. DTCC explains, "The DTCC GCF Repo Index is the only index that tracks the average daily interest rate paid for the most-traded GCF Repo contracts for U.S. Treasury, federal agency and mortgage-backed securities issued by Fannie Mae and Freddie Mac.... The index's rates are par-weighted averages of daily activity in the GCF Repo market and reflect actual daily funding costs experienced by banks and investors, per underlying asset class."
Wells' Sloan also says about month-end, "The Fed reverse repo facility also rose, with 57 participants and $150 billion in collateral accepted. The facility rose from an average usage level well below $100 billion for the month of August, and was also above the July usage number of $131 billion and 52 participants." While we won't know how much money funds held in Fed RRP until next week (when our 8/31 Holdings are published), the $150 billion in month-end of Fed repo is up from $132 billion at the end of July. (See Fed RRP numbers here.)
On the repo rate surge, Barclays strategist Joseph Abate looks at possible explanations. One is the G-SIB capital surcharge. He explains, "The Federal Reserve approved a risk-based capital surcharge for the largest, most systemically important US banks. The additional capital buffer is meant to capture the bank's size, interconnectedness, and complexity. But it also creates an incentive for large G-SIB banks to reduce their reliance on short-term wholesale funding. The capital surcharge for 2015 and 2016 will be based on the average short-term funding on three specific days: July 31, 2015, August 24, 2015, and September 30, 2015."
He adds, "Like quarter-ends for the non-US banks, these dates should cause a similar pull-back in repo borrowing on these days. And as these large banks pull away from the GCF repo market, the smaller dealers are forced to pay more to borrow cash to finance their Treasuries. G-SIBs might have only stepped away from the GCF market on those three days -- not the period in between. The futures market seems to imply that this might be a permanent shift. But the G-SIB banks have actually been doing more repo with money funds. Volume data in the GCF market as well as the broader tri-party and bilateral repo markets do not show evidence of a decline in volume." Other possible explanations for the jump in rates, according to Abate, include: 2) lack of specials activity and a smaller short-base in the Treasury market and, 3) Currency-related selling.
Abate comments, "There is plenty of collateral in the repo market. But it is held by banks and brokers whose credit ratings or balance sheet size prevent them from directly engaging (borrowing from) money funds. Rated money funds generally cannot "look through" to the underlying collateral to bypass their counterparty's credit rating -- even for Treasuries. The universe of high quality "money fund" and GSE eligible repo counterparties has shrunk."
In other news, Northern Trust filed to make the necessary changes to its Government money funds to comply with the new SEC rules for those funds, we learned from Strategic Insight's Simfund Filing service. The filing, dated July 24, says, "The Board of Trustees of Northern Institutional Funds recently approved certain changes to the principal investment strategies of the U.S. Government Portfolio, U.S. Government Select Portfolio and Treasury Portfolio. These changes were approved in connection with amendments to Rule 2a-7 under the Investment Company Act of 1940, as amended, which is the primary rule governing money market funds, including the Portfolios. The Prospectus is being updated as described below to reflect that the Portfolios will operate as "government money market funds," as defined in the Amendments.”
It continues, "The changes, all of which are effective September 30, 2015, will bring the Portfolios into conformance with the requirements of the Amendments. The first two paragraphs ... on page 6 of the Prospectus are deleted and replaced with the following: The Portfolio seeks to achieve its objective by investing, under normal circumstances, substantially all (and at least 99.5%) of its total assets in cash, securities issued or guaranteed as to principal and interest by the U.S. government or by a person controlled or supervised by and acting as an instrumentality of the U.S. government pursuant to authority granted by the Congress of the United States or any certificate of deposit of any of the foregoing, and repurchase agreements that are fully collateralized by cash or such securities."
With Northern's filing, we have now heard from 19 of the top 20 managers on at least some portion of their plans on how they will adapt to money market reforms. On July 22, we wrote, "Managers Rolling with Reform Changes; Recap of Announcements So Far," which summarized all of the changes up to that point. However, since then we have had announcements from Blackrock ("BlackRock to Liquidate 3 Muni MMFs, Convert Old Merrill Primes to Govt"), Goldman Sachs AM ("Goldman Sachs to Launch New Prime Retail, Treasury Fed RRP Funds"), American Funds ("American Funds Leans Government"), SEI ("SEI Consolidates Classes; Trillion Dollar Shift?"), T. Rowe Price (T Rowe Price to Launch Prime Inst MMF"), and Franklin Templeton ("Franklin Goes Government; $200 Billion To-Date to Convert from Prime"). The only top 20 MMF manager we have not seen any announcements or filings from to date is BofA Funds.
Crane Data has begun tracking Daily Liquid Assets (DLA) and Weekly Liquid Assets (WLA), adding the two statistics to our Money Fund Intelligence Daily product. DLA includes securities maturing in one day plus all Treasury securities, while WLA includes securities maturing within 7 days plus Treasury and Government discount securities. We added these to MFI Daily, our daily 8am e-mailed Excel file with assets, yields, dividends, Crane Indexes and daily commentary, late last week. The addition of DLA and WLA is in response to the SEC's 2014 Money Market Fund Reforms, which will require money fund providers to report such data on their websites starting in April 2016. A number of fund companies have already begun posting these statistics. (We also already track MNAVs, or market NAVs, on MFI Daily, which money fund managers will also be required to post as part of the new disclosure rules but many already post.) In other news, we report that Wells Fargo is rebranding its family of mutual funds by eliminating the "Advantage" moniker and we cite a new paper from Capital Advisors, below.
Crane Data President Peter Crane explains, "While all money funds don't have to disclose daily liquid assets and weekly liquid assets until April 2016, a number of fund companies have started posting this info. We decided to add these alongside our MNAV (market NAV) field in MFI Daily, since there are now enough of them to calculate averages and to monitor these metrics, which are crucial in monitoring whether a fund may be in danger of implementing an emergency gate or fee."
While less than half of the fund's that Crane Data tracks are currently posting these statistics (these include BlackRock, Goldman Sachs, JPMorgan, and Morgan Stanley), we now have a decent sample and are able to produce some averages in our Crane indexes. The DLA for all funds that Crane Data tracks is 44.3 while the WLA is 72.2. For the Crane Money Fund Average, which includes just taxable money funds, the DLA is 46.7 while the WLA is 69.7. The DLA for the Crane 100 is 38.8, while the WLA is 56.5. (Note: We've been publishing %M1 and %M2-7, percent of securities maturing in one day and in 2-7 days, as well as percentage in Treasury and percentage in Government Agencies, in our monthly MFI XLS. But these don't match the SEC's Daily and Weekly liquidity formula exactly and are only updated monthly with a lag.)
As a backgrounder on why we are tracking DLAs and WLAs, we cite the SEC's final rules on website disclosure. (See our Aug. 6, 2014 News, "SEC Money Fund Reform Disclosure Requirements Not Quite Kitchen Sink.") The final rules read: "We are adopting, as proposed, amendments to rule 2a-7 that require money market funds to disclose prominently on their websites the percentage of the fund's total assets that are invested in daily and weekly liquid assets, as of the end of each business day during the preceding six months.... We believe that daily disclosure of weekly liquid assets and daily liquid assets ultimately benefits investors and could both increase stability and decrease risk in the financial markets. [W]hile there is a potential for heavy redemptions in response to a decrease in liquidity, the increased transparency could reduce run risk in cases where it shows investors that a fund has sufficient liquidity to withstand market stress events."
Also, in other news, Wells Fargo sent out a note to investors last week that it would be rebranding by eliminating the "Advantage" name from its funds. Wells Fargo spokesman John Roehm tells us, "On Friday, we notified investors that, effective December 15, we will be simplifying and shortening our product names by removing the word 'Advantage.' Because fund names are often abbreviated in database listings, longer fund names can make it difficult for investors to identify a specific fund. We believe this change will help alleviate confusion and will allow us to more clearly communicate our product names." The company has a wide array of money market funds which will be adopting this new name come December 15.
Finally, a new Capital Advisors paper, "Staying Afloat in a Floating Net Asset Value Money Market Fund," addresses the liquidity challenges for institutional prime money market funds after October 2016. The introduction says, "It is fall of 2016. The dust has settled on money market fund reform. Institutional prime money market funds have adopted floating net asset values (NAVs) with optional liquidity fees and gates provisions. Institutional investors demanding NAV and liquidity certainty have eschewed the product for other liquidity options. Will floating NAV funds retain a critical mass to stay afloat as a viable cash management tool? How will fund dynamics be different? For remaining shareholders, what are the liquidity challenges?"
It continues, "Assuming that fund sponsors are able to successfully accommodate outflows in the implementation phase, we think that the first few months after October 2016 may be less hectic than one might fear. There are reasons to remain positive on floating NAV funds as viable cash management tools.... With the SEC allowing fund advisors to "top off" on fund NAVs on Day One, one should expect the funds to start with a rounded $1.0000 NAV from the start. For the first few months at least, fund managers likely will manage their portfolios conservatively to keep the NAVs as close to $1.0000 for as long as possible.... Despite the spotlight on potential liquidity fees and gates, the likelihood of such events occurring is quite low. For fees and gates to be triggered, the so-called seven-day liquidity level must be at 10% or less, or about one third of 30% as prescribed by the SEC in 2010. Even at this level, a fund's board of directors still has the discretion to withhold such measure if it is not in the best interest of all shareholders."
Capital Advisors' piece concludes, "In light of the challenges discussed thus far, we could foresee a portfolio approach with liquidity instruments that complement each other. The portfolio may consist of stable NAV government funds, floating NAV prime funds, and direct purchases of government and other highly liquid securities. Government fund shares may accommodate unforeseen intraday liquidity needs. Prime fund shares may provide extra yield potential and function as next-day source of liquidity. A laddered portfolio of government and other liquid securities may provide back-up liquidity through maturities or open market sales in the unlikely event of liquidity becoming inaccessible in prime funds.... This diversified liquidity approach may be the best compromise since many things remain unknown, including how other institutional shareholders will perceive and accept the reformed prime product, how effective liquidity monitoring tools will be, and whether intra-day liquidity is possible. While we think there may be room and potential for prime funds to belong in cash management accounts, managing liquidity risk through this period of its metamorphosis and beyond demands a lot of attention and caution from all stakeholders."
The 19th largest money market fund manager, Franklin Templeton, recently filed with the Securities and Exchange Commission, to convert all of its Prime portfolios into Government money funds, including the Franklin Money Fund, Franklin Templeton Money Fund, and the Franklin Institutional Fiduciary Trust (IFT) Money Market Portfolio. Overall, these 3 portfolios have about $24.5 billion in assets. Franklin is the latest in a parade of money fund providers filing to convert Prime assets to stable NAV Government funds in response to SEC reforms. So far, about $200 billion worth of Prime funds have declared their intent to convert to Government funds. Of course, it remains to be seen whether those assets will stay put if interest rates go up and the spread between Prime and Government funds widens. Below, we recap the latest Prime to 'Govie' move, as well as the others that have been announced so far.
The filing for the $1.6 billion Franklin Money Fund says, "In connection with amendments to Rule 2a-7 under the Investment Company Act of 1940, which is the primary rule governing the operation of money market funds, the Fund's board of trustees approved changes to the Fund's investment policies to allow the Fund to qualify and begin operating as a "government money market fund," as defined in the Amended Rule, effective November 1, 2015. The Fund will invest, through The U.S. Government Money Market Portfolio (currently named "The Money Market Portfolio"), at least 99.5% of its total assets in government securities, cash and repurchase agreements collateralized fully by government securities or cash. For purposes of this policy, "government securities" mean any securities issued or guaranteed as to principal or interest by the United States, or by a person controlled or supervised by and acting as an instrumentality of the government of the United States pursuant to authority granted by the Congress of the United States; or any certificate of deposit for any of the foregoing."
It explains, "The Fund will continue to use the amortized cost method of valuation to seek to maintain a stable $1.00 share price and does not currently intend to impose liquidity fees or redemption gates on Fund redemptions. Please note, however, that the Board may reserve the ability to subject the Fund to a liquidity fee and/or redemption gate in the future, after providing prior notice to shareholders and in conformance with the Amended Rule. In connection with these changes, the Fund will change its name to "Franklin U.S. Government Money Fund," also effective November 1, 2015." The $678 million Franklin Templeton Money Fund will also be converted into the Franklin Templeton US Government Money Fund.
The filing for the Institutional Fiduciary Trust -- Money Market Portfolio, also says, "In connection with amendments to Rule 2a-7 under the Investment Company Act of 1940 ... the Fund's board of trustees approved changes to the Fund's investment policies to allow the Fund to qualify and begin operating as a "government money market fund" ... effective November 1, 2015. `The Fund will invest, through The U.S. Government Money Market Portfolio (currently named "The Money Market Portfolio"), at least 99.5% of its total assets in government securities.... The Fund will continue to use the amortized cost method of valuation to seek to maintain a stable $1.00 share price and does not currently intend to impose liquidity fees or redemption gates on Fund redemptions." Note: The $695 million Franklin California Tax-Exempt Money Fund wasn't mentioned in these filings.
To date, approximately $199.0 billion worth of Prime funds have filed to convert to Government funds, led by the first and largest, Fidelity Cash Reserves. The pending shift to date involves roughly 20 Prime to Government fund conversions across 5 different money fund managers, including Fidelity, BlackRock, Deutsche, T. Rowe Price, and Franklin. Franklin, referenced above, would represent the next biggest shift after Fidelity, with its plans to move $24.5 billion from Prime to Government. (MFS and a handful of other smaller managers have also previously shifted funds from Prime to Government.)
As mentioned, Fidelity was the first to announce a conversion back in late January (see our Feb. 2 News, "Fidelity Announces Major Changes to MMFs; Staying Stable, Going Govt") when it stated that it would transform 4 Prime funds to Government funds. These moves involve $142.3 billion (current assets), including the $113.8 billion Fidelity Cash Reserves, which will become Fidelity Government Cash Reserves. The others include the FMMT Retirement Money Market Portfolio (converting into FMMT Retirement Government Money Market Portfolio II), VIP Money Market Portfolio (converting into VIP Government Money Market Portfolio), and CMF Prime Fund (merging into Fidelity Government MMF). Changes are expected to be effective in the 4th quarter of 2015.
On July 31, BlackRock (see "BlackRock to Liquidate 3 Muni MMFs, Convert Old Merrill Primes to Govt") said it was moving $18.0 billion from Prime to Government across 6 portfolios. The portfolios being converted include the 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. Also, FFI Premier Institutional Fund, FFI Institutional Fund, and FFI Select Institutional Fund will be converted from Prime Institutional to Government. These 3 funds used to be Merrill Lynch's Funds for Institutions lineup.
Also, on July 21, Deutsche Wealth and Asset Management (see "Deutsche Announces Reform Plans, Will Convert Most Prime MFs to Govt"), the 18th largest money fund manager, announced that it will convert all of its large Prime Institutional portfolios into Government funds, including Cash Management Fund; Cash Reserves Fund Institutional; Deutsche Money Market Series; Deutsche Money Market VIP; and Prime Series of Cash Reserve Fund, Inc. The 5 funds total $6.9 billion. Deutsche will continue to offer its $10.00 a share prime "Variable NAV Money Fund.
In addition, as we wrote on August 21 (see "T Rowe Price to Launch Prime Inst MMF"), T. Rowe Price told ignites.com it will convert its largest money market fund -- the $6.4 billion Prime Reserve -- to a Government fund, though the company will also launch a new Prime Institutional fund. Regarding previous conversions, we reported in March that MFS Investment Management had already converted $499 million from Prime to Government -- specifically, the $377 million MFS Money Market Fund and $122 million MFS Cash Reserves. Finally, Goldman Sachs also announced in July it was converting the $194 million Goldman VIT Money Market Fund into the Goldman Sachs VIT Government MMF.