News Archives: February, 2016

Fitch Ratings released a statement entitled, "Reform, Policy Hurting Small US MMF Managers," which says, "Recent money fund reforms and monetary policy implementation are placing smaller money fund managers at a competitive disadvantage relative to their larger rivals." Also, Wells Fargo Funds published a white paper called, "Prime money market fund NAV volatility will likely remain low," which spells out why investors shouldn't give up on Prime Inst funds. Finally, BlackRock sent a letter to clients with an update on the BofA funds merger, and BofA submitted several Form N-CR filings for its pending Muni fund liquidations. We review all of these below.

The Fitch report begins, "Following years of fee waivers and forgone revenue driven by low interest rates, the costs arising from money fund reform implementation are proving too onerous for many small fund managers. This has led to acquisitions of smaller funds by larger rivals, liquidations of small funds and conversions from prime to government funds, which Fitch expects to accelerate as reform deadlines loom in 2016. Recent acquisitions of mostly smaller money funds by BlackRock, Federated and Dreyfus, three of the largest US money fund managers, demonstrate the relationship between scale and efficiency in the money fund space."

It continues, "For example, Federated (ranked the fourth-largest US money fund manager by Crane with $211 billion AUM) over the past year took over management responsibility for approximately $4 billion of money fund assets previously managed by Reich & Tang, acquired $930 million of money funds previously managed by Huntington Asset Advisors and $100 million of money funds previously managed by Touchstone. In addition, Dreyfus (ranked the eighth-largest US money fund manager by Crane with $163 billion AUM) acquired $1 billion of money funds previously managed by Touchstone. After the Federated and Dreyfus transactions, Reich & Tang, Huntington and Touchstone were no longer active players in the money fund industry."

Fitch continues, "Fitch believes the high incremental operating expenses associated with complying with money market reforms introduced in 2014 will be a more significant burden for smaller fund managers than for their larger peers. These reforms are being phased in through October 2016. Based on discussions with industry participants, Fitch estimates incremental reform-related costs, such as infrastructure upgrades, legal fees, product development and client outreach could range from single-digit to tens of millions of dollars. This is particularly true for institutional prime funds, which will require more changes than government funds.... This means they will incur higher costs as a percentage of assets, reducing their competitiveness and/or profitability."

They add, "Smaller funds also have limited or no access to the Fed's reverse repo program (RRP) given the Fed's asset size prerequisites to participation. The RRP is an important source of supply of government securities in a market where the supply of government paper is low relative to demand. Nineteen of the 20 largest money fund families (as tracked by Crane data) have at least one RRP-eligible fund compared with only five of the next 20 largest fund families having access.... The RRP has become a cornerstone of the investment strategy of many of the funds that are eligible counterparties for the Fed."

In other news, Wells Fargo's new paper on "NAV volatility"," explains, "Institutional prime money market funds will be required to transact at market-based, or floating, net asset values (NAVs) as of October 14, 2016.... To help clients gauge the practical implications of this change, below we share observations about how our prime funds have performed. The price fluctuations of our prime funds have been minimal; Scenario analysis suggests that income earned should remain the largest component of a fund's return; and Prime money market fund market-based NAVs have been steady because they have invested in short-term, high-quality assets."

They say under, "Reasons to continue to count on prime money market funds," "While past performance is not a guarantee of future results, we have always sought to provide our shareholders with both stability of principal and a high degree of liquidity, and we have done this by prudently managing our prime money market funds. In addition, the SEC requires money market funds to meet certain maturity, credit quality, and diversification limits to reduce risk and bolster liquidity. For example, a money market fund generally may not acquire any security with a remaining maturity greater than 397 days, the dollar-weighted average maturity of the securities owned by the fund may not exceed 60 days, and the fund's dollar-weighted average life to maturity may not exceed 120 days. These limits serve to curtail interest-rate risk. Similarly, liquidity and diversification requirements also help reduce risk."

It continues, "The price fluctuation of our flagship prime money market fund, the Wells Fargo Heritage Money Market Fund, has been minimal based on the four-digit market-based NAV that we have published since 2011. [F]rom the beginning of 2011 to the most recent data point, the difference between the highest market-based NAV and the lowest market-based NAV was 2 basis points. Assuming a $100 million investment and that the fund had been operating with a floating NAV rather than a stable $1.00 NAV, the largest price change in any one year (a 2-bp price change in 2011) would have resulted in a $20,000 loss.... [I]ncome payments would outweigh the effect of an NAV loss, resulting in a positive total return."

Wells adds, "The price fluctuation of the Wells Fargo Cash Investment Money Market Fund, a prime money market fund, also has been minimal based on its four-digit market-based NAV. [F]rom the beginning of 2011 to the most recent data point, the difference between the highest market-based NAV and the lowest market-based NAV was 3 bps. Looking at this in dollar terms, assuming a $100 million investment and that the fund had been operating with a floating NAV rather than a stable $1.00 NAV, the largest price change in any one year was 2 bps or $20,000."

The piece concludes, "In the future, institutional investors in prime money market funds will see a number of changes from the new SEC rules, especially those that take effect in October 2016. To help investors make confident choices, we suggest that they watch the fund data posted on fund websites, including market-based NAVs, weekly liquidity percentages, and yields. Many funds already report this information, and all will be required to do so beginning in April 2016.... While the stable NAV of a government money market fund may be best for some institutional investors, we believe that higher yields may be an important consideration for others. In fact, we expect we may begin to see a larger difference between prime money market fund yields and government money market fund yields, given the strong demand for government securities from a number of different investor types amid limited supply."

On Friday, BlackRock sent a letter to clients from Tom Callahan, Head of Cash Management, saying, "In November, we shared the exciting news that we had entered into an agreement with Bank of America's asset management business, BofA Global Capital Management, to transfer investment management responsibilities for approximately $94 billion of assets under management currently managed by BofA Global Capital Management to BlackRock." (See our `Feb. 12 News, "BofA Details Fund Mergers Into BlackRock MMFs.")

They tell us, "Since that announcement, we have made several important decisions, not least of which are the proposed reorganizations of certain BofA Global Capital Management money market funds into BlackRock money market funds. Below are the proposed reorganizations which have been approved by the BofA Funds' board of trustees and the BlackRock Funds' board of trustees." It explains that BofA Cash Reserves and BofA Money Market Reserves will be merged into BlackRock TempFund. (This will bring TempFund's assets to around $91.6 billion, making it one of the largest MMFs.) Also, BofA Govt Plus Reserves will be merged into BlackRock FedFund, BofA Government Reserves will be merged into the Federal Trust, and Treasury Reserves will merge into BlackRock T-Fund.

Callahan concludes, "If these reorganizations are completed, we believe the additional scale resulting from the combination of the assets of these funds will benefit our clients through even greater liquidity and diversity. The BofA Funds reorganizations are expected to be completed on or about April 15, 2016, subject to certain closing conditions, including shareholder approval."

Finally, note that BofA also recently filed a Form N-CR for each of its liquidating Municipal MMFs -- BofA CA Tax-Exempt Reserves, BofA CT Muni Reserves, BofA MA Muni Reserves, BofA Municipal Reserves, BofA NY Tax-Exempt Reserves, and BofA T-E Reserves. (See our Feb. 24 News, "Clean Sweep: Tax Free MMFs Liquidating En Masse; BofA, RBC, Deutsche.") The Form N-CRs say, "On February 22, 2016, the Board of Trustees of the Fund adopted a plan of liquidation and termination. Capital contributions would be provided to the extent necessary so that no shareholder of the Fund will receive less than $1.00 per share in connection with the liquidation of the Fund." The amount of support remains "To be determined."

Money fund assets increased for the third straight week, climbing $15.1 billion and pushing asset totals to $2.778 trillion, their highest total since January 2011. The Investment Company Institute's weekly statistics show that for the first time ever, Government money funds now have more assets than Prime funds. Government MMF assets stand at $1.270 trillion, while Prime assets are at $1.265 trillion, according to ICI data. We review ICI's latest "Money Market Fund Assets" report, and their latest monthly "Trends in Mutual Fund Investing," which shows a $19 billion decline in January, below. We also discuss ICI's "Month-End Portfolio Holdings of Taxable Money Funds," which confirms that holdings of Repo plummeted in January, while CDs (including Time Deposits) skyrocketed. Commercial Paper and Agencies also gained. (See our Feb. 10 News, "Latest MF Portfolio Holdings Show Fed Repo Plunge; TDs, CDs, CP Jump.")

ICI's latest weekly asset update says, "Total money market fund assets increased by $15.05 billion to $2.78 trillion for the week ended Wednesday, February 24, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $17.30 billion and prime funds increased by $140 million. Tax-exempt money market funds decreased by $2.39 billion."

As mentioned, Government assets, including Institutional and Retail (and Treasury and Government), stand at $1.270 trillion, slightly ahead of Prime assets, which are at $1.265 trillion, for the first time ever. This was eventually likely inevitable, given the restrictions placed on Prime funds by the SEC. Since November, over $172 billion has converted from funds (and $92 billion more is scheduled to switch in the next several months. Later this year, investors are expected to move hundreds of billions more to Government funds -- most estimates range from $200 billion to $400 billion.

The weekly release explains, "Assets of retail money market funds decreased by $2.64 billion to $1.02 trillion. Among retail funds, government money market fund assets increased by $1.20 billion to $375.97 billion, prime money market fund assets decreased by $2.12 billion to $463.77 billion, and tax-exempt fund assets decreased by $1.72 billion to $177.21 billion. Assets of institutional money market funds increased by $17.69 billion to $1.76 trillion."

ICI continues, "Among institutional funds, government money market fund assets increased by $16.10 billion to $894.36 billion, prime money market fund assets increased by $2.26 billion to $801.25 billion, and tax-exempt fund assets decreased by $670 million to $65.26 billion." Year-to-date through Feb. 24, MMF assets are up $19 billion. For the month of February, assets are up about $26 billion, and note that February is typically a down month. In six of the last 7 years, MMF assets have declined in February, averaging a drop of about $22 billion in February.

A Footnote to ICI's release adds, "In anticipation of the Securities and Exchange Commission's (SEC) new money market fund regulations, many advisers are changing their prime money market funds into government money market funds. As a result, there have been, and will continue to be, large shifts in assets from prime funds to government funds before the October 2016 deadline." (There were no noticeable shifts in ICI's series in the latest week, but note that Crane Data reclassified a number of funds in its `MFI Daily earlier this week.)

ICI's "Trends in Mutual Fund Investing: January 2016" confirmed a decrease in MMF assets in January. It shows MMFs down $19.0 billion, or 0.7%, to $2.736 trillion last month. Assets had increased in 7 of the last 8 months of 2015, but they've slowed in the new year, as is typically the trend. MMFs increased $35.3 billion in December, $4.8 billion in November, and $45.2 billion in October.

The release says, "The combined assets of the nation's mutual funds decreased by $571.38 billion, or 3.7 percent, to $15.08 trillion in January, according to the Investment Company Institute's official survey of the mutual fund industry.... Bond funds had an outflow of $5.15 billion in January, compared with an outflow of $27.21 billion in December.... Money market funds had an outflow of $20.45 billion in January, compared with an inflow of $35.39 billion in December. In January funds offered primarily to institutions had an outflow of $21.55 billion and funds offered primarily to individuals had an inflow of $1.10 billion." Money funds now represent 18.1% of all mutual fund assets, while bond funds represent 22.7%. The total number of money market funds increased to 483 in January, from 482 the previous month.

ICI's latest "Month-End Portfolio Holdings of Taxable Money Fund" summary shows that Repo plummeted and Treasuries fell in January, while CD holdings skyrocketed and CP and Agencies gained. CDs (including Eurodollar CDs) leapt from fourth to first, displacing Repurchase agreements as the largest portfolio segment. CDs increased $122.7 billion, or 27.0%, in January to $576.4 billion, representing 23.2% of taxable MMF holdings. (ICI's CD totals likely include Time Deposits, which Crane Data and the SEC categorize as "Other" -- we reported a large decrease in Other/TDs in December.)

Repurchase agreements dropped to second, decreasing $160.7 billion, or 23.0%, in January to $538.6 billion. Treasury Bills & Securities dropped to third place among composition segments, falling $7.2 billion, 1.5%, in January to $475.7 billion (19.1% of assets). U.S. Government Agency Securities increased by $4.2 billion, or 0.9%, to $471.6 billion (18.9% of assets), but fell to fourth among portfolio segments. Commercial Paper remained fifth, increasing $12.0B, or 4.0%, to $310.8 billion (12.5% of assets). Notes (including Corporate and Bank) jumped by $12.2 billion, or 18.9%, to $76.6 billion (3.1% of assets), and Other holdings (including Cash Reserves) gained $5.8 billion to $39.0 billion.

The Number of Accounts Outstanding in ICI's series for taxable money funds decreased by 640.7 thousand to 22.754 million, while the Number of Funds increased by 3 to 339. Over the past 12 months, the number of accounts fell by 574.7 thousand and the number of funds declined by 24. The Average Maturity of Portfolios increased by 2 days to 37 days in January. Over the past 12 months, WAMs of Taxable money funds have declined by 7 days. Note: Crane Data updated its February MFI XLS last week to reflect 1/31/16 Portfolio Composition and Maturity Breakout data for our entire fund universe. (Visit our Content Center and the latest Money Fund Portfolio Holdings download page to access our February Money Fund Portfolio Holdings and the latest files.)

The money market fund changes and the hits to Prime Retail and Tax-Exempt MMFs just keep on coming. Today we report on filings from Putnam, UBS, RBC, and Deutsche on fund liquidations, Prime to Govie conversions, and Tax-Exempt Inst to Retail changes. The big news: UBS is converting its Liquid Assets "sweep" fund to Government, and also making several changes related to funds in sweep accounts. It's also converting some Tax-Exempt Inst funds to Retail. Putnam too filed to convert its Putnam VI Money Market Fund from Prime to Govie and it decided to liquidate Putnam Tax-Exempt fund. We also mention some new RBC and Deutsche filings, which provide details on changes that have already been announced.

UBS has made several SEC filings in recent weeks (watch for our "Profile" of them in the March Money Fund Intelligence too), including one to convert the $824 million UBS Liquid Assets Fund from Prime to Government. The Liquid Assets filing states, "The purpose of this supplement is to update the Prospectus and SAI in response to amendments to Rule 2a-7 under the Investment Company Act of 1940, as amended, the primary rule governing money market funds, including UBS Liquid Assets Fund. The changes are expected to become effective on or about April 15, 2016. As discussed in more detail below, the Prospectus and SAI are being updated to: (1) reflect that the Fund intends to qualify and operate as a "government money market fund," as defined in the Amendments, and (2) change the Fund's name to "UBS Liquid Assets Government Fund."

It adds, "The Board also approved changing the Fund's name to UBS Liquid Assets Government Fund in an effort to ensure that the Fund is understood to be a government money market fund.... In addition, effective October 30, 2015, the Fund's investment advisor and distributor were renamed UBS Asset Management (Americas) Inc. and UBS Asset Management (US) Inc., respectively. All references to "UBS Global Asset Management (Americas) Inc." in the Fund's Prospectus and SAI are hereby replaced with "UBS Asset Management (Americas) Inc."

Several of the new UBS filings relate to funds no longer being offered in sweep accounts. The filing for UBS Retirement Money Fund states, "The purpose of this supplement is to update the Prospectus and SAI in response to amendments to Rule 2a-7 under the Investment Company Act of 1940, as amended, the primary rule governing money market funds, including UBS Retirement Money Fund. These regulatory changes, which have a tiered compliance period that extends until October 2016, impact key aspects of how money market funds are structured and operate. Later this year, but before the October 2016 compliance deadline, the Fund may no longer be offered as a sweep fund as part of certain distributor platforms. As a result, the Fund's shareholders would be transitioned to an alternative money market sweep fund. Shareholders will receive additional information at a future time in advance of these changes."

A filing for the UBS RMA Money Market Portfolio, RMA US Govt Portfolio, RMA Tax-Free Fund, RMA California Muni Fund, and RMA New York Muni Fund includes similar language. Additionally, another filing for the UBS Select Prime Capital and UBS Select Tax-Free Capital says the same thing.

There are also 3 filings related to converting Muni Inst funds to Retail. The first filing is for the UBS Select Prime Inst and UBS Select Tax-Free Inst funds. It says, "The purpose of this supplement is to update the Prospectus and SAI in response to amendments to Rule 2a-7 under the Investment Company Act of 1940, as amended, the primary rule governing money market funds, including UBS Select Prime Institutional Fund and UBS Select Tax-Free Institutional Fund. These regulatory changes, which have a tiered compliance period that extends until October 2016, impact key aspects of how money market funds are structured and operate. Later this year, on or before the October 2016 compliance deadline, UBS Select Prime Institutional Fund will no longer be able to use the amortized cost method of valuation to seek to maintain a stable $1.00 net asset value per share as a result of the Amendments and will have a floating NAV."

It continues, "UBS Select Tax-Free Institutional Fund intends to qualify and operate as a "retail money market fund," as defined in the Amendments, and will continue to seek to maintain a stable $1.00 NAV per share. In order to qualify as a "retail money market fund," later this year this Fund will adopt policies and procedures reasonably designed to limit all beneficial owners to "natural persons."

UBS adds, "Shareholders who do not so qualify will no longer be permitted to own Fund shares and are expected to receive information at a future time regarding alternative money market funds. Each of UBS Select Prime Institutional Fund and UBS Select Tax-Free Institutional Fund may be subject to the imposition of liquidity fees and/or the temporary suspension of redemption privileges if the Fund's portfolio liquidity falls below certain required minimum levels because of market conditions or other factors once transitioned later this year in compliance with the Amendments. Effective on or about August 31, 2016, the name of UBS Select Tax-Free Institutional Fund will be changed to "UBS Tax-Free Reserves Fund."

A filing for the UBS Select Prime Preferred and UBS Select Tax-Free Preferred funds, as well as a filing for the UBS Select Prime Investor Fund, UBS Select Treasury Investor Fund, and UBS Select Tax-Free Investor Fund, includes similar language. In other words, UBS Select Tax-Free Preferred and UBS Select Tax-Free Investor will be designated as Retail funds and both change their names to UBS Tax-Free Preferred and UBS Tax-Free Investor, respectively, on August 31, 2016. Select Prime Investor and Select Prime Preferred will adopt the floating NAV on or before October 2016.

Putnam filed to liquidate its $39 million Putnam Tax-Exempt Money Market Fund. The Prospectus Supplement says, "At a meeting held on January 29, 2016, the Board of Trustees of Putnam Tax Exempt Money Market Fund approved a plan to liquidate the Fund upon recommendation by Putnam Investment Management, LLC, the Fund's investment adviser. The liquidation of the Fund is expected to occur on or about March 23, 2016. Effective as of February 12, 2016, the Fund will be closed to new purchases, other than the reinvestment of dividends, in anticipation of the liquidation. Shareholders can redeem their shares from the Fund at any time on or before the close of business on March 23, 2016 at the then-current net asset value." (See our Feb. 24 News, "Clean Sweep: Tax Free MMFs Liquidating En Masse; BofA, RBC, Deutsche," where we recap recent Muni fund liquidations.)

Also, the $129 million Putnam Variable Trust Money Market Fund will be converted to a Government fund, according to the SEC filing. The filing states, “In connection with the Securities and Exchange Commission’s amendments to Rule 2a-7 under the Investment Company Act of 1940, as amended, which governs money market funds, Board of Trustees of Putnam VT Money Market Fund has approved the conversion of the fund to a “government money market fund,” as defined by Rule 2a-7. This conversion will result in changes to the fund’s investment strategies and the fund’s name. Effective April 30, 2016, the fund will be called Putnam VT Government Money Market Fund and the following disclosure will be included in the fund's prospectus, as indicated below."

The RBC filing is for the RBC Prime Money Market Fund, which says the "RBC Institutional Class 1 shares of the Prime Money Market Fund will no longer be available for new investment effective March 22, 2016." (See yesterday's News about them liquidating their Tax Free MMF and our `Dec. 1 News, "RBC Latest to Abandon Prime MMFs; BlackRock Designates Retail, Inst.") RBC is liquidating the rest of the $8 billion Prime portfolio in September 2016.

Finally, Deutsche filed with the SEC to convert a series of Prime funds to Govt funds, as they first announced last summer. (See our July 21, 2015 News, "Deutsche Announces Reform Plans, Will Convert Most Prime MFs to Govt.") The funds are: Cash Reserve, Cash Preserve Prime, Cash Reserves Prime Inst, Cash Management, Cash Reserves Inst, and Money Market Series. They will all convert to Govt on May 2, 2016.

There has been a steady stream of fund liquidations since SEC Money Fund Reforms were announced, with a surprisingly large number of them coming from the Tax-Exempt side. Our Crane Tax Exempt Money Fund Index currently tracks 352 funds vs. 397 on 7/31/14 (when reforms were announced), a drop of 45 funds or 11.3%. Total Tax-Exempt MMF assets stand at $246.6 billion down almost 50% from Dec. 2008 and down 23% over the past 5 years. (Assets peaked at over $500 billion in Aug. 2008.) These liquidation trend shows that money fund managers do not want to deal with potential gates and fees within T-E funds, which are heavily weighted towards "sweep" accounts and retail investors. Below, we review new muni fund liquidation filings from BofA, Deutsche, and RBC, and we recap all of the Municipal MMF liquidations we've seen in the past year. We also look at the fund complexes that will continue to offer Tax-Exempt Institutional funds.

The latest muni fund liquidation filings come from the BofA Funds, which are in the process of merging their taxable money funds into BlackRock. (See our Feb. 12 News, "BofA Details Fund Mergers into BlackRock MMFs and our Nov. 3 News, "BlackRock Taking Over BofA MMFs in One of Biggest Acquisitions Ever.") BofA indicates in new SEC filings that about $6.1 billion in Muni money funds will be liquidated. A spokesman tells us, "BofA Global Capital Management has decided to liquidate its BofA municipal funds following recent money market reform. We will no longer offer the funds as a sweep option."

The Prospectus Supplement for BofA California Tax-Exempt Reserves, BofA Connecticut Municipal Reserves, BofA Massachusetts Municipal Reserves, BofA Municipal Reserves, BofA New York Tax-Exempt Reserves, and BofA Tax-Exempt Reserves says, "On February 22, 2016, the Board of Trustees of BofA Funds Series Trust considered and approved a proposal from the BofA Municipal Funds' investment adviser, BofA Advisors, LLC, to liquidate each of the BofA Municipal Funds. The Board's decision was based on the Advisor's recommendation, as well as recent input from key intermediaries, who represent the vast majority of assets invested in the BofA Municipal Funds, that they would no longer offer municipal money market funds to their clients."

It explains, "The liquidation of the BofA Municipal Funds is expected to occur by the close of business on April 8, 2016.... At that time, each BofA Municipal Fund will be completely liquidated and any remaining shareholders will receive liquidation proceeds equal to their net asset value per share holdings on the Liquidation Date. As described in the BofA Municipal Funds' prospectuses and SAI, BofA Global Capital Management Group, LLC, the direct parent company of the Advisor, has entered into an agreement to transfer the investment management responsibilities of the Advisor to BlackRock, Inc.... Given that the BofA Municipal Funds will be liquidating in advance of the closing of the Transaction, the management of such Funds will not be transferred to BlackRock, Inc."

We also came across two more firms that are liquidating Muni funds: RBC and Deutsche. The filing for RBC Tax-Free Money Market Fund says, "On February 19, 2016 the Board of Trustees of RBC Funds Trust approved the liquidation of the Tax-Free Money Market Fund. This decision was made after careful consideration of the Fund's operations, asset size and current expenses. Effective on or about February 22, 2016, the Fund will suspend all purchases and exchanges into the Fund other than purchases through dividend reinvestment, in order to facilitate an orderly liquidation on or after February 26, 2016." It has about $958 million in assets.

Deutsche is liquidating its NY Tax Free Money Fund and the Tax Free Money Fund Investment, according to an SEC filing. The "497" Prospectus Supplement says, "Upon the recommendation of Deutsche Investment Management Americas Inc., the Board of DWS Money Market Trust has approved the liquidation and termination of NY Tax Free Money Fund and Tax Free Money Fund Investment, each a series of the Trust, effective on or about April 8, 2016.... In conjunction with approving the liquidation of each Fund, the Board of the Trust further approved closing each Fund to investments for new accounts effective February 25, 2016." The NY Tax Free MF has $37 million in assets, while the Tax Free Money Fund Investment has $219 million.

Earlier in 2016, Dreyfus liquidated and merged away several Muni funds, as we reported in our Feb. 17 News, "Invesco, Dreyfus Detail Added Lineup Tweaks; BofA Shareholder Vote." Dreyfus merged Municipal Money Market Fund into General Municipal MMF (Nov. 13) and NY AMT-Free Municipal Cash Management into NY Municipal Cash Management (Aug. 28). Dreyfus has also liquidated Dreyfus BASIC Municipal MMF (Aug. 18), New York AMT-Free MMF (Oct. 28), and BASIC New York Municipal MMF (Oct. 28.).

In December, we also learned that Federated renamed its Institutional Shares to "Wealth Shares" on its Tax-Free Obligations, Municipal Obligations, California Municipal Cash Trust, Florida MCT, Michigan MCT, Minnesota MCT, New Jersey MCT, New York MCT, Ohio MCT, Pennsylvania MCT, and Virginia MCT. Wells Fargo also filed to change its "Institutional" class to retail "Premier" class on Wells Fargo California Municipal Money Market Fund, Wells Fargo Municipal MMF and Wells Fargo National Tax-Free MMF by April 1, 2016. (For more, see our Dec. 30 News, "MMF Yields Double on Fed, Prime Inst Rises First; Voya Goes Govt."

Also in December we reported that Goldman Sachs AM designated its GS Financial Square Tax-Free Money Market Fund, which was listed as Inst, as a retail fund and changed the name to Goldman Sachs Investor Tax-Exempt Money Market Fund. In addition, GSAM will liquidate two tax-exempt money market funds -- Goldman Sachs FS Tax-Exempt NY and Goldman Sachs FS Tax-Exempt CA on or before August 31, 2016.

Other firms that have liquidated or changed Muni funds in recent months include: Cavanal Hill, which will change the Institutional class of the Cavanal Hill Tax Free MMF to the retail Reserve Class by April 2016; SSGA, which liquidated its Institutional Tax Free Money Market Fund on Dec. 15 (see our Dec. 9 Link of the Day, "State Street Liquidating Institutional Tax-Free Money Fund"); and, Schwab converted the Inst Shares of the Schwab Municipal Money Fund to Premier Shares, making it a Retail fund.

Last summer, we wrote in our August 17 News, "Another Muni Money Fund Liquidates: A Recap of Recent Expirations," which reviews the rash of Muni fund liquidations that had taken place up to that point. The story features Muni fund liquidations/mergers from Western, Federated, BlackRock, Fidelity, and more. While the number of Muni Inst funds has been reduced drastically, some, but not all, of the major money fund managers will still have at least one Tax-Exempt Inst fund. We reviewed this trend in the December 2015 issue of Money Fund Intelligence, but there have been several updates since then. So below we summarize some additional T-E Inst plans from a few of the largest shops.

Fidelity announced in October that it won't have an Institutional Tax Exempt fund, converting the $2.2 billion FIMM Tax Exempt portfolio to Retail. (See our October 15 News, "Fidelity Details Retail vs. Inst MMF Changes; Only One Floating Fund.") JP Morgan didn't categorize any of its Tax Exempt funds as Institutional either (see our Feb. 23 News, "JPMorgan Announces MMF Changes; Prime to Float; First Designations").

BlackRock will have one Tax-Exempt Inst fund, BLF MuniCash fund. The rest of its Muni offerings were designated as Retail. (See our Dec. 1 News, "RBC Latest to Abandon Prime MMFs; BlackRock Designates Retail, Inst.") Federated announced that it will have one Tax Exempt Institutional fund, Federated Tax-Free Trust. (See our Nov. 17 News, "Federated Designates Inst MMFs; Wells, Goldman, BlackRock Gain in Oct.") Vanguard won't have any Institutional funds; neither will Schwab.

Dreyfus will have 1 Muni Inst fund, Dreyfus Tax Exempt Cash Management, as we covered in our Feb. 17 News, "Invesco, Dreyfus Detail Added Lineup Tweaks; BofA Shareholder Vote." Goldman Sachs AM will launch a new institutional tax-exempt money market fund, `Goldman Sachs Financial Square Tax-Exempt Money Market Fund. The Fund is projected to be launched on or around March 31, 2016, and it will be GSAM's only T-E Inst fund. (See our Dec. 21 News, "Goldman Sachs AM Details More MMF Changes, Portal Enhancements.") No word yet on Morgan Stanley plans for its T-E Institutional funds.

Among other top 20 money fund managers, Wells Fargo and Invesco will also have Tax Exempt Institutional offerings. Wells will offer Wells Fargo Municipal Cash Management Money Market Fund (see our May 22 News, "Wells Fargo Announces Money Fund Lineup Changes; Splits Retail, Inst"), while Invesco will have the Invesco Premier Tax Exempt Portfolio (see our Nov. 10 News, "Schwab Files Variable NAV Money Fund; Invesco Announces Changes"). Also, Deutsche will convert Institutional shares of its Tax-Exempt Portfolio and Tax Free Money Fund to Retail (See our July 21 News.) Finally, Western AM will still offer the Western Asset Institutional Tax Free Reserves Fund.

The preliminary agenda is available and registrations are now being taken for Crane's Money Fund Symposium, which will take place June 22-24, 2016 at The Philadelphia Marriott, in Philadelphia, Pa. Money Fund Symposium is the largest gathering of money market fund managers and cash investors in the world. Last summer's event in Minneapolis attracted a record 505 attendees, and we expect yet another robust turnout for our 8th annual event in Philadelphia this June. (Symposium participants include money fund managers, marketers and servicers, cash investors, money market securities dealers, issuers, and regulators.) Visit the MF Symposium website (www.moneyfundsymposium.com) for more details. Registration for attendees is $750, and discounted hotel reservations are also now available. We review the agenda and conference details below. (E-mail us at info@cranedata.com to request the full brochure or click here.) We also excerpt some comments from yesterday's speech by the New York Fed's Simon Potter, who briefly mentioned money funds.

Symposium's June 22 Opening (afternoon) Agenda kicks off with a "Welcome to Money Fund Symposium 2016" by Peter Crane, President & Publisher of Crane Data. Next, we've scheduled BlackRock to present our keynote discussion on "The New Look of Money Market Funds." (We just learned that CEO Larry Fink, who was originally invited, can't make it. So watch for this slot to be revised soon.) The rest of the Day One agenda includes: "Strategists Speak '16: Repo, Rates and Regs," with Mark Cabana of Bank of America Merrill Lynch, Joseph Abate of Barclays, and Rob Zambarana of Guggenheim Securities; "Enhanced Cash and Ultra-Short Bond Funds," moderated by J.P. Morgan Securities' Alex Roever, and featuring Dave Fishman of Goldman Sachs Asset Management and Michael Morin of Fidelity Investments; and , "Major Money Fund Issues 2016," moderated by Peter Crane and featuring Charlie Cardona of BNY Mellon Cash Investment Strategies, John Donohue of J.P. Morgan AM, and Roger Merritt of Fitch Ratings. (The opening evening's reception will be sponsored by Bank of America Merrill Lynch.)

Day 2 of Money Fund Symposium 2016 begins with "Treasury Update: Supply, FRNs, and Stability Issues, with John Dolan of the U.S. Treasury. The rest of Day Two features: "Senior Portfolio Manager Perspectives," moderated by Frank Dugan of Barclays, and including Laurie Brignac of Invesco, Tim Huyck of Fidelity, and `Peter Yi of Northern Trust; "Government and Treasury Money Fund Issues," moderated by Garrett Sloan of Wells Fargo Securities, and featuring Mike Bird of Wells Fargo Funds, and Rob Sabatino of UBS Global AM; "Muni & Tax Exempt Money Fund issues" with Justin Schwartz of Vanguard, and John Vetter of Fidelity.

The Afternoon of Day 2 (after a Dreyfus-sponsored lunch) features: "Dealer Roundtable: Supply and New Products," with Stewart Cutler of Barclays, John Kodweis of J.P. Morgan Securities, and Jean-Luc Sinniger of Citi Global Markets; "Portal Panel: Transparency and Direct Investments," moderated by Ryan Kipp of Cachematrix and featuring Greg Fortuna of State Street's Fund Connect, Tony Hazard of ICD, and Steve Kraus of FIS Global; "MMF Issues in Europe and in Asia," with Reyer Kooy of IMMFA, Jonathan Curry of HSBC Global AM, and Dan Morrissey of William Fry; and "Investor Issues: Corporate, Brokerage Sweeps" with Tony Carfang of Treasury Strategies, Tom Hunt of the AFP, and Sunil Kothapalli of Wells Fargo Advisors. (The Day 2 reception is sponsored by Barclays.)

The third day of Symposium features: "State of the Money Fund Industry" with Peter Crane, Deborah Cunningham of Federated Investors, and Alex Roever of J.P. Morgan Securities; "Money Fund Reforms: Outstanding Issues," moderated by Joan Swirsky of Stradley Ronon and featuring Jane Heinrichs of the Investment Company Institute, Sarah ten Siethoff of the U.S. Securities & Exchange Commission, and Jack Murphy of Dechert LLP; "Reform Issues: Credit Ratings, Floating NAVs" with Jimmie Irby of JPMAM and Charles Hawkins of BNY Mellon Asset Servicing. Finally, the last session is entitled, "Money Fund Data, Statistics, and Software," with Peter Crane presenting on the latest money fund information tools.

We hope you'll join us in Philadelphia this June! (We'd also like to encourage attendees, speakers and sponsors to register and make hotel reservations early.) In other conference news, Crane's 4th annual "offshore" money fund event, European Money Fund Symposium, will be held in London, England, September 20-21, 2016. This website (www.euromfs.com) will be live soon. (Contact us to inquire about sponsoring or speaking.) Our next Money Fund University "basic training" event is tentatively scheduled for Jan. 19-20, 2017, in Jersey City. Finally, the date and location for our inaugural Bond Fund Symposium are set –- it will be held March 23-24, 2017 in Boston. Watch www.cranedata.com in coming months for more details on these events.

In other news, Simon Potter, the executive vice president of the New York Federal Reserve, spoke Monday on "Money Markets after Liftoff: Assessment to Date and the Road Ahead." Potter discussed the Fed's RRP program, saying, "[T]he Federal Reserve instead pursued offering an overnight investment opportunity that could, with sufficient capacity, intensify competition in money markets and, without necessarily draining reserves, enhance the transmission of IOR into other overnight money market rates. This approach entailed a twist on a traditional Federal Reserve tool, reverse repos: Instead of running quantity-based, term operations aimed at altering reserve levels, the Desk would run interest-rate-based overnight operations aimed directly at influencing market rates.... To summarize my conclusion about the performance of the operating framework to date: I am extremely pleased with what we've seen so far."

He adds, "We have learned a lot about the structure of our operations from our experience with liftoff.... Let's begin with quantifying the aggregate capacity limit.... [T]he ON RRP is currently being run with an aggregate capacity limit of around $2 trillion, which is far in excess of typical daily demand and well above the $300 billion capacity limit the facility had had since September 2014. As the FOMC made clear in the minutes to its March 2015 meeting, this elevated capacity was intended to ensure a smooth liftoff, but the absence of an aggregate cap is only temporary. This is why the recent January minutes included a discussion of when and how it will be appropriate to reinstate an aggregate cap."

Potter continues, "So, what have we learned about the appropriate level of the cap? It seems likely that having a very elevated aggregate capacity was helpful in controlling market rates initially, perhaps because it showed the FOMC's commitment to achieving interest rate control, but it's unclear exactly how much available capacity, or "headroom," is needed to maintain such control. `Our recent experience suggests that having reasonably high aggregate capacity can help improve control without necessarily encouraging greater use of the facility.... This means that they might accept relatively low rates in money markets.... So, having a high capacity could actually reduce ON RRP take-up."

Finally, he explains, "We are also paying close attention to developments in the money market mutual fund industry and their potential impact on policy implementation The Securities and Exchange Commission recently announced new regulations for these funds aimed at enhancing financial stability. One important feature of these new rules is that government-only money funds receive different regulatory treatment than prime funds, possibly making government-only funds more attractive for some institutional investors. If the assets under management in government-only money funds were to grow significantly, that could put upward pressure on ON RRP take-up, since most fund managers consider the facility to be a government investment. As I noted earlier, we would not want to see growth in government-only money funds if it were predicated on a mistaken impression that ON RRP would be around indefinitely and with high capacity. Also, if assets under management in prime funds were to decline sharply, this could possibly lead to less efficient transmission of monetary policy."

Footnote 49 in the speech's transcript notes, "Assets under management in government-only funds could grow two ways: Prime funds could convert into government-only funds, or prime fund investors could transfer their money into government funds. Most prime funds have announced their intentions at this point, and among those that have converted to government funds, take-up has not markedly increased, so therefore we are less concerned about such conversions, but we continue to pay close attention to them, as we do to investor behavior."

While most of the major lineup changes were announced in 2015, money fund managers continue to fine tune their lineups in 2016. The most recent update is from Wells Fargo Funds, who posted a release Friday entitled, "Wells Fargo announces effective dates for changes to certain money market funds." It lays out Wells' latest fund lineup plans, official change dates, and "strike times" for its floating NAV funds. (For other recent updates, see our Feb. 17 News, "Invesco, Dreyfus Detail Added Lineup Tweaks; BofA Shareholder Vote.") We also review recent European money market funds developments, including the European Securities and Markets Authority's "Follow-up Peer Review Money Market Fund Guidelines," which updates an April 2013 report that detailed countries not compliant with ESMA's money fund guidelines. In addition, a Reuters article, "Goodbye capital preservation, hello damage limitation, money funds say," discusses how European MMF assets have stabilized despite negative rates.

The new Wells Fargo release explains, "In May 2015, Wells Fargo Funds announced its plan to restructure its money market fund lineup in response to the new U.S. Securities and Exchange Commission (SEC) regulations that take effect in October 2016. The Wells Fargo Funds Board of Trustees has now approved the restructuring and related effective dates, and this product alert explains the upcoming changes." (See our May 22, 2015 News, "Wells Fargo Announces Money Fund Lineup Changes; Splits Retail, Inst.")

The update says of, "Retail Prime and Municipal funds," "Effective September 1, 2016, the Wells Fargo Funds listed immediately below will be offered as retail money market funds. These funds will continue to transact at a stable $1.00 net asset value (NAV) but will be limited to beneficial shareholders who are natural persons." These include: Wells Fargo California Municipal Money Market Fund, Wells Fargo Money Market Fund, Wells Fargo Municipal Money Market Fund, and Wells Fargo National Tax-Free Money Market Fund.

Wells says, "Institutional investors must redeem their shares of these retail funds by September 1, 2016. Any institutional investors remaining in the funds on September 1, 2016, will be redeemed automatically. Intermediaries should enforce these retail fund requirements and redeem institutional investors from these funds by September 1, 2016. Institutional investors will continue to have several money market fund options available, including our variable NAV prime and municipal money market funds and our stable NAV government money market funds described below. You can find more details in the Product Comparison Guide."

The alert says about "Variable NAV prime and municipal money market funds," "Under the new SEC rules, prime and municipal money market funds that allow institutional investors will no longer be permitted to maintain a stable $1.00 NAV and must transact at their market-based NAVs, rounded to four decimal places. Effective prior to or on October 14, 2016, the funds listed immediately below [Wells Fargo Cash Investment Money Market Fund, Wells Fargo Heritage Money Market Fund, and Wells Fargo Municipal Cash Management Money Market Fund] will be offered as variable NAV money market funds. We anticipate finalizing an effective date for the funds' conversion to variable NAV pricing by the end of March 2016."

Wells Fargo Funds continues, "Effective on conversion, the funds will implement the following multiple intraday price times in order to continue providing same-day settlement and intraday liquidity to our investors. We will calculate the NAV at the following times each business day." The Cash Investment MMF and Heritage MMF will calculate same-day settlement NAVs at 9am, 12pm, and 3pm, and a next day settlement at 5pm. Municipal Cash Management will calculate its NAV at 9am and 12pm, and next day settlement at 5pm. They add, "Also effective on their conversion to variable NAV pricing, the funds will no longer support the following features: National Securities Clearing Corporation (NSCC) trading, Automated Clearing House (ACH) trading, Checkwriting, and Exchanges."

The 10th largest MMF manager with $107.9 billion in assets also says of its Government funds lineup, "The Wells Fargo government money market funds are not subject to either the liquidity fees or redemption gates described under the new SEC rule. We will continue to offer the following government money market funds to retail and institutional clients: Wells Fargo 100% Treasury Money Market Fund; Wells Fargo Government Money Market Fund; and Wells Fargo Treasury Plus Money Market Fund."

The release concludes, "As we implement the new rules required by the SEC, we do not anticipate broad changes to the way we manage our money market portfolios. For more than 25 years, the Wells Fargo Money Market Funds have maintained a discipline of rigorous credit analysis and steadfast attention to preservation of capital and liquidity.... We look forward to continuing to work with our clients and delivering a variety of money market funds that meet their needs."

Finally, it adds, "In addition to money market funds, Wells Fargo also offers various types of liquidity solutions, including short-duration bond mutual funds, separate accounts, and individual securities that may further augment our clients' investment choices. Wells Fargo Funds offers the following short-duration bond funds to clients seeking cash management solutions: Wells Fargo Adjustable Rate Government Fund, Wells Fargo Conservative Income Fund, Wells Fargo Ultra Short-Term Income Fund, and Wells Fargo Ultra Short-Term Municipal Income Fund."

In other news, ESMA's "Follow-Up Peer Review" says, "In December 2011, the ESMA Board of Supervisors mandated the Review Panel to carry out a peer re-view on the application of the CESR Guidelines on a common definition of European money market funds.... In particular, the Guidelines distinguish between two categories of money market funds: a) Short-term Money Market Funds, and b) Money Market Funds. For both categories, CESR has established a list of criteria with which funds must comply if they want to use the label "Money Market Fund"."

It continues, "The Peer Review Report was published on April 15, 2013. The Report sets out the result of the assessment by peers on the level of compliance with the Guidelines by those national competent authorities (NCAs) which had implemented the Guidelines as of August 2012. In 14 Member States (AT, CZ, DE, DK, EL, ES, FR, IE, IT, LV, RO, SI, SK, UK) the Guidelines had been implemented into national legal systems by means of mandatory provisions."

ESMA adds, "This Follow-up Peer Review Report provides an update on the findings of the first peer review and sets out the result of this second assessment by peers. The review period is from 1 May 2014 to 1 May 2015.... Fourteen NCAs, which did not implement in full or in part the Guidelines at the time of the first peer review are listed in the following table with their country codes and acronyms." These countries include: Bulgaria (BG), Cyprus (CY), Estonia (EE), Greece (EL), Hungary (HU), Iceland (IS), Liechenstein (LI), Lithuania (LT), Latvia (LV), Malta (MT), Norway (NO), Poland (PL), Portugal (PT), and Sweden (SE).

Finally, Reuters writes "Goodbye capital preservation"," which says, "Money market funds in Europe that can no longer return all your cash remain popular with companies due to a lack of alternatives, even if an era of increasingly negative interest rates may demand a broader rethink of cash management. Outflows from the money market funds that keep the financial system flowing have stabilized, allaying concerns that their withdrawal could seed a banking crunch like that in the United States eight years ago." "Investors pulled out of money market funds originally and looked for different solutions to find a positive yield but ultimately, not finding suitable alternatives, they chose to come back," the piece quotes Alastair Sewell of Fitch Ratings."

It adds, "Data from the Institutional Money Market Funds Association (IMMFA), which offers a snapshot of 20 of the most conservative money fund managers, shows that when the first euro funds recorded negative returns last year there was a rush of redemptions. The money invested in these funds, which stood at 88 billion euros ($98 billion) in March 2015, declined by more than 20 percent in the space of three months. Yet despite a further ECB rate cut at the end of 2015 and the fact that all IMMFA's euro funds lost money over the course of the year, assets have remained stable at around 70 billion euros in the eight months since."

The Investment Company Institute released its latest "Money Market Fund Holdings" summary (with data as of Jan. 31, 2016), which reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds. (See our Feb. 10 News, "Latest MF Portfolio Holdings Show Fed Repo Plunge; TDs, CDs, CP Jump" for our earlier report on holdings.) Also, we recently interviewed Vanguard's Pam Tynan, who is retiring at the end of this month, and colleague, Justin Schwartz, who will replace Tynan as Head of the Short-Term Municipal Desk, for the February issue of our Bond Fund Intelligence publication. Tynan and Schwartz also run Vanguard's $17.3 billion Tax-Exempt Money Market Fund and several State Tax-Exempt money fund portfolios, so we asked them some money fund questions while we had them on the phone. The two discuss challenges in the Tax-Exempt space, as well as fees, MMF reforms, and the stickiness of assets, below.

ICI's "Prime and Government Money Market Funds' Daily and Weekly Liquid Assets" table shows Prime Money Market Funds' Daily liquid assets at 27.8% as of Jan. 31, down from 33.1% on Dec. 31. Daily liquid assets were made up of: "All securities maturing within 1 day," which totaled 23.4% (vs. 28.4% last month) and "Other treasury securities," which added 4.4% (down from 4.7% last month). Prime funds' Weekly liquid assets totaled 41.5% (vs. 44.8% last month), which was made up of "All securities maturing within 5 days" (34.6% vs. 37.4% in December), Other treasury securities (4.3% vs. 4.7% in December), and Other agency securities (2.6% vs. 2.7% a month ago).

The report says, Government Money Market Funds' Daily liquid assets totaled 56.3% as of Jan. 31 vs. 61.3% the previous month. All securities maturing within 1 day totaled 24.0% vs. 27.5% last month. Other treasury securities added 32.3% (vs. 33.8% in December). Weekly liquid assets totaled 76.3% (vs. 77.4%), which was comprised of All securities maturing within 5 days (34.1% vs. 36.7%), Other treasury securities (30.5% vs. 31.1%), and Other agency securities (11.8% vs. 9.6%).

ICI's "Prime and Government Money Market Funds' Holdings, by Region of Issuer" table shows Prime Money Market Funds with 39.5% in the Americas (vs. 55.5% last month), 19.7% in Asia Pacific (vs. 20.1%), 40.5% in Europe (vs. 24.1%), and 0.4% in Other and Supranational (vs. 0.3% last month). Government Money Market Funds held 85.2% in the Americas (vs. 93.9% last month), 1.4% in Asia Pacific (vs. 0.8%), 13.4% in Europe (vs. 5.3%), and 0.0% in Supranational (vs. 0.0%). The table, "Prime and Government Money Market Funds' WAMs and WALs" shows Prime MMFs WAMs at 35 days as of Jan. 31, up from 31 days last month. WALs were at 59 days, up from 56 days last month. Government MMFs' WAMs was at 39 days, down from 40 days last month, while Government fund WALs was at 90 days, up from 86 days.

The 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.)

ICI also recently updated a slide originally published in its "Money Market Working Group Report" which shows that money market funds own about one quarter of the almost $10 trillion in total taxable instruments in the money markets. Specifically, ICI states that there are, as of September 2015, $9.565 trillion in total taxable instruments, and they calculate that money market funds hold $2.316 trillion, or 24%.

Looking at the various segments, MMFs hold $391 billion (13%) of the $2.974 trillion in Treasury Securities, $692 billion (34%) of the $2.062 trillion in Repo, $482 billion (25%) of the $1.895 trillion in CDs, $338 billion (34%) of the $991 billion in Commercial Paper, $399 billion (43%) of the $930 billion in Agency Securities, and $13 billion (2%) of the $714 billion in Eurodollar deposits. Also, MMFs hold $242 billion (84%) of the $288 billion in Tax-Exempt instruments.

In our recent BFI interview with Pam Tynan and Justin Schwartz, we discussed Vanguard's Short-Term Tax-Exempt Fund and other municipal bond funds. But the two Muni PMs also touched on a range of Tax-Exempt money fund related issues. Tynan said, "The biggest challenge, of course, has been related to low rates in the money market funds for a protracted period of time now. The key thing here is, despite the fact that the Fed has actually begun to raise rates, our benchmark SIFMA rate remains at all-time lows. The main reason for this disconnect is the supply conditions in our market, which have remained very constrained. Clearly, the supply-demand imbalance will have to right itself, and we expect that might come with a shift of assets to the taxable side of the house. We actually think this may occur sooner rather than later.... In fact we are already witnessing industry outflows, which I believe are being led by institutional accounts."

When BFI asked about the stability of assets, she told us, "Considering we have been in a zero rate environment, the Vanguard Tax-Exempt Money Market Fund has done surprisingly well. It still has over $17 billion in assets -- that's testimony to the fact that the objective -- safety, liquidity, and, of course, the best value possible -- does seem to resonate well with our investors given that there has been a lot of uncertainty and volatility in markets in general. The fund, for all intents and purposes, is all retail and we haven't had a lot of migration out of our funds with respect to money market fund reform concerns.”

She said the funds have very high liquidity levels, much higher than taxable funds, so there is less of a concern about the new fees and gates regulation. Tynan explained, "Weekly and Daily Liquidity is in the 75-80% range for the fund, which is near the averages for the municipal money fund market in general. That definitely makes investors more comfortable about the liquidity in these funds when you compare them with the requirements under Rule 2a-7. As a result, there has been little noise from our shareholder base on that front."

Finally, on fee waivers, Tynan explained, "We don't look to recover fees on our funds. We have been limiting some of our operating expenses for the Vanguard Tax-Exempt Money Market Fund to make sure we have a positive yield for our investors. For the year ended October, which is our fiscal year for that fund, the rate is 8 bps, or about half the expense ratio that we would typically charge." We'd like to wish Tynan the best of luck in retirement!

Law firm Dechert released, "U.S. Money Market Fund Reform: Diversification, Stress Testing and Disclosure Compliance Deadline Quickly Approaching; SEC Staff Issues New FAQs," which focuses on the aspects of MMF Reform that go into effect this coming April. Authors Jack Murphy, Brenden Carroll, Stephen Cohen and Justin Goldberg write, "The April 14, 2016 compliance date for certain new money market fund requirements adopted by the U.S. Securities and Exchange Commission is quickly approaching. In particular, money funds will be required to: Comply with new diversification and stress testing requirements; Report new information on their websites; and Incorporate new disclosure into their registration statements and advertisements." Also, JP Morgan Asset Management came out with a report on "Liquidity Investors and Basel III," authored by Andrew Linton, Head of Product Development for the J.P. Morgan Global Liquidity Group. We examine both the Dechert and JPMAM pieces below.

The Dechert paper says, "Money funds and their advisers should consider updating their policies and procedures, registration statements and advertisements and adopting new systems and controls to address these requirements in advance of the upcoming compliance date. Certain of these changes may need to be approved or ratified by the money fund's board of directors/trustees (board).... This OnPoint provides an overview of the new requirements that have an April 14, 2016 compliance date, as well as the updated FAQs. The compliance date for the remaining new money fund requirements adopted by the SEC -- namely, liquidity fees, redemption gates, floating net asset value (NAV) and retail eligibility -- is October 14, 2016. Money funds and their advisers should consider whether changes to any agreements with intermediaries are necessary to incorporate the requirements with an October 14, 2016 compliance date."

The update provides an overview of each of the rules that go into effect on April 14, 2016, starting with the Diversification requirements. Dechert writes, "Rule 2a-7 under the Investment Company Act of 1940 currently requires that money fund portfolios be diversified as to the issuers of securities they own, as well as to any guarantors and demand feature providers related to those securities. The amendments to Rule 2a-7 include changes to these diversification provisions of Rule 2a-7." The diversification rules call for: Grouping of affiliates for 5% issuer diversification limitation; Sponsor of asset-backed securities as guarantor; and Removal of the 25% basket.

Next is Stress Testing. They explain, "The Amendments will enhance stress testing requirements. Specifically, effective April 14, 2016, money funds will be required to periodically test their ability: (1) to have invested at least 10% of their total assets in weekly liquid assets; (2) to minimize principal volatility; and (3) for stable NAV money funds, to maintain a stable NAV per share, based upon certain hypothetical events. In addition, money funds will be required to test their ability to maintain these conditions not only in response to such hypothetical events, but also in combination with various levels of shareholder redemptions. Money fund advisers also will be required to include additional information in the stress testing reports to money fund boards, including: (1) a summary of the significant assumptions made when performing the stress tests; (2) various assessments of a money fund's ability to withstand certain hypothetical events; and (3) any such other information as may be reasonably necessary for a money fund's board to evaluate the stress tests and the results of such tests."

On the pending "Website Posting" mandates, Dechert writes, "The Amendments will require a money fund to "prominently" disclose on its website the following information as of the end of each business day during the preceding six months: (1) the percentage of total assets invested in daily liquid assets and weekly liquid assets; (2) the daily net inflows and outflows; and (3) the current NAV per share rounded to four decimal places. This information, which would include fund data from the six-month period preceding the compliance date (i.e., information for the period commencing October 14, 2015), must be presented in the form of a schedule, chart, graph or other depiction. The Amendments also will: (1) revise the categories of investments that are currently required to be reported on a money fund's website; and (2) require that money funds disclose certain events on their website, which money funds must also report on Form N-CR (e.g., when the money funds receives financial support from its sponsor or other fund affiliate)." Also, money funds will be required to include a new risk disclosure in their prospectus summary section and sales materials.

The OnPoint also explains, "Possible Changes to Policies and Procedures and Possible Supplements to Money Fund Registration Statements," writing, "In light of the rapidly-approaching April 14, 2016 compliance date, a money fund and its adviser should consider updating existing policies and procedures (or developing new policies and procedures) to ensure that the fund has updated its diversification and stress testing requirements, revised its website disclosure policies and implemented the various clarifying amendments to Rule 2a-7. Changes to existing policies and procedures (or new policies and procedures) may need to be approved or ratified by the money fund's board. In addition, with respect to the new registration statement disclosure requirements, money funds may need to amend or supplement their disclosure documents to incorporate the new disclosure requirements prior to April 14, 2016."

Dechert also notes that the SEC updated its FAQs for the third time. They say, "On January 13, 2016, the SEC Staff updated the FAQs that it originally released on April 22, 2015. Among the revisions made to the FAQs were the addition of questions regarding reverse stock splits, private money funds, multi-class money funds and government money funds. You can read the FAQ update here."

Finally, they conclude, "Compliance with the Amendments may involve revisions and additions to money fund policies and procedures, some of which may entail board consideration and approval. Therefore, it is important that money funds and their advisers plan in a timely manner for the relevant changes to the funds' operations relating to diversification, stress testing and disclosure."

JPMAM's piece on "Liquidity Investors and Basel III" examines the impact of new regulations to help cash investors most effectively segment and structure their portfolios. In summary, it explains, "Basel III regulations redefine global standards for bank capital, liquidity and leverage, and will profoundly impact how banks manage their balance sheets. Liquidity investors need to understand how banks will treat deposits under the new rules. In this way, they can most effectively structure and segment their liquidity portfolios to gain the greatest benefit from the new rules and incentives, and maximize their investment returns."

It continues, "Deposits deemed to be non-operating cash will be less attractive to banks than those categorized as operating cash. Though the precise definition of operating cash is not yet final, it will be stricter than previous standards. Deposits categorized as non-operating cash, such as wholesale funding from financial services corporations, will move off bank balance sheets into alternatives such as money market funds, separately managed accounts and self-directed individual securities. Though Basel III will not be completely implemented until 2019, in January 2014 European and U.S. banks started to report under the new regulations, and many large banks are choosing to follow the rules sooner than required."

Furthermore, JPMAM's Linton explains, "A centerpiece of Basel III -- widely described as a "game changer" in the way banks view their deposits -- is the liquidity coverage ratio (LCR). It aims to ensure that a bank can meet its liquidity needs in a severe stress scenario. Specifically, the regulation looks to make certain that a bank holds a sufficient stock of unencumbered assets that can be converted into cash within a day, without a decrease in value, to meet all of the bank's liquidity needs for a 30-day stress scenario. The ratio of high-quality liquid assets (HQLA) to a bank's expected net cash outflows during this period must be greater than 100%.... The regulations will have a particular impact on financial institutions, an important contingent of liquidity investors."

He concludes, "Properly segmenting cash balances into operating and non-operating pools and making investments that maximize returns on both pools has never been more important. Liquidity investors should work with their banks to maximize their operating cash returns and with their investment managers to maximize their investment returns."

While most fund companies have announced their major changes and fund reorganizations ahead of Money Market Reform later this year, many continue to tweak the remaining portions of their lineups. Invesco details additional changes to its money market fund lineup in a Feb. 4 update, entitled, "Money Market Regulatory Reform." Specifically, they say they will categorize the $7.9 billion Invesco Premier Portfolio as Retail, and they will convert the $951 million Invesco Money Market Fund from Prime to Government. When the conversion is complete on June 28, 2016, this fund will be renamed Invesco Govt Money Market Fund. Also, a posting entitled, "Dreyfus Product Changes and Timeframes," includes additional details on the BNY Mellon advisors' post-MMF reform lineup. Finally, BlackRock set the dates for shareholders to vote on the planned BofA fund mergers. We review all of these updates below.

Invesco released their initial money market fund lineup categorizations and changes 3 months ago, which we covered in our Nov. 10 News, "Schwab Files Variable NAV Money Fund; Invesco Announces Changes." That update included future categorization information on all of Invesco's funds except two, Premier Portfolio and Invesco Money Market Fund. They wrote at the time, "We will communicate plans for Invesco's other money market funds, the Invesco Money Market Fund and Premier Portfolio, not specifically mentioned in this letter, in the coming weeks."

The new update, addressed to "Invesco Money Market Fund Investors," says, "Since July 2014, when the U.S. Securities and Exchange Commission (SEC) issued new rules for money market funds, Invesco has been thoughtfully evaluating the impact of money market fund reform and the impact this reform will have on our investors and our product line. Throughout this process, we have been listening to investors' questions and working through any concerns to ensure our products continue to meet their needs. In order to best serve our investors, we began to outline our money market fund product line in November 2015. We would now like to share further updates on those plans. Accordingly, we have reviewed these intentions with the funds' Board of Trustees."

It continues, "Invesco's Premier Portfolio intends to operate consistent with the constant net asset value (CNAV) retail money market fund classification. By keeping the Premier Portfolio a CNAV fund, we hope to accommodate current retail investors as well as other retail investors looking for a retail prime fund option." Currently, the Premier Portfolio totals $7.9 billion in assets, according to our MFI XLS.

In addition, the $951 million Invesco Money Market Fund will be converted to Government and be called the Invesco Government MMF on June 28. (Crane Data now counts a total of $267.4 billion in Prime funds that have been or will be converted to Government funds.) The update adds, "The Invesco money market funds will be in compliance with the new regulations prior to the October 14, 2016 deadline. The specific timing of changes will be determined and communicated in the coming months as final reform implementation takes shape."

With these new changes, Invesco will have 6 Government funds –- Government & Agency, Government Tax Advantage, Premier US Government, Treasury Portfolio, Invesco Government MMF, and Invesco VI Government MMF. It will have 3 Retail funds, including one Prime Retail, Premier Portfolio, and 2 Muni Retail, Tax-Exempt Cash and Tax-Free Cash Reserve. Finally, Invesco will have 3 Institutional funds -- Liquid Assets, STIC Prime, and Premier Tax-Exempt.

Dreyfus' MMF update" outlines its fund changes to date, and includes some new information -- including fund liquidations and name changes. It says, "As the money market fund industry prepares to implement the SEC's regulatory reforms, Dreyfus has worked diligently to re-align the money market fund line up to offer a diversified mix of cash management products to support the various liquidity needs and requirements of our valued clients. As such, we highlight below our revised money market product line up, including expected implementation dates."

As we wrote in our Nov. 18 News, "Columbia Threadneedle Going Govt; Dreyfus Details MF Moves; Deutsche," Dreyfus has merged its Municipal Money Market Fund into General Municipal MMF (Nov. 13); its Dreyfus NY AMT-Free Municipal Cash Management into Dreyfus NY Municipal Cash Management (Aug. 28); its Dreyfus Worldwide Dollar MMF into Dreyfus Liquid Assets (Sept. 18); and its Dreyfus 100% US Treasury into General Treasury Prime (Dec. 4).

Dreyfus has also liquidated, or is in the process of liquidating, 4 funds. Three have already been liquidated -- Dreyfus BASIC Municipal MMF (Aug. 18), New York AMT-Free MMF (Oct. 28), and BASIC New York Municipal MMF (Oct. 28.) Also, Dreyfus Money Market Reserves Fund will be liquidated on Feb. 26. Further, the "Service Shares" and the "Select Shares" of Dreyfus Treasury & Agency Cash Management fund will be liquidated on March 1.

Dreyfus will have 4 Prime Inst funds -- Dreyfus Cash Management; Dreyfus Institutional Cash Fund; Dreyfus Institutional Preferred Money Market Fund Prime; and, Dreyfus Institutional Preferred Plus Money Market Fund Prime -- and one Muni Inst fund, Dreyfus Tax Exempt Cash Management. Among the latest changes, Dreyfus removed the "Advantage" name from the Dreyfus Institutional Cash Fund. It also reclassified the Prime Shares as Inst Shares and Reserve Shares as Hamilton Shares for its Inst Preferred MMF.

In addition, Dreyfus will have 4 Prime Retail and 8 Muni Retail funds. The Prime Retail funds are: BASIC Money Market Fund, Liquid Assets, Prime MMF, and General MMF. Its new Prime Money Market Fund will be a name change from the Citizens Select Prime MMF, which will take effect on March 1. The 8 Muni retail funds include: Dreyfus AMT-Free Municipal MMF; California AMT-Free Municipal Cash Management; Municipal Cash Management Plus; New Jersey Municipal MMF; New York Municipal Cash Management; General California Municipal MMF; General Municipal MMF, and General New York AMT-Free Municipal.

Also, Dreyfus posted its Government/Treasury MMF lineup. Dreyfus' 5 Government funds include: Govt Cash Management; Govt Prime Cash Management; Inst Preferred Govt MMF (converted from Prime on 11/1); General Government Securities; and Dreyfus VI Fund Govt MMP (converted from Prime effective May 1, 2016). The 7 Dreyfus Treasury funds include: Institutional Treasury and Agency Cash Advantage; Inst Treasury Prime Cash Advantage; Treasury and Agency Cash Management; Treasury Prime Cash Management; General Treasury and Agency MMF; General Treasury Prime MMF; and Inst Preferred Treasury MMF, which will be renamed from Citizen Select Treasury MMF on March 1.

Finally, in a follow up to our Feb. 12 News, "BofA Details Fund Mergers Into BlackRock MMFs; WSJ on Big Retail MMFs," we learned through a new filing that BlackRock has set a March 31 date for its shareholder vote to merge the BofA money funds into BlackRock funds. The proxy statement says, "As you may know, BofA Global Capital Management Group, LLC, the direct parent company of BofA, the investment adviser to the funds of the Target Trust (the "BofA Funds"), has entered into an agreement to transfer investment management responsibilities of BofA to BlackRock, Inc.... [I]t is being proposed that certain BofA Funds, including the Target Fund, be reorganized into corresponding money market funds advised by BlackRock.... The enclosed materials relate to the proposed Reorganization of the Target Fund with the Acquiring Fund (as defined below). Shareholders of other BofA Funds are separately being asked to vote on the reorganization of their funds."

BBH is the latest manager to "go Government" and convert their Prime money market fund ahead of the October 2016 implementation of the SEC's 2014 Money Market Fund Reforms. Brown Brothers Harriman filed to convert its $1.8 billion BBH Money Market Fund into the newly named BBH US Government Money Market Fund on April 1, 2016. We review this and the overall Prime to Government trend below, and provide more color on MassMutual's plan to convert its Premier Money Market Fund to a US Government MMF. (See our Feb. 11 Link of the Day, "MassMutual MMF Goes Govt," and see our previous two "Going Govt" stories -- "American Beacon Goes Govt" (1/25/16) and "More Funds Jump on Prime to Govt Conversion Bandwagon; Mergers" (12/22/15).) Also, we briefly recap the February issue of our Bond Fund Intelligence newsletter, which was sent out to subscribers late Friday, and we review commentary from PIMCO portfolio manager Jerome Schneider, entitled, "Giving Cash Its Due."

The January 27 BBH filing says, "In connection with the amendments adopted by the U.S. Securities and Exchange Commission to Rule 2a-7 and other rules governing money market funds under the Investment Company Act of 1940, the BBH Money Market Fund intends to operate as a "government money market fund" effective on or about the date provided below. The Fund will also change its name at that time." The new name will be BBH US Government Money Market Fund and the conversion date is April 1, 2016.

The filing continues, "Accordingly, the Fund will adopt a new investment policy requiring the Fund to invest 99.5% or more of its total assets in cash, U.S. government securities, and/or repurchase agreements that are collateralized fully by cash and/or U.S. government securities. Please note that the Fund's current investment strategy permits the intended investments of the U.S. government money market fund strategy. As a result, in order to keep transaction costs to a minimum, the Fund will gradually transition its portfolio holdings from its current investment strategy to its new investment strategy and may be invested in accordance with its new investment strategy before the actual effective date of the Fund's transition."

We learned about another conversion from Fund Action, which wrote earlier this week, "Mass Mutual To Convert Prime Money Fund." It says, "MassMutual is the latest in a storm of firms planning to convert prime money market funds to government funds. According to a Securities and Exchange Commission filing, the $441.1m MassMutual Premier Money Market Fund will be rebranded the MassMutual Premier US Government Money Market Fund in May.... In total, including Mass Mutual's fund, $265bn in prime money assets are set to move to government funds, Peter Crane, president at Crane Data, told FA. He added $173bn of those assets have already converted, including the largest among them -- Fidelity Investments' $121bn Cash Reserves Fund."

The FA piece continues, "The smaller fund complexes and those firms with smaller money fund lineups are switching en masse, Crane added. "For most of these small providers that have under $1bn and use their money fund just as a convenience for their clients, it's a no brainer," he said. "The costs of converting to prime are substantial with the systems issues of dealing with a floating NAV, if they're institutional, or the gates and fees if they're retail or institutional. It's a pain for the systems. Their boards of directors don't want the responsibility of the gates and fees even though it's unlikely to happen."

The article says, "Crane added in this environment where yields are still very close to zero, investors aren't going to complain. "It's probably not going to happen anytime soon but if yields ever do go up, where they're measured in percentages and not basis points, investors may complain and they may want their higher-yielding prime funds back," he said. "In the meantime, it's an easy decision for most small players."

Fund Action concludes, "We're at the tail end of the barrage of conversion announcements, however, Crane added. This is because most fund boards determined the next steps for their money funds around year's end. "Certainly the big money has already declared," he said. A spokesman from MassMutual did not return calls for comment."

With the pending conversion of BBH and MassMutual's Prime assets, Crane Data now counts 26 firms with almost 56 funds that have decided to "go government" with some or all of their money market funds. Currently, we show $266.5 billion in Prime funds switching to government with $172.4 billion already converted to date. The next big batch of conversions comes on April 1 and April 6 when some $20 billion will shift to Government, including the American Funds, Cavanal Hill (see their new statement here), and John Hancock MMF.

Note that Fitch Ratings just released a video recap from Director of Funds and Asset Management Greg Fayvilevich, entitled, "US Money Fund Conversion Update." Fayvilevich says, "The movement of such large sums of money is impacting demand and yields in the market, evident by the spread between yields of prime and government money funds, which has recently widened near the pre-crisis average of 14 basis points."

In other news, the February issue of our Bond Fund Intelligence went out to subscribers on Friday. BFI features: a story on the pending "Segmentation of the Conservative Ultra Short Bond Fund space;" an interview with Vanguard Short-Term Tax-Exempt portfolio managers Pamela Tynan and Justin Schwartz; monthly bond fund asset flows; and a sidebar on Morningstar's Fixed Income Fund Manager of the Year, PIMCO's Jerome Schneider. We also recap the latest bond fund news, including the introduction of our new Crane BFI 100 Index, an average that tracks the performance of the 100 largest taxable bond funds. Subscribers can now access the latest and back issues of BFI on our "`Content" page (scroll down to see Bond Fund Intelligence).

Finally, PIMCO's Schneider has also penned a new Q&A, "Giving Cash Its Due". Schneider states, "In the cash markets, the reaction to the Fed's first 25-basis-point increase in December was very subdued. Treasury bill yields have lagged due to strong demand, and money market government fund yields on a net basis are basically still around zero, since some management fees have ticked up. Further, not only have bank deposit rates generally stayed put, even though many investors had expected banks to raise them, but some major banks have said they will start to charge fees on deposits for certain customers. As these trends continue, we do not expect any meaningful increase in cash yields from the Fed's next rate hike either."

He adds, "Going forward, we expect that the Fed will raise rates as economic conditions improve, and yields on the front end of the curve should increase gently. But that doesn't mean that all yields will rise. Investors should be aware that some asset classes, including money market funds and the instruments they invest in, predominantly T-bills, will continue to be structurally restrained in terms of yield. Money market reform and bank capital requirements have increased demand for these securities, which is likely to keep yields low. T-bill and agency debenture issuance is also lower than historical levels, which may put further pressure on yields."

Schneider concludes, "Structural changes are also underway this year: Money market reform is set for the third quarter, and ongoing bank regulations will continue to limit market liquidity and the availability of high quality, short-term assets. In the past, cash allocations were sometimes an afterthought for investors. But today, as more investors make cash and short-term investments an integral part of the portfolio, these allocations matter. As a result, investors need to be prepared for the changes that are underway and be proactive so they can meet their needs for both return and liquidity in the year ahead."

BlackRock and BofA Global Capital Management disclosed details of their plan to reorganize and merge the two companies' money market mutual fund lineups in a new SEC filing. The Prospectus Supplement for the BofA Funds Series Trust, dated Dec. 30, 2015, comes almost two months after BlackRock announced that it was buying BofA's $87 billion cash management business ($43B of which is in MMFs). (See our Nov. 3 News, "BlackRock Taking Over BofA MMFs in One of Biggest Acquisitions Ever.") When the deal is completed, possibly as soon as April 2016, BlackRock will become the second largest MMF manager (from 3rd currently). The fund reorganizations are subject to shareholder approvals. We review the filing and merger details below, and we also recap yesterday's online Wall Street Journal article, "What December Rate Rise? Most Money-Fund Yields Haven't Changed."

The BofA filing says, "As previously communicated, BofA Global Capital Management, the direct parent company of the BofA Funds' investment advisor, BofA Advisors, LLC (the Advisor), has entered into an agreement to transfer the investment management responsibilities of the Advisor to BlackRock, Inc. This transaction includes the transfer of the part of the Advisor's business that relates to the investment management of the BofA Funds."

It explains, "In connection with the Transaction, the BofA Funds' Board of Trustees has considered and unanimously approved reorganizations of the BofA Funds into funds managed by a BlackRock affiliate (each, a BlackRock Fund and, collectively, the BlackRock Funds), as listed in the table below (each, a Reorganization and, collectively, the Reorganizations). The Reorganizations were proposed by the Advisor and BlackRock."

The table shows: BofA Cash Reserves ($8.1 billion) and BofA Money Market Reserves ($20.1 billion) will merge into BlackRock TempFund (currently $63.4 billion); BofA Government Plus Reserves ($2.3B) will merge into BlackRock FedFund ($13.2B); BofA Government Reserves ($5.7B) will merge into into BlackRock Federal Trust Fund ($718M); and, BofA Treasury Reserves ($10.4B) will merge into BlackRock T-Fund ($21.1B).

BofA Funds' filing adds, "The closing of each Reorganization is subject to the satisfaction of a number of conditions, including approval by the shareholders of each BofA Fund at a joint special meeting of shareholders expected to be held in the first part of 2016. In each Reorganization, if various conditions to the closing of the Reorganization are satisfied, a BlackRock Fund will receive substantially all of the assets and assume certain of the liabilities of the BofA Fund, and BofA Fund shareholders will receive shares of the BlackRock Fund in exchange for their shares of the BofA Fund. A BofA Fund shareholder will receive shares of the BlackRock Fund with the same aggregate net asset value as the shares of the BofA Fund that such shareholder owns immediately prior to the closing of the Reorganization.... Additionally, BofA Fund shareholders will not incur any transaction charges as a result of the Reorganizations. Each Reorganization, if it is approved by shareholders and all other conditions to the closing are satisfied, is expected to occur in the first part of 2016."

The Journal's "What December Rate Rise?" piece says, "Investors in many of the largest money-market mutual funds haven't received any benefit from the Federal Reserve's Dec. 16 increase in its target short-term interest rate. Recent yields are unchanged from the levels of Dec. 15 at 13 of the 20 largest share classes of "prime" money funds for individuals, according to Crane Data LLC, a Westborough, Mass., firm that tracks money-market funds. These include funds from Bank of New York Mellon Corp.'s Dreyfus Funds, Federated Investors Inc., Charles Schwab Corp. and T. Rowe Price Group Inc."

It continues, "The major reason that many money funds' yields haven't risen along with interest rates in the market is that fund companies have taken advantage of the increase to cut back on the subsidies they had been providing to their funds over the past few years of near-zero rates. In some cases, the funds' yields continue at just 0.01%, or a mere $1 a year on a $10,000 holding. By contrast, according to Crane Data, yields have risen over the same period on some lower-expense money funds that had lower subsidies in place, or none at all. That includes the $110.3 billion "Investor" share class of the Vanguard Prime Money Market Fund, the largest prime money fund for individuals, where the yield rose to 0.37% from 0.15% according to Crane Data."

The article quotes Peter Crane, president of Crane Data, "In general, yields are lower on funds with higher expense ratios." It explains, "Expenses are the prime differentiators when it comes to the yield on money-market funds because regulations limit the pool of securities they can invest in, he says. In recent years, though, many fund companies with higher fees waived all or part of their fees to keep expenses from eating up the funds' yields and taking a bite out of investors' principal. Fund companies are clearly hungry to collect the fees they have lost out on over recent years, even as money-fund holders wish for the chance to earn more on the cash reserves they have parked in these low-risk funds."

The Journal piece continues, "Joseph Lynagh, a money-market portfolio manager for T. Rowe Price Group, says the firm hasn't earned a management fee on the $6.4 billion T. Rowe Price Prime Reserve Fund for nearly seven years. With the recent rate increase, the fund's interest earnings are now sufficient to cover part of its operating expenses. But the firm continues to waive its 0.34% management fee and to cover 0.04 percentage points of the fund's 0.19% in other expenses so that it can sustain its 0.01% yield, Mr. Lynagh says."

It goes on, "Ryan Robson, a general partner at a unit of brokerage Edward D. Jones & Co., said the firm was happy to see a rate increase from the Fed because Edward Jones Money Market Fund had been essentially fully subsidized since 2009 by its adviser, a limited partnership jointly owned by Edward Jones and a subsidiary of asset manager Federated Investors. As a result of the rate increase, he said, the adviser has been able to lower the amount of fees that it waives.... In deciding what to do with their fee waivers, fund companies are watching each other's behavior. "We certainly want to be competitive in the market and see what some of our peers are going to do," Mr. Robson said."

The WSJ continues, "Some money funds have higher fees than others to compensate financial advisers that sell them. And fees are generally higher on money funds used as "sweep" accounts in brokerage accounts. With those arrangements, excess cash in a brokerage account is regularly swept into the money fund and withdrawn from that fund when needed for securities purchases. The $40.5 billion Schwab Cash Reserves fund -- the second-largest prime money fund for individuals, according to Crane Data -- charges a higher fee than some other Schwab money funds because it is a sweep fund, said a Schwab spokeswoman. The fund's yield has remained at 0.07% since mid-December. The Schwab fund may charge as much as 0.70% in total expenses per its prospectus, but the fund company has capped the expenses at 0.66% and is currently waiving 0.39 percentage points of that."

Finally, it concludes, "The $13.7 billion Class B shares of Dreyfus's General Money Market Fund, with a continuing yield of 0.01% and expenses of 1.03% listed in the prospectus, "are sold to retail investors though financial advisers," a spokesman said. "The total expense ratio of the fund supports a variety of cash-management services including a daily automated cash sweep, check writing, debit cards and online bill payments -- all as part of a bundled fee." At the Vanguard Prime Money Market Fund, the usual fee is 0.16%. Vanguard hasn't been waiving any fees since at least December, the company has said."

While Federal Reserve Chair Janet Yellen got most of the attention yesterday in her Semiannual Monetary Policy Report to the Congress, Vice Chairman Stanley Fischer also spoke in Washington on the Fed as "The Lender of Last Resort." He discussed liquidity pressures in the "shadow banking" sector and how, in an emergency, the Fed can provide liquidity to the financial markets. We excerpt from this speech below, and we also return to the suddenly hot topic of negative rates, reviewing commentary from RBC Capital Markets' Michael Cloherty and from Fed Chair Yellen. Cloherty says, "Speculation about negative rates is wildly overdone.... [W]e think there are $2.5T reasons why assuming that the US follows Europe is a mistake."

In his speech, Fischer explains, "While we have likely reduced the probability that lender of last resort loans will be needed in the future, we have not reduced that probability to zero. We could, presumably, require financial institutions to fund illiquid assets entirely with longer-term debt and equity or, equivalently, allow them to use short-term liabilities to fund only safe and highly liquid assets. However, such an approach would be costly in terms of reduced lending to American businesses and households."

On shadow banking, he continues, "During a crisis, liquidity pressures can materialize in the shadow banking sector -- that is, the set of nonbanks that use a range of markets and instruments to provide financing to borrowers. At the time of their initial difficulties, both Bear Stearns and Lehman Brothers were in the shadow banking system. To help improve the resiliency of this sector, a few new regulations have been introduced, including the final rule on risk retention in securitization issued jointly by the Federal Reserve and five other agencies in October 2014 and the new money market fund rules issued by the Securities and Exchange Commission (SEC) in July 2014."

He adds, "In addition, the Federal Reserve can, if needed in an emergency, and with the approval of the Secretary of the Treasury, lend through a broad-based facility, including to nonbanks, to provide liquidity to financial markets. Indeed, during the financial crisis -- which can be thought of as an old-fashioned bank run, but on the shadow banks -- the Fed's credit facilities were used in an effort to stop the run in the shadow banking system. Such broad-based facilities were instrumental in ensuring that money market mutual funds were able to liquefy their assets and so meet investor withdrawals, that the markets for critical short-term funding remained open, and that funding remained available for securitizations that were, in turn, funding loans to students, car buyers, small businesses, and others."

Fischer continues, "In several of these interventions, the Fed was lending to increase the liquidity of, or activity in, securities markets, in order to maintain the flow of essential credit to businesses and to households. Had that flow of credit ceased, the financial crisis, the severe recession that resulted, and the consequences for the U.S. economy, and thus every American, would have been far more serious."

He states, "In November of last year, in a revision to its regulations reflecting the changes to the Federal Reserve's emergency lending authority included in the Dodd-Frank Act, the Board spelled out how the Federal Reserve would design and operate such broad-based emergency lending facilities in the future. Among other things, an emergency facility would be designed to provide liquidity to a market or sector of the financial system and not be for the purpose of assisting a specific firm, or group of firms, in avoiding bankruptcy."

Fischer explains, "The Dodd-Frank Act removed the Federal Reserve's authority to lend to an individual troubled institution. Instead, the act required large banks and systemically important nonbanks to submit plans under which they could be resolved under bankruptcy in a rapid and orderly manner if they suffered material financial distress."

Negative rates have been in the news of late after the Bank of Japan joined the European Central Bank in dropping interest rates into negative territory. Could it happen here? We examined the mechanics of it in our Feb. 8 News, "BofA ML on Negative Yields, Fitch on Angst, and Moody's on Anxiety." Earlier this week, Michael Cloherty, Head of US Rates Strategy at RBC Capital Markets, weighed in on the topic in a commentary, "Negative rates? CCAR and the Street Echo Chamber."

He writes, "Speculation about negative rates is wildly overdone. In addition to the legal issues -- an August 2010 Fed memo says, "it is not at all clear that the Federal Reserve Act permits negative IOER rates" -- the market structure in the US is dramatically different than the structure in place in countries that have implemented negative rates <b:>`_. Primarily, US markets are highly reliant on the $2.5T in money market funds, and money fund business models would be under extraordinary stress if rates fell below zero. In addition, today's Fed policy regime relies on money fund arbitrage of the RRP -- rapidly shrinking the money funds would erode the Fed's control over rates."

Cloherty continues, "So if negative rates may not be legal, would cause dramatic shocks to market structure, and would erode Fed control over rates, why is everyone talking about negative rates? We think this all stems from the Fed's 2016 bank stress tests and the Street echo chamber. The "severely adverse market shock" scenario in the 2016 CCAR includes negative rates. That scenario also includes the unemployment rate hitting 10%, Q1 2016 to Q1 2017 GDP running at -5.1%, -7.5%, -5.9%, -4.2%, and -2.2%, the Dow Jones falling to 10395, etc. The severely adverse scenario is designed to ensure that banks can survive even the most extraordinary events -- it is not intended to be a Fed forecast."

The Strategist adds, "But the market became highly focused on negative rates just after the CCAR scenarios were released. The reason seems to be the way information flows around the Street. Modeling the negative rate scenario is extraordinarily difficult, as many of the rates that the Fed provides are not very useful in analyzing bank portfolios or liabilities. It is much more important that banks know what 3m LIBOR is, not the 3m Tbill rate that the Fed provides in their scenario. And predicting how LIBOR would behave in a negative rate environment is a difficult question."

He explains, "As a result, we suspect that there have been many calls from banks to dealer research departments to discuss what LIBOR would look like if Tbill rates fell to -50bp. Typically, when a research person gets a call from four or five clients in a row on the same subject, we assume that this issue is important to everyone, and we write up a report. Clients then see several Street research groups putting out pieces on the same subject, assume that there is fire behind all that smoke, and ask more questions. And the echo chamber begins."

Finally, Cloherty says, "But in this case, the initial phone calls were not because investors were suddenly much more worried about the Fed taking rates negative -- they were asking because there is a regulatory requirement for banks to figure out how the market would react if Tbill rates went to -50bp. So confusion about the CCAR scenario seems to have forced investors to more heavily weigh rates going negative, unsettling the market.... Adding our two cents to the stress test thought-experiment, we suspect that most banks will heavily weight the European negative rate experience in their CCAR estimates. But we think there are $2.5T reasons why assuming that the US follows Europe is a mistake."

Fed Chair Yellen was asked repeatedly about negative rates during her semi-annual report to Congress on Wednesday and played down the idea, saying it's not only unlikely, but probably illegal. CNBC explains in its recap, "Fed's Janet Yellen: Not sure we can do negative rate; rate cut unlikely," "As whispers mount that the Fed could implement negative interest rates as a way to goose economic activity, Chair Janet Yellen said Wednesday the central bank has not completely researched whether that would be legal."

The article says, "During her semiannual congressional testimony, Yellen said the Federal Open Market Committee discussed charging banks to hold excess reserves at the Fed but never fully researched the issue. "We didn't fully look at the legal issues around that," she said. "I would say that remains a question that we still would need to investigate more thoroughly." Asked whether she foresees the Fed cutting rates after just hiking its interest rate target in December, Yellen said she did not expect that to happen anytime soon as she considers the risk of recession low.... "I do not expect the FOMC is going to be soon in the situation where it's necessary to cut rates," she said."

The CNC piece adds, "In the 2010 examination of whether to use negative rates, Yellen said that outside of the legal questions, there was doubt raised over whether it was the right way to go. "We got only to the point of thinking it wasn't a preferred tool," she said. "We were concerned about the impact it would have on money markets, we were worried it wouldn't work in our institutional environment."

Crane Data released its February Money Fund Portfolio Holdings yesterday, and our latest collection of taxable money market securities, with data as of Jan. 31, 2016, shows a huge drop in (primarily Fed RRP) repo, and gains in Other (Time Deposits), CP, CDs, and Agencies. Money market securities held by Taxable U.S. money funds overall (tracked by Crane Data) increased by $6.0 billion in January to $2.612 trillion. MMF holdings decreased by $2.2 billion in December and $7.8 in November, increased by $61.8 billion in October, and decreased by $30.1 billion in September. Repos remained the largest portfolio segment, followed by Treasuries and Agencies. CDs were in fourth place, followed by Commercial Paper, Other (mainly Time Deposits) securities and VRDNs. Money funds' European-affiliated securities represented 27.0% of holdings, up dramatically from the previous month's 15.1%. Below, we review our latest Money Fund Portfolio Holdings statistics.

Among all taxable money funds, Repurchase Agreements (repo) plummeted at quarter-end, as they normally do, decreasing $182.2 billion (24.8%) to $553.2 trillion, or 21.2%, after increasing $176.6 billion in December, decreasing $49.9 billion in November, and falling $119.8 billion in October. (Treasury Repo decreased by a massive $222.0 billion to $283.6 billion.) Treasury securities fell $3.4 billion (0.7%) to $497.3 billion, or 19.0% of holdings, after dropping $33.2 billion in December and climbing $110.2 billion in November. Government Agency Debt increased $7.5 billion (1.65) to $491.3 billion, or 18.8% of holdings, after increasing $35 billion in December, decreasing $3.6 billion in November, and increasing $34.1 billion in October. The steady rise by Treasuries and Agencies reflects the shift of about $190 billion (so far) of Prime fund to Govt fund assets.

Certificates of Deposit (CDs) were up $33.0 billion (8.1%) to $442.9 billion, or 17.0% of holdings, after decreasing $51.8 billion in December, dropping $36.1 billion in November, and increasing $15.8 billion in October. Commercial Paper (CP) increased $36.3 billion (10.6%) to $379.7 billion, or 14.5%, while Other holdings, primarily Time Deposits, jumped $115.5 billion (99.2%) to $231.9 billion, or 8.9% of holdings. VRDNs held by taxable funds decreased by $600 million (3.6%) to $15.7 billion (0.6% of assets).

Among Prime money funds, CDs represent just under one-third of holdings at 31.0% (up from 29.1% a month ago), followed by Commercial Paper at 26.6% (up from 24.4%). The CP totals are primarily Financial Company CP (14.6% of total holdings), with Asset-Backed CP making up 8.1% and Other CP (non-financial) making up 3.9%. Prime funds also hold 7.2% in Agencies (down from 7.7%), 5.2% in Treasury Debt (down from 6.4%), 3.6% in Treasury Repo (down from 5.4%), 4.8% in Other Instruments, 4.9% in Other Instruments (Time Deposits), and 6.1% in Other Notes. Prime money fund holdings tracked by Crane Data total $1.427 trillion (down from $1.409 trillion last month), or 54.6% of taxable money fund holdings' total of $2.612 trillion.

Government fund portfolio assets totaled $683 billion, down from $687 billion in December, while Treasury money fund assets totaled $502 billion, down from $510 billion in December. Government money fund portfolios were made up of 56.9% Agency Debt, 19.2% Government Agency Repo, 8.0% Treasury debt, and 14.9% in Treasury Repo. Treasury money funds were comprised of 73.5% Treasury debt, 26.1% in Treasury Repo, and 0.4% in Government agency, repo and investment company shares. Government and Treasury funds combined total $1.185 trillion, or 45.4% of all taxable money fund assets.

European-affiliated holdings rose $312.1 billion in January to $704.3 billion among all taxable funds (and including repos); their share of holdings jumped to 27.0% from 15.1% the previous month. Eurozone-affiliated holdings rocketed $181.6 billion to $412.2 billion in January; they now account for 15.8% of overall taxable money fund holdings. Asia & Pacific related holdings increased by $1.0 billion to $285.9 billion (11.0% of the total). Americas related holdings decreased $306.0 billion to $1.619 trillion and now represent 62.0% of holdings. (The Americas drop and European jumps are both primarily the result of the reversal of a traditional quarter-end spike in Fed Repo and plunge in European bank debt.)

The overall taxable fund Repo totals were made up of: Treasury Repurchase Agreements, which plummeted $222.0 billion, or 43.9%, to $283.6 billion, or 10.9% of assets; Government Agency Repurchase Agreements (up $40.8 billion to $201.6 billion, or 7.7% of total holdings), and Other Repurchase Agreements ($68.0 billion, or 2.6% of holdings, down $1.0 billion from last month). The Commercial Paper totals were comprised of Financial Company Commercial Paper (up $17.1 billion to $208.6 billion, or 8.0% of assets), Asset Backed Commercial Paper (up $16.9 billion to $115.5 billion, or 4.4%), and Other Commercial Paper (up $2.2 billion to $55.6 billion, or 2.1%).

The 20 largest Issuers to taxable money market funds as of Jan. 31, 2016, include: the US Treasury ($497.3 billion, or 19.0%), Federal Home Loan Bank ($341.1B, 13.1%), Federal Reserve Bank of New York ($95.1B, 3.6%), BNP Paribas ($83.6B, 3.2%), Wells Fargo ($78.9B, 3.0%), Credit Agricole ($76.0B, 2.9%), Federal Home Loan Mortgage Co. ($67.1B, 2.6%), RBC ($60.4B, 2.3%), Bank of Tokyo-Mitsubishi UFJ Ltd ($56.4B, 2.2%), Societe Generale ($55.2, 2.1%), Federal Farm Credit Bank ($52.4B, 2.0%), Bank of Nova Scotia ($51.2B, 2.0%), JP Morgan ($48.8B, 1.9%), Bank of America ($47.0B, 1.8%), Credit Suisse ($43.9, 1.7%), Sumitomo Mitsui Banking Co ($40.4B, 1.5%), Toronto-Dominion Bank ($40.2B, 1.5%), Natixis ($36.1B, 1.4%), Citi ($36.0B, 1.4%), and HSBC ($35.3B, 1.4%).

In the repo space, the Federal Reserve Bank of New York's RPP program issuance (held by MMFs) remained the largest repo program with $95.1B, or 17.2% of money fund repo. The 10 largest Fed Repo positions among MMFs on 1/31 include: Fidelity Cash Central Fund ($7.2B in Fed RRP), Northern Trust Trs MMkt ($7.0B), UBS Select Treas ($6.3B), State Street Inst Lq Res ($5.5B), Fidelity Govt Money Market ($5.4B), Schwab Govt MMkt ($5.0B), Fidelity Govt Cash Reserves ($4.7B), Dreyfus Tr&Ag Cash Mgmt ($4.2B), BlackRock Lq T-Fund ($3.5B), and Franklin IFT MMP ($2.8B).

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 ($95.1B, 17.2%), BNP Paribas ($51.3B, 9.3%), Wells Fargo ($45.8B, 8.3%), Societe Generale ($45.7B, 8.3%), Bank of America ($36.5B, 6.6%), Credit Agricole ($33.7B, 6.1%), Credit Suisse ($31.3B, 5.7%), JP Morgan ($26.2B, 4.7%), RBC ($21.9B, 4.0%), and Citi ($21.8B, 3.9%).

The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: Bank of Tokyo-Mitsubishi UFJ Ltd ($44.8B, 4.8%), Credit Agricole ($42.3B, 4.5%), Sumitomo Mitsui Banking Co ($40.4B, 4.3%), RBC ($38.5B, 4.1%), DnB NOR Bank ASA ($33.3B, 3.5%), Wells Fargo ($33.1B, 3.5%), Bank of Nova Scotia ($32.7B, 3.5%), BNP Paribas ($32.3B, 3.5%), Skandinaviska Enskilda Banken AB ($31.3B, 3.3%), and Svenska Handelsbanken ($30.2B, 3.2%).

The 10 largest CD issuers include: Bank of Tokyo-Mitsubishi UFJ Ltd ($29.1B, 6.6%), Sumitomo Mitsui Banking Co ($28.8B, 6.6%), Toronto-Dominion Bank ($25.7B, 5.9%), Wells Fargo ($25.0B, 5.7%), Bank of Nova Scotia ($20.0B, 4.7%), Mizuho Corporate Bank Ltd ($19.8B, 4.5%), Bank of Montreal ($19.4B, 4.4%), RBC ($17.9B, 4.1%), Sumitomo Mitsui Trust Bank ($17.6B, 4.0%), and Canadian Imperial Bank of Commerce ($17.1B, 3.9%).

The 10 largest CP issuers (we include affiliated ABCP programs) include: BNP Paribas ($18.2B, 5.7%), JP Morgan ($17.7B, 5.5%), Commonwealth Bank of Australia ($17.5B, 5.5%), RBC ($16.8B, 5.3%), Westpac Banking Co ($13.4B, 4.2%), Bank of Tokyo-Mitsubishi UFJ Ltd ($12.9B, 4.0%), Sumitomo Mitsui Banking Co. ($11.3B, 3.5%), Bank of Nova Scotia ($11.1B, 3.5%), HSBC ($10.4B, 3.2%), and Australia & New Zealand Banking Group Ltd ($9.7B, 3.0%).

The largest increases among Issuers include: Credit Agricole (up $38.7B to $76.0B), BNP Paribas (up $38.3B to $83.6B), Societe Generale (up $27.9B to $55.2B), DnB NOR Bank ASA (up $25.8B to $33.3B), Skandinaviska Enskilda Banken AB (up $23.0B to $31.3B), Natixis (up $21.5B to $36.1B), Credit Suisse (up $19.5B to $43.9B), Federal Home Loan Bank (up $18.1B to $341.1B), Swedbank AB (up $17.4B to $23.8B), and Svenska Handelsbanken (up $14.9B to $30.2B).

The largest decreases among Issuers of money market securities (including Repo) in January were shown by: Federal Reserve Bank of New York (down $313.4B to $95.1B), Bank of NY Mellon (down $11.7B to $10.1B), Federal National Mortgage Association (down $7.0B to $27.4B), Bank of Montreal (down $5.0B to $30.2B), Federal Home Loan Mortgage Co. (down $3.7B to $67.1B), US Treasury (down $3.4B to $497.3B), Canadian Imperial Bank of Commerce (down $2.8B to $20.7B), Goldman Sachs (down $2.7B to $12.4B), National Australia Bank Ltd. (down $1.9B to $15.2B), and DBS Bank Ltd. (down $1.4B to $7.4B).

The United States remained the largest segment of country-affiliations; it represents 53.5% of holdings, or $1.396 trillion (down $301.0B). France jumped to second from fourth (11.0%, $285.9B), while Canada (8.5%, $220.9B) fell to third. Japan (7.0%, $182.0B) dropped to fourth, while Sweden (4.2%, $110.1B) jumped to fifth from eighth. The United Kingdom (3.5%, $90.6B) remained sixth, while Australia (3.0%, $78.8B) dropped to seventh from fifth. The Netherlands (2.4%, $62.0B), Switzerland (2.1%, $54.7B), and Germany (1.9%, $48.4B) round out the top 10 among country affiliations. (Note: Crane Data attributes Treasury and Government repo to the dealer's parent country of origin, though money funds themselves "look-through" and consider these U.S. government securities. All money market securities must be U.S. dollar-denominated.)

As of Jan. 31, 2016, Taxable money funds held 27.9% (down from 33.9%) of their assets in securities maturing Overnight, and another 13.5% maturing in 2-7 days (up from 9.4%). Thus, 41.4% in total matures in 1-7 days. Another 23.7% matures in 8-30 days, while 12.0% matures in 31-60 days. Note that over three-quarters, or 75.1% 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 10.8% of taxable securities, while 9.8% matures in 91-180 days, and just 2.3% matures beyond 180 days.

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

Our February Money Fund Market Share, with data as of Jan. 31, 2016, shows asset decreases for about half of the largest US money fund complexes in the latest month and increases for most money fund complexes over the past 3 months. Assets decreased by $21.8 billion overall, or 0.8%, in January, but rose by $26.0 billion, or 1.0%, over the past 3 months. For the past 12 months through Jan. 31, total assets are up $61.4 billion, or 2.4%. The biggest gainers in January were Northern, UBS, Fidelity, Schwab, Vanguard and Invesco, rising by $5.8 billion, $3.0B, $2.5B, $2.1B, $1.5B, and $1.3B, respectively. Fidelity, Goldman Sachs, Northern, Schwab, and Morgan Stanley had the largest increases over the 3 months through Jan. 31, 2016, rising by $26.4 billion, $19.4B, $10.2B, $7.0B, and $6.8B, 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.)

Over the past year through Jan. 31, 2015, Fidelity showed the largest asset increase (up $43.1B, or 10.6%), followed by Morgan Stanley (up $22.2B, or 20.3%), Goldman Sachs (up $14.7B, or 9.7%), SSGA (up $9.2B, or 11.1%), and Vanguard (up $8.7B, or 5.1%). Other asset gainers for the past year include: Northern (up $8.6B, 10.4%), BofA (up $4.3B, or 8.9%), Franklin ($4.2B, 22.6%), BlackRock (up $2.0B, 9.3%), and Wells Fargo (up $2.3B, or 2.0%). The biggest decliners over 12 months include: JP Morgan (down $26.4B, or -10.3%), Invesco (down $7.9B, or -13.0%), Western (down $6.8B, or -15.1%), Dreyfus (down $4.1B, or -2.5%), and Deutsche (down $3.8B, or -11.8%). (Note that money fund assets are volatile month to month.)

Our latest domestic U.S. money fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $448.0 billion, or 16.8% of all assets (up $2.5 billion in January, up $26.4B over 3 mos., and up $43.1B over 12 months). Fidelity was followed by JPMorgan with $229.6 billion, or 8.6% market share (down $4.5B, down $9.9B, and down $14.8B for the past 1-month, 3-mos. and 12-mos., respectively). BlackRock remained the third largest MMF manager with $225.1 billion, or 8.4% of assets (down $9.3B, up $8.0B, and up $3.2B). Federated Investors was fourth with $211.9 billion, or 7.9% of assets (up $7.2B, up $5.7B, and down $4.0B). Vanguard remained in fifth place with $179.3 billion, or 6.7%, (up $2.1B, up $3.5B, and up $5.7B).

Goldman Sachs moved ahead of Schwab and Dreyfus to become the sixth largest MMF managers, with $167.8 (6.3%) billion in total, while Schwab ($164.5B, 6.1%) stayed in seventh place. Dreyfus fell to eighth place with $163.0B (6.1%). Also, Morgan Stanley moved up a spot to ninth place with $131.0B (4.9%), dropping Wells Fargo to tenth place with $122.8B (4.6%). The eleventh through twentieth largest U.S. money fund managers (in order) include: SSgA ($95.7B, or 3.6%), Northern ($85.3B, or 3.2%), BofA ($51.7B, or 1.9%), which moved ahead of Invesco ($51.6B, or 1.9%), Western Asset ($44.0B, or 1.6%), First American ($40.0B, or 1.5%), UBS ($36.8B, or 1.4%), Deutsche ($30.5B, or 1.1%), Franklin ($23.6B, or 0.9%), and RBC ($16.1B, or 0.6%), which displaced American Funds from the top 20. Crane Data currently tracks 65 U.S. MMF managers, the same number as last 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). 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 ($454.3 billion), JPMorgan ($352.2 billion), BlackRock ($318.1 billion), Goldman Sachs ($254.7 billion), and Federated ($220.0 billion). Dreyfus/BNY Mellon ($187.6B), Vanguard ($180.8B), Schwab ($166.5B), Morgan Stanley ($153.8B), and Wells Fargo ($118.8B) round out the top 10. These totals include offshore US Dollar money funds, as well as Euro and Pound Sterling (GBP) funds converted into US dollar totals.

Finally, our February Money Fund Intelligence and MFI XLS show that both net and gross yields increased in January after jumping in December on the Fed hike. The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 815), rose 3 basis points to 0.09% for the 7-Day Yield (annualized, net) Average, while the 30-Day Yield also went up 3 basis points 0.08%. The Gross 7-Day Yield was 0.30% (up 4 basis points), while the Gross 30-Day Yield was 0.29% (up 5 basis points). Our Crane 100 Money Fund Index shows an average 7-Day (Net) Yield of 0.18 (up 5 basis points) and an average 30-Day Yield of 0.16% (up from 0.10%). The Crane 100 shows a Gross 7-Day Yield of 0.37% (up 5 basis points), and a Gross 30-Day Yield of 0.35% (up 6 basis points). For the 12 month return through 1/31/16, our Crane MF Average returned 0.03% (and our Crane 100 returned 0.05%. The number of funds rose to 1,167, up one from last month.

Our Prime Institutional MF Index (7-day) yielded 0.20% (up 2 bps) as of Jan. 31, while the Crane Govt Inst Index was 0.10% (up 4 basis points) and the Treasury Inst Index was 0.07% (up 3 bps). The Crane Prime Retail Index yielded 0.05% (up 2 bps), while the Govt Retail Index yielded 0.03% (up 2 bps) and the Treasury Retail Index was 0.02% (up 1 bps). The Crane Tax Exempt MF Index yielded 0.01% (unchanged). The Gross 7-Day Yields for these indexes were: Prime Inst 0.45% (up 6 basis points from last month), Govt Inst 0.29% (up 6 bps), Treasury Inst 0.21% (up 4 bps), and Tax Exempt 0.11% (up 1 bp) in January. The Crane 100 MF Index returned on average 0.01% for 1-month, 0.02% for 3-month, 0.01% for YTD, 0.05% for 1-year, 0.03% for 3-years (annualized), 0.04% for 5-year, and 1.24% for 10-years. (Contact us if you'd like to see our latest MFI XLS, Crane Indexes file or market share numbers.)

In other news, Barclays money market strategist Joseph Abate discusses GCF Settlement and T-Bill supply in his latest "US Weekly Money Market Update." He writes, "The largely arcane trade settlement details in the blind, brokered inter-dealer GCF repo market have suddenly become a hot topic. Recall that the GCF market is a centrally cleared platform, with the Fixed Income Clearing Corporation (FICC) acting as the counterparty to every sale and purchase. Since trades are with a single, central counterparty, sales and purchases of the same collateral type net. Volume in the market -- term and overnight -- is about $300bn/day and is concentrated in Treasuries and MBS. Mechanically, trades in the GCF market are settled via tri-party. Cash and collateral are exchanged in accounts belonging to the FICC at one of the two clearing banks. Until recently, all trades in tri-party required copious amounts of intra-day credit from the clearing banks. The Federal Reserve has pushed the tri-party market to reduce its reliance on intra-day credit provided by the clearing banks. By mid-2015, intra-day credit was practically eliminated."

He adds, "However, it has proven much harder to remove intra-day credit from a subsector of the tri-party market: trades between GCF members that clear through different clearing banks. These trades account for approximately $45bn of the $300bn daily volume on GCF. Without dwelling too deeply on the finer points of securities clones and the daily unwind process, the removal of intra-day credit here seems intractable given the technological expense and time required. As a result, the FICC will suspend GCF repo clearing across different clearing banks in mid-July 2016."

Finally, Abate says, "The Treasury reduced coupon issuance in order to make room for additional bill supply. We look for bill issuance to increase by $250bn this year. The Treasury will likely increase bill supply by $135bn in February and March to reach its quarter-end cash target of $320bn.... We expect the extra bill supply in February and March to keep the GCF and fed funds rate trading heavy. At the same time, this should reduce money fund demand for the RRP. The Treasury was a bit more hesitant to introduce a new 2m bill maturity than we expected. While the Treasury can increase bill supply by $250bn with its current mix of bill maturities, accomplishing this might be easier if it sold $25bn/week in 2m bills. Our sense is that the Treasury's uncertainty about the scale of the increased demand for government safe assets this year may be keeping it cautious about introducing a new maturity."

Three papers released last week address three of the biggest questions in the money markets of late -- cash investor concerns, demand for Prime MMFs, and, a surprise new arrival (or revival), negative yields. Fitch Ratings' published, "Yields, Counterparty Risk Fuel Angst for Treasurers," which surveys corporate treasurers on their biggest cash investing challenges. Moody's Investors Service wrote, "Higher Yields and Rising Investor Anxiety Support Demand for Large US Prime MMFs," which looks at the possibility of Prime outflows. And, finally, BofA Merrill Lynch released commentary on "Negative Rates in the US." We excerpt from and summarize the three reports below.

On the possibility and implications of negative rates in the U.S., BofA's Mark Cabana writes, "With other major central banks adopting negative rates, discussion has recently shifted to whether the Fed would consider a similar policy. While not our baseline scenario, if the US economy were to sufficiently weaken we believe the Fed could consider negative rates as a means to ease policy.... To implement negative interest rates, the Fed could potentially utilize the overnight reverse repo facility (ON RRP) and interest rates on excess reserves (IOER)."

Cabana says, "Adopting a negative rate policy could result in charges on institutional or nonoperational bank deposits and increase the risk that charges get passed along to a broader set of depositors. Such a policy would also create operating challenges for money market mutual funds, where they might need initiate customer fees, operate at a loss, or close their funds. In addition, negative rates would likely necessitate changes to US Treasury Department auction systems to issue bills and nominal coupons at prices above par. Unproductive shifts in savings and payment behavior could also result from a prolonged period of deeply negative interest rates."

He adds, "Another complication of negative rates is the $3 trillion money fund industry and its ability to operate in such an environment.... To deal with low returns, money funds could consider charging customers, reducing management fees, seeking subsidies from fund sponsors, or closing their doors.... Although negative rates have posed challenges for the $1.15 trillion (E1.04 trillion) in European money funds, the industry has adapted.... [S]ome European money funds employ "reverse stock splits" or "reverse exchange mechanisms" where outstanding shares in the fund are gradually reduced to reflect the negative yield. Some European funds have also applied explicit customer charges.... `U.S. money funds might consider applying similar mechanisms in a negative rate environment."

Note: Crane Data has been asked about negative yields and European money funds a number of times this week. For more information, see the following Crane Data News articles in our Archives: "FT on Negative Rates in Europe" (11/28/14), "Northern's New Euro VNAV MMF" (11/6/14), "Moody's on Negative Yields, Euro MFs" (11/3/14), "BlackRock Activates "Reverse Distribution Mechanism" on Euro Govt MF" (9/15/14), "Moody's Reviews Euro Money Fund Preparations for Negative Yields" (3/15/13), "World Turned Upside Down: JPM Flex Class For Negative Euro Rates" (10/19/12), "Moody's on JPM Euro Liquidity Funds' Launch of Flex Distributing Class" (11/21/12), "More on Ultra-Low Treasury Rates, Fee Waivers and Negative Yields" (1/7/09), "Federal Reserve Cuts Target to Zero; Can Money Market Funds Survive?" (12/16/08), and "Video: "Crane Says Money Fund Yields May Fall to Less Than Zero"" (12/11/08).

Fitch's survey piece asks, What issues are keeping corporate treasurers up at night? Authors Roger Merritt, Alastair Sewell and Charlotte Quiniou write, "Corporate treasurers face numerous headwinds in investing cash and funding their balance sheets, many brought on by post-crisis regulatory initiatives. In terms of investing cash, low yields remain the number one concern for treasurers in a recent Fitch survey. For those managing cash in the U.S., the recent 'lift off' by the Federal Reserve may help somewhat, but no relief is in sight for Euro investors where yields are decidedly negative."

They continue, "Somewhat surprisingly, regulations (money fund reform and Basel III) have taken a back seat in recent months among corporate treasurers' cash investing challenges. Why? Because counterparty risk has emerged as a primary concern for treasurers, placing second in a recent survey conducted by Fitch." According to the survey, 80% cited low yields as the biggest cash investing challenge, while about 60% said counterparty risk, and 55% said Basel 3 Banking regulations. Just under 40% said money fund regulations, while around 25% said supply, and 20% said trapped cash.

Fitch says, "On the topic of money market fund reform, corporate treasurers are most concerned with how yields will be affected, the requirement that U.S. institutional prime money funds implement fees & gates, and the difficulties they are likely to face in adapting to this new environment. In fact, the liquidity fees & gates prospect is proving to be quite a large hurdle for treasurers who need ready access to operational cash to fund their business." The survey found that 55% said impact on yields was the number one reform-related concern, followed by fees and gates at 51% and operational at 50%. Intraday was around 40%, while the floating NAV was well down the list at 35%.

The data also revealed treasurers likelihood of remaining in Prime, writing, "In fact, roughly 55% of treasurers that Fitch surveyed said their allocations to institutional prime money market funds would stay the same or go up once these funds switch to floating NAV. This indicates that some modest exposure to mark-to-market pricing is not an overarching concern. Having access to liquidity on an intra-day basis also appears to be an important feature of money funds that many treasurers are seeking to retain." The survey said 45% would stay the same, 10% would increase Prime Inst allocations, 24% would decrease, and 21% would eliminate altogether.

Fitch continues, "Many corporate treasurers still hold large amounts of "back-up" cash on balance sheet in case market conditions change. A sizeable number of these treasurers also do not segment their cash into so-called liquidity buckets, which could help generate more yield by giving up some liquidity. Why is this? Until now, money funds have been the ideal vehicle to meet liquidity needs, providing cash managers with a "free lunch" of yield, liquidity and preservation of capital. However, looming market changes means the free lunch is over and the cost of same-day liquidity will go up. It will be instructive over time as corporate treasurers come to terms with the new, more challenging cash management paradigm whether they become more open to cash segmentation."

Finally, Moody's report estimates that Prime Inst outflows could exceed 25%. It states, "Prevailing risk-off sentiment will keep investors in money market funds. Although total US prime money market fund assets contracted in 4Q 2015 owing to previously announced prime to government fund conversions, asset levels in the 10 largest Moody's rated US prime funds rose 4% to $443 billion. Higher yields on prime money market funds following the Fed's December rate increase -- along with waning investor risk appetites -- should sustain demand for cash investments in 1Q 2016. That said, investor demand for prime money market funds will likely reverse in the second and third quarters of 2016 ahead of the implementation of new money fund reforms in October. Investor-directed outflows are likely to be lumpy, since money fund investors tend to act together, and could exceed 25% of institutional prime fund assets."

It adds, "Prime fund managers shortened WAMs to their lowest levels in a year in 4Q 2015 in anticipation of a December Fed action. However, with year-end behind us and the potential for market instability to slow the pace of Fed rate increases, we expect prime money market funds to extend WAMs in 1Q 2016. We expect prime fund managers to seek yield opportunities through increasing investment in longer-tenor securities.... Liquidity profiles of US prime funds strengthened in 4Q 2015, with 38% of assets maturing overnight (also includes US Treasuries with 18 months or less to maturity) at December month-end, up from 28% at September month-end."

The February issue of our flagship Money Fund Intelligence newsletter, which was sent to subscribers Friday morning, features the articles: "MMF Yields Higher & Spread Returns; Outflows Ahead?," which looks at how the increases in yields and spreads could affect fund flows; "MF University Experts on Supply & Demand in '16," where we recap the hot topics from last month's MFU conference; and "Worst Over for Fee Waivers; Earnings Up," which discusses how money fund managers are reducing fee waivers. We have also updated our Money Fund Wisdom database query system with Jan. 31, 2016, performance statistics, and sent out our MFI XLS spreadsheet Friday morning. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our January Money Fund Portfolio Holdings are scheduled to ship Tuesday, February 9, and our February Bond Fund Intelligence is scheduled to go out Friday, February 12.

MFI's lead article on "MMF Yields," says, "After a Fed-related jump in December, money fund yields continued to rise in January. But the all-too-brief party may be at an end, as expectations for additional hikes sank along with the stock market the past month. Talk of negative yields even surfaced this week, and assets experienced their first drop in 4 months, down $22.4 billion, in January. Preparations for MMF Reforms continued, and speculation focused on how much investor cash might leave Prime funds later in 2016."

The piece adds, "Our Crane Money Fund Average 7-Day Yield, a simple average of all taxable MMFs, rose to 0.09% from 0.06% at yearend (and triple the 0.03% from 11/30/15). The Crane 100 MF Index, which tracks the largest MMFs -- mainly Institutional and Prime -- rose to 0.18% from 0.15% on 12/31 and 0.07% on 11/30.... MMF yields rose less than the Fed hike, but more than expected of the move was passed through to investors. Gross yields rose by about 12-15 bps over 2 months (0.18% to 0.30% for the Crane MFA and 0.22% to 0.37% for the Crane 100), while Expenses rose by just 2-5 bps."

Our MFU recap reads, "Our 6th annual Money Fund University convened Jan. 21-22 in Boston and attracted a record 125 people. The "basic training" event, targeted at those new to the money fund industry, featured primers on interest rates, money market securities, the Federal Reserve, ratings, portfolio management, and money fund regulations and reforms. One of the overriding themes of this event was the supply outlook for 2016, which experts say should be more positive than 2015. Conference host and President of Crane Data Peter Crane commented, "This was our biggest and best MFU yet; it was encouraging to see new blood in the space given the change and challenges MMFs face."

It continues, "Crane kicked off the event with a session called, "History and Current State of Money Funds," reminding attendees that the industry has been remarkably stable since the Financial Crisis, gaining assets slightly in each of the past four years. "After six years of 0% yield and radical regulatory change, if you are still in a money market fund, [this likely means] you're not going anywhere." Crane said the migration out of Prime funds ultimately won't be as dramatic as many expect due to the yield advantage they will have over Government funds in a rising rate environment."

The piece adds, "That sentiment was echoed by others as well. He also expects inflows from the banking sector. "I believe you are going to hear a giant sucking sound out of the banking sector once money fund yields get to 100 basis points," he commented. Until then, much change is anticipated in the MMF space as reforms go into effect on Oct. 14, 2016. Fund managers, not quite sure which way the money will flow, are ready for everything. Crane added, "A lot of people are getting buckets out because they don't know where it's going to rain."

The "Worst Over for Fee Waivers" article says, "The December interest rate hike was a welcome relief for fee-starved money fund managers. As Crane Data's Peter Crane told Ignites in the article "`Fed Hike a 'Lifeline' for Money Funds, Waivers Drop to $5.5B," "The Fed hike was a lifeline and huge windfall for money fund managers." The Ignites piece adds, "The 25-basis-point federal funds rate increase will likely increase the amount of fees shops can collect from managers by 5 to 10 basis points. That would boost annualized revenues by $1.3 billion, to $2.6 billion, he adds. Waivers will likely decrease to 2009 levels this year and could eventually drop to levels last seen in 2007 and 2008 if the central bank raises rates again this year, says Crane."

We also review the Prime fund landscape in the sidebar, "The Big Sort: Inst or Retail?" It says, "We've reported frequently on the $264.1 billion converting from Prime to Government, but what about the remaining Prime money funds? Which will declare as pure "Retail" and which will become all "Institutional" and float in October." We provide a brief overview of how the 8 largest money fund managers are sorting out their Prime funds. We also write "China Passes Ireland, Regs," about how China became the second largest MMF country.

Our February MFI XLS, with Jan. 31, 2016, data, shows total assets decreasing $22.4 billion in January after increasing $44.2 billion in December, rising $3.5 billion in November, jumping $56.5 billion in October, and declining by $9.4 billion in September. Our broad Crane Money Fund Average 7-Day Yield climbed by 3 bps to 0.09% for the month, while our Crane 100 Money Fund Index (the 100 largest taxable funds) increased 5 basis points to 0.18% (7-day).

On a Gross Yield Basis (before expenses were taken out), funds averaged 0.30% (Crane MFA, up 4 basis points) and 0.37% (Crane 100, up 5 bps). Charged Expenses averaged 0.21% (up 1 bps) and 0.19% (unchanged) for the two main taxable averages. The average WAM (weighted average maturity) for the Crane MFA was 35 days (up 1 day from last month) and for the Crane 100 was 36 days (up 2 days). (See our Crane Index or craneindexes.xlsx history file for more on our averages.)

Finally, Crane Data released the preliminary agenda for its upcoming Money Fund Symposium, which will be held June 22-24 at the Philadelphia Marriott. Registration is now live (and is $750) and the website and brochure are now available. (E-mail us at info@cranedata.com for the PDF brochure, or visit www.moneyfundsymposium.com for details.) We're also making preparations for our next European Money Fund Symposium, Sept. 20-21, in London, and our first Bond Fund Symposium, tentatively scheduled for March 23-24, 2017 in Boston.

"One of the hottest questions we've been getting recently, other than who is switching to government, is about the space beyond money market funds -- what's developing there, who is launching products, and what are the different options there," said Crane Data President Pete Crane, speaking at our recent Money Fund University in Boston. Crane and BofA Global Capital Management's Jonathan Carlson presented at a session called "Offshore MMFs, SMAs, and Ultra-Short Bonds." Crane discussed the burgeoning "Conservative Ultra-Short Bond Fund" sector, while Carlson focused on Separately Managed Accounts. We briefly excerpt from this session below (look for more in our upcoming February Bond Fund Intelligence), and we also review the U.S. Treasury's latest "Quarterly Refunding Statement," which indicates increasing Treasury Bill issuance in coming months.

At MFU, Crane estimated that the size of the Ultra-Short Bond Fund (USBF) market at about $200 billion, with another $100 billion or so in Short-term Bond ETFs. The SMA market is a bit harder to pinpoint, but he estimates it at about $400 billion, based on a recent report from the Treasury's Office of Financial Research, "Private Fund Data Shed Light on Liquidity Funds," which tracks Managed Account assets. (For a video of Crane's comments on Ultra-Short Bond Funds at MFU, see Crane Data's Facebook page, and for the slides to this session see the MFU Download Center.)

"We dove in about a year ago and started tracking the Ultra Short Bond Fund category," said Crane, referencing the launch of Crane Data's new Bond Fund Intelligence monthly newsletter. (In BFI, Crane Data tracks the performance of $1.663 trillion in bond fund assets, about half the universe, with a focus on the Short- and Ultra-Short sectors <b:>`_.) Crane added, "What you are seeing now in the Ultra-Short space is segmentation. We're creating a new Conservative Ultra Short Bond Fund category, because there's a cluster of new funds coming out -- from Deutsche, Morgan Stanley, SSGA, to name a few. Some of them are like "old" 2a-7 funds, some are beyond that. There are a series of different points where these bond funds are setting up camp. `How investors' react to them depends on where spreads go."

The attraction of Ultra-Short Bond Funds is they only price out to the third decimal place (vs. 4 decimal places for new floating NAV MMFs), so the NAV is not going to move very often. Crane explained, "Of course the further out on the curve you go, the further down the credit spectrum you go, the more volatility you're going to get. But you may have an odd scenario where the conservative Ultra-Short bond fund fluctuate less than a Prime money market fund." He concluded, "The asset managers have to be ready. Wherever their investors want to move they need a bucket, so they are putting out buckets. It is truly a new frontier, and what gains investor acceptance is anyone's guess."

On Separate Accounts, Carlson said they are poised for growth. "If you are accepting of the idea of a Variable NAV, why would you not be accepting of the idea of cutting your fees and determining your own destiny? This is ultimately the biggest plus of the separate account space. You put your money in, you determine your risk tolerance -- all of that gets built right into your separate account." He added, "You are not diluted by anybody else's activity. You own the securities." In addition, he said, "You get your money when you want it, there's no such thing as a gate or a fee." Carlson added that the investment fees are typically lower than money fund management fees, and the minimums range anywhere from $10 million to $500 million, depending on the manager.

The key is educating clients about Separate Accounts, as many don't know they are available or what their benefits are. Of their clients, Carlson said the number one priority is principal preservation. The second priority, he said, is "make sure you have it when I need it, not when you tell me I can have it." The third, and its always number 3, is "give me a rate of return that's commensurate with the risk in the portfolio." Added Carlson, "My first job is to keep the guy that decided to hire me, employed. I don't want to buy a bond that is going to cause him angst."

In other news, the Treasury will increase T-bill issuance in FY 2016, according to a release "Quarterly Refunding Statement of Acting Assistant Secretary for Financial Markets Seth B. Carpenter." It says, "In November 2015, Treasury reiterated intentions to increase Treasury bill issuance. The supply of bills outstanding as a percentage of the total Treasury portfolio is at a multi-decade low while demand for Treasury bills is high and is expected to grow. Given current projected financing needs over the next few years and the existing auction schedule, Treasury will modestly reduce the issuance of coupon securities in order to increase Treasury bill issuance."

Furthermore, in a "Report to the Secretary of the Treasury from the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association," Chair Dana Emery writes, "Treasury believes it prudent to increase the level of Treasury bills outstanding over the coming quarters. Given demand for high quality liquid collateral by market participants, the Committee agreed that Treasury bill issuance should increase, and that Treasury should continue to study the potential addition of two month Treasury bills. Demand for Treasury bills remains strong."

The TBAC report continues, "The Committee continued its recommendation from the November 2014 meeting that Treasury increase its Treasury bill issuance in order to reduce interest expense, to enhance short-term market function, and to increase Treasury's operational cash balance. Treasury bill demand is expected to increase given demand for high- quality liquid collateral given money market and other regulatory changes. However, if Treasury were to significantly increase in Treasury bill issuance, it would likely need to reduce nominal coupon and TIPS issuance over the coming quarters."

Finally, the "Minutes of the Meeting of the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association February 2nd," says, "Deputy Assistant Secretary Clark noted that demand for Treasury bills is high and is expected to continue to grow throughout FY2016. DAS Clark commented that, consistent with Treasury's commitment at the November 2015 quarterly refunding to increase bills issuance, Treasury may need to downwardly adjust nominal coupons and TIPS auction sizes."

Finally, the minutes state, "Next, the Committee turned to a presentation on Treasury bill market dynamics.... The presenting member began by noting that money market mutual fund reform and the need for high quality assets will likely result in increased demand for Treasury bills. The presenting member estimated that Treasury could meet this demand by increasing bills issuance by $230 billion in FY2016 and by an additional $65 billion in FY2017.... [T]his increase in bills issuance might justify the introduction of a new bill maturity. However, the presenting member also noted that an increase in bills outstanding of this magnitude was unlikely to result in significantly higher yields for the current suite of bill securities, given the aforementioned demand dynamics.... Members broadly agreed that the case for increasing bills issuance is strong, but acknowledged that the estimates for bill demand vary widely. As such, several noted that a gradual approach to increasing bills and reducing coupon issuance was prudent."

How much cash will shift out of Prime money funds into Government money funds? The question has been asked ever since Money Market Fund Reforms were passed in July 2014. While it was pure speculation last year, the reclassification of more than $264 billion in Prime funds to Government funds in late 2015 and early 2016 ($172 billion has moved to date) has already partially answered the question. Now the approach of the October floating NAV and gates and fees deadline are bringing the question of investor behavior to the fore. The fund conversions were the first wave of money market reform-driven flows; the second wave will come from investors potentially moving assets. The big question we're getting now is: How much will investors move out of Prime and into Government funds, or other vehicles, in 2016? The answer, of course, is that no one knows for sure. But we'll examine the question, recap some of the estimates out there, and give you our own best guess below.

First, how much money is in each type of money fund currently? According to the Investment Company Institute's latest "Money Market Fund Assets" report (as of Jan. 27, 2016), total Government money fund assets are almost equal to Prime MMF assets -- $1.267 trillion is in Prime vs. $1.241 trillion in Government. Among Prime assets, $797.8 billion is Institutional and $469.6 billion is Retail. Over the past year, Government assets have gained $255.8 billion, or 26%, primarily due to the "going Government" conversions. Meanwhile, Prime assets dropped $188 billion, or 12.9%. So with almost $1.3 trillion still in Prime, the range of outflows is anywhere from zero to $1.3 trillion.

What are the projections for outflows in 2016? Estimates range from $250 billion to $1 trillion, but the major variables include rate levels, spreads between Prime and Government funds, and investor acceptance and behavior. We continue to take the "under" and are now projecting additional outflows of around $250 billion, or 20% of the remaining Prime assets. We base this estimate on at least another Fed hike (to widen spreads further) and on inflows from bank deposits and bond funds "back-filling" much of the money that shifts due to convenience and investment restrictions. We also believe that the shifts will not occur until the last minute -- late September or October of 2016.

Discussions about the size of potential outflows were prevalent at our recent Money Fund University. Barclays Joseph Abate said, "It's anybody's guess as to how much will move from Prime to Govie in 2016." His projections fall in the mainstream, estimating that about $300 billion will shift from Prime to Government. Abate added, "If the [prime] fund generates a high enough yield, it may overcome the institutional investors' displeasure with an emergency fee and gate structure, especially since fee and gates don't apply unless there is a major catastrophe."

J.P. Morgan Securities reiterated in its latest "Short-Term Market Outlook and Strategy" that it expects an additional $400 billion to leave Prime funds via investor outflows with a portion potentially finding its way into government MMFs. JPM's Teresa Ho also stated this at MFU as well, saying she expects about $400 billion in investor flows on top of the Prime funds that have already, or are in the process of, converted.

In our Oct. 19, 2015 Link of the Day, entitled, "Goldman Sachs AM Sees Almost $1 Trillion Leaving Prime Money Market Funds," we cited commentary from GSAM that projected large outflows from Prime. They wrote then, "We expect that the switch to a floating NAV and the imposition of fees and gates will result in a large migration of assets out of Prime funds. The global money market industry is roughly $3.3tn in size, $2.7tn of which is in the US. Prime funds account for just over half the US total, about $1.4tn. We estimate as much as 70% of the $1.4tn [$980 billion] in Prime funds will migrate elsewhere due to uncertainty around how the transitional period will play out, along with the fact that several institutions, governments and agencies have investment policies that only allow cash to be invested in stable value instruments."

Last year, we wrote also about an estimate from Capital Advisors, which predicted total prime outflows of $615 billion, which includes both investor outflows and fund conversions. (See our April 10, 2015 News, "Capital Advisors' Pan, Campbell on Recent MMF Moves; $615B Outflow?.")

Surveys of corporate treasurers also shed some light on the potential for Prime outflows, though this information has given mixed signals. JP Morgan's 2015 Global Liquidity Survey found that 70% of institutional investor who are currently invested in Prime funds will stay in them. (See our Nov. 16 News, "JP Morgan Global Liquidity Survey Shows 70 Percent Will Stick w/Prime.") Sungard also released a survey indicating light prime outflows. (See our Nov. 9 News, "Sungard Survey Shows Majority of Corps Will Stick w/Prime; Portals"). This article says, "Sixty percent of treasurers in the U.S. anticipate that they will continue to invest in prime MMFs at a similar level once SEC reforms are implemented in 2016. Thirty-seven percent expect to decrease their holdings, identifying accounting, intraday liquidity and investment policy constraints as the biggest obstacles."

On the other hand, our July 9 News, "AFP Liquidity Survey 2015 Shows Safety Still First, Record Deposits," indicates potentially significant outflows. The survey says, "Nearly half (46 percent) anticipate their companies will either discontinue investing in prime funds altogether or move some or all their holdings out of those funds. Specifically, 29% said they would not invest in Prime funds altogether and 17% would move out of Prime funds. Also, 37% would not make any significant changes to how it invests in Prime funds, while 20% would move into Government funds or bank products."

What about perhaps the most important variable, spreads? As of Feb. 1, our Crane Prime Inst Index shows a 7-Day Yield of 0.21% vs 0.07% for our Crane Treasury Inst Index -- a spread of 14 basis points. (The Crane Govt Inst Index is yielding 0.09% -- a spread of 12 basis points.) That could potentially widen, particularly if the Fed raises rates again before the Oct. 14, 2016, reforms kick in, which is projected to happen at least once, possibly twice. Historically, the spreads between Prime and Treasury is about 24 basis points, as our 10-year returns show. The Crane Prime Inst Index had a 10-year average annualized return of 1.32% compared to the Crane Treasury Inst Index at 1.08%. The 10-year return for the Crane Govt Inst Index is 1.22%.

Note: For more on previous fund conversions and fund re-categorizations, see our Jan. 6 News, "Rolling w/Reform Changes II: Recap of '15 Announcements, '16 Plans" for a recap of conversions to date, and see our Jan. 15 News, "The Big Sort: Who's Going Retail or Floating Inst Among Prime MMFs?." Finally, watch for more coverage of yields, spreads and potential outflows in our pending February issue of Money Fund Intelligence.

Standard & Poor's Ratings Services published an updated "Principal Stability Fund Rating Methodology," which includes "new portfolio diversification metrics for investment in banks rated in our highest short-term category ('A-1+'), changes to cure periods for withdrawn and downgraded securities, further differentiation of the methodology at each PSFR level and expansion of credit quality metrics for collateralized repurchase agreements (repo)," according to a spokeswoman. The press release says, "Standard & Poor's Ratings Services has published its updated methodology for its principal stability fund rating (PSFR) criteria in an article titled "Principal Stability Fund Rating Methodology." The criteria apply globally and fully supersede the prior global criteria as well as any region-specific PSFR criteria. The criteria publication follows a request for comment (published March 30, 2015), and the changes from the request for comment are summarized in a separate article, titled "Standard & Poor's Summarizes The Request For Comment Process For The Principal Stability Fund Rating Criteria."

The S&P release explains, "A PSFR, commonly referred to as a money market fund rating, is a forward-looking opinion about a fixed-income fund's ability to maintain principal value. PSFRs are typically assigned to funds that seek to maintain stable or, as is prevalent in non-U.S. funds, accumulating NAVs. PSFRs have an "m" suffix (e.g., 'AAAm') to distinguish the principal stability fund rating from Standard & Poor's issue or issuer credit ratings. We expect that the PSFR criteria may result in downgrades on funds in certain countries. The downgrades would be primarily due to applying the change in diversification metrics to funds. Portfolio amortization and portfolio rebalancing may partly or wholly offset the rating impact. These criteria are effective immediately. We intend to complete our review of all affected ratings within the next three months."

The most popular change among money fund providers will likely be that the new "Rating Methodology" ease the criteria for A-2 rated counterparties. It says about "Repo counterparty risk," "Counterparties (such as broker/dealers) that do not have a rating of 'A-1+', 'A-1', or 'A-2' from Standard & Poor's or do not have a guarantee of all their obligations from an equivalently rated Standard & Poor's-rated entity, are "higher-risk investments." Since we view 'A-2' rated counterparties as sufficiently rated but more likely to force reliance upon the collateral, a repo rated 'A-2' (i.e., whose counterparty is rated 'A-2') is limited to overnight maturities and a fund aggregate and per issuer exposure limit comparable with 'A-1', and more limited than 'A-1+' rated repos (see table 12). This applies to all repo, regardless of the types of collateral backing these transactions."

A document entitled, "Standard & Poor's Summarizes The Request For Comment Process For The Principal Stability Fund Rating Criteria," encapsulates the major changes, explaining, "On March 30, 2015, Standard & Poor's Ratings Services published a request for comment (RFC) on our proposed revisions to the approach we use to rate principal stability funds. Following feedback from the market, we finalized and published our criteria, titled "Principal Stability Fund Rating Methodology," on Feb. 1, 2016.... This RFC Process Summary provides an overview of the changes between the request for comment and the final criteria, and the rationale behind those changes."

On the "Impact on Outstanding Ratings," it says, "We don't expect the rating impact to change as a result of the changes to these criteria from the proposals in the RFC. We currently estimate that the rating impact is consistent with the RFC estimate. We expect that less than 2% of principal stability fund ratings (PSFR) could change. A unique feature of actively managed short-term portfolios such as these funds is that portfolio rebalancing naturally allows for quantitative metrics to align with the updated criteria. Downgrades are less likely than when we published the RFC but are still possible due to the application of global criteria to those funds in Australia and New Zealand that we previously assessed under regional criteria."

A "Summary of Changes for PSFR Criteria" says, "A number of changes made relative to the RFC are editorial in nature or assist in clarifying the analytical approach. Because they are editorial, many of those changes are not detailed in this summary. Criteria changes following the RFC include individual issuer and group concentration limits for investment in highly rated ('A-1+') banks, fund aggregate limits for funds with heavily concentrated investment in banks, diversification limits for investment in overnight bank deposits with 'A-1+' rated banks, credit quality limits for repurchase agreements, application of diversification guidelines, impact of negative yields upon net asset value (NAV) stability, and group issuer limits."

On "Highly Rated Bank Concentration--'A-1+' Bank Limits," "We increased and clarified the amount of concentration that investment funds can hold in highly rated bank (HBC) assets. For example, the individual 'A-1+' rated bank aggregate limit proposed in the RFC for 'AAAm' rated funds was 30%. We increased this limit to 40%. The 40% limit has been clarified with regard to the mix of term and overnight exposure. We also eliminated the maximum maturity limit of 92 days (three months) for HBC assets."

On "Credit Quality--Repurchase Agreements--Counterparty Credit Quality," the following change was made. "Minimum counterparty credit quality for investment was 'A-1' short term, across all PSFR categories. We extended credit rating eligibility to 'A-2' counterparties involved in repurchase agreements (repo) when fully or overcollateralized by traditional collateral (as defined within PSFR criteria) and maturing overnight. Investments rated 'A-2' that mature overnight would be added to the maximum 'A-1' category for the purposes of determining overall portfolio credit quality.... This was not proposed in the RFC. Market feedback via the RFC consultation provided valuable information that encouraged us to consider the advances made in the repo markets since 2011."

S&P explains, "Our research into repo market operations resulted in our belief that improved operations and risk management practices has enhanced confidence in the ability of money market funds to close out repurchase agreements with smooth transition of collateral in the event of default involving collateralized repo transactions. In addition, we reviewed updated short-term default data and historical spread movements over short maturities. These confirm a low likelihood of counterparty default over short-time horizons and the low volatility of "traditional" collateral (typically government securities issued by highly rated sovereigns) underlying the repo transaction."

On "Diversification--Application of Criteria," they write, "We better aligned treatment of differing types of exposures to the same rated issuer. Specifically, we aligned the diversification criteria so that we treat investment exposure to an issuer at the same maturity similarly irrespective of the form the exposure takes. Specifically this resolves differing treatment to an issuer whether the fund invests in an overnight deposit or term investment such as commercial paper.... In a similar approach already utilized in the criteria for a repo and commercial paper exposure combination we re-aligned the "per issuer" exposure metrics. For example, a 5% 90-day commercial paper with an 'A-1' rated bank can now be combined with an 'A-1' rated overnight deposit of 5% to form an aggregate 10% exposure to that 'A-1' rated bank."

Furthermore, there were changes made to "Diversification--Group Limits." The document explains, "We added to our approach of the newly introduced group limits by slightly increasing the group limit for HBC.... This change has occurred following the RFC. The group limit thresholds remain as proposed in the RFC for investments from the same group, rated 'A-1' or 'A-1+'. However, we have added an exception for HBC to align the group limit with the HBC limit. In our view, potential price volatility of group members is based upon how strategically important (or connected) they are to the group."

Also, there was a change related to "Negative Yields." It says, "We make a statement on negative yields and management fees and their association to fund losses in the PSFR criteria.... This was not proposed in the RFC. However, on Sept. 17, 2015, we added a section on frequently asked questions to the previous criteria, "Principal Stability Fund Rating Methodology," which was originally published June 8, 2011. The section addressed the topic of stable NAV and variable NAV funds' (inclusive of accumulating NAV funds) investment in securities that generate negative yields. The FAQ information has been embedded in the criteria, and the FAQ has been deleted."

It explains, "PSFRs are an assessment of credit risk in a portfolio and its impact on a fund's principal value. In times when market yields are below zero (0.00%), investors seemingly recognize that they are losing capital by their continued use of money market fund products. Negative yields due to market rates for investments are not addressed by these ratings when (a) they result from strategies consistent with the risk mitigation framework expressed in our criteria, and (b) when the fund disclosure and operating documents explicitly state a loss in principal is possible through share cancellation (or similar mechanisms). In our updated approach, NAV declines due to negative yields would not automatically result in a negative rating action, but NAV declines due to management fees greater than the fund's return result in a loss of principal to investors and can result in lowering a PSFR."

Finally, a second S&P release, entitled "Principal Stability Fund Ratings Placed Under Criteria Observation Due To Revised Criteria," explains, "The funds with ratings placed under observation as a result of the changes to our PSFR criteria are labeled as being "UCO" (under criteria observation).... Fund placed Under Criteria Observation include: "BlackRock Cash Fund (fund sponsor, BlackRock Asset Management Australia Ltd.), Principal stability fund rating AAAm; Colonial First State Wholesale Premium Cash Fund (fund sponsor Colonial First State Investments Ltd.), Principal stability fund rating AAAm; Goldman Sachs A$ Cash Reserves Fund (fund sponsor Goldman Sachs Asset Management Australia Pty Ltd.), Principal stability fund rating AAAm; and, Macquarie Treasury Fund (fund sponsor, Macquarie Investment Management Ltd.), Principal stability fund rating AAAm." (See also our May 22 News, "JP Morgan Streamlines AAA Ratings on Money Funds; Lux Current Yield.")

Federated Investors' fourth quarter earnings call with analysts Friday morning was dominated by talk of money market funds, specifically, the lessening impact of fee waivers, industry consolidation, reform-related fund flows, and Federated's soon-to-be-released Private money market fund. The Pittsburgh manager's latest earnings press release says, "Federated's money market assets were $256.4 billion at Dec. 31, 2015, down $2.4 billion or 1 percent from $258.8 billion at Dec. 31, 2014 and up $9.5 billion or 4 percent from $246.9 billion at Sept. 30, 2015. Money market mutual fund assets were $221.6 billion at Dec. 31, 2015, down $3.9 billion or 2 percent from $225.5 billion at Dec. 31, 2014 and up $5.3 billion or 2 percent from $216.3 billion at Sept. 30, 2015." Federated's share of the money market fund business in the U.S. was 8.0% at year-end, according to our Money Fund Intelligence XLS product. You can hear the replay of the earnings call on www.federatedinvestors.com or find the call transcript on Seekingalpha.com.

President & CEO Chris Donahue states, "We continue to advance on the substantial effort necessary to position our product offerings well in advance of the October 2016 requirements for floating NAVs for Institutional Prime and Municipal money market funds. We announced our institutional fund lineup in November and completed a series of fund mergers in December. We continue to work on a privately placed fund for qualified institutional investors who are unable or unwilling to use money funds as modified by the new rules." Later in the call Donahue said they were expected a Q2 launch for the Private fund. He added, “We completed the transition of $930 million in money market assets from Huntington in the 4th quarter and continue to look for consolidation opportunities."

Federated showed strong revenue increases, "primarily to a decrease in voluntary fee waivers related to certain money market funds." The release says, "The increase in revenue was partially offset by a decrease in revenue from lower average money market assets." In 2015, Federated "derived 33% of its revenue from money market assets." Yields jumped (0.03% to 0.06%) and charged expense ratios for money market funds moved higher (up 4 bps to 0.20% on average) in December as the Federal Reserve hiked rates for the first time in almost 10 years. Note that net and gross yields (and charged expenses) continued inching higher in January.

Federated COO Tom Donahue says, "The pretax impact of money fund yield related waivers of $16.4m was down from the prior quarter and Q4 of last year. Based on current assets and yield we expect the impact of fee waivers on pretax income in Q1 to be about $11 million. An increase in yields of 25 basis points in 2016 could lower this waiver impact to about $4 million per quarter and a 50 basis point increase could lower the impact to around $1 million per quarter. Finally an increase in yields of 75 basis point could nearly eliminate these waivers. However, as we previously discussed, partially offsetting any potential waiver recovery is the impact of a potential change in a customer relationship that may reduce pretax income by about $6 million per quarter beginning late in 2016. This is most of the amount of waivers that we began estimating a year ago that may ultimately not be recovered." Later in the call, Federated officials were asked about this potential change, saying it was a one-off situation and that they weren’t at liberty to say who the client was.

In the Q&A portion, the discussion turned back to fee waivers several times. One analyst comments, "I just heard that one or maybe more of your larger competitors may keep their prices at these depressed levels as fee waivers go up." He then asked about price competition in the MMF space. Chris Donahue responded, "I'm going to give you two elements to this. One, there has been one competitor who for a considerable amount of time, meaning more than a year, maintained a price of paying higher than what the yields would indicate in the marketplace and that has been something that we've had to deal with.... The other one was the individual client. This individual client is simply redoing the structure of their arrangement. And yes there are pricing things involved with it, but it is an individual customer who for a lot of different reasons is making these kinds of moves and we have not seen this duplicated in other clients nor do we have any other clients similarly situated." Later in the call he added, "We're not currently planning to have a different type of waiver recapture because of what competitors are doing or may do."

Chris Donahue continues, "So, yes there will be constant competition from others, but don't forget that it is the logical result of big hairy regulations to oligopolize the business. There are just less and less people going to be in this business. Before 2007 there were over 200 people offering funds and now there's about 60 and the bottom of those don't have much money and don't have much opportunity to distribute to third parties."

When asked if he thinks there will still be any small managers, say under $50 billion in AUM, in the next 5 to 10 years, Donahue says, "Yes ... and the reason is that either if you control the right to redeem your assets, then you could run a money fund with very modest assets.... And if you decide you can accommodate the regulations by running either all government funds or something like that -- then you can run a relatively small group. A second group will be those who have large fund groups and therefore can handle all the regulations and want to be offering all the products that are necessary to their fund group. They may not get to $50 billion in money market fund assets, but they will have those as an accommodation to their clients. So yes, those types of groups will continue doing business while the total number of purveyors of these products will continue to dwindle."

He also said it's possible we could see more large acquisitions, like BlackRock's purchase of BoA's MMF business. Later in the call he adds, "In this type of business, there's so much change..... `n some of those institutions, the money market fund business does not drive the truck.... We always put out our sign that we are warm and loving home for any of those opportunities."

On Federated's MMF platform and the opportunities going forward, Donahue explains, "Once the dust settles, we think there is excellent opportunity for growth in this business by us. Part of the reason is because the force of these regulations is to "oligopolize" more, and we are on the side, we believe, of the winners or the larger players in this business. Furthermore the clients right now are still to a large extent in "pause" mode. That will begin to change in first and second quarter as people decide what they're going to do and we see how much movement goes from institutional prime and or muni into Govies. We will have all the products available. We think we've got some pretty creative things going with our private fund. We think we're going to be well set up to capture this business for the long term."

Money Market Chief Investment Officer Debbie Cunningham adds, "If you look at the fourth quarter results, Prime funds were up substantially over the quarter and continued to be faring well in January. Having said that, with conversations continuing with our clients, we are aware that there will be some of them that at this point believe they will be moving into the government marketplace. And that's all well and good -- we have buckets to catch all of the various raindrops. If you want only Treasury we have that, if you are Treasury with repo we have that, if you want government agencies we have that, so there are a lot of different products that we can offer. It's one of the reasons why we didn't do any of the conversions that many of our competitors in the marketplace did."

She says with banks shedding deposits, "We think the industry in fact will grow and be substantially larger." Cunningham continues, "The private fund ... is a very innovative product that we believe will capture the attention of many customers in the marketplace and will give them basically the experience that they have had in a Prime Institutional money market fund, to date. So we think we're ready. We did a lot of fund mergers in the fourth quarter so our product is right-sized. We believe from a performance perspective and from a size perspective, we're positioned well in the marketplace as clients go through and make their decisions -- probably late second, early third quarter of 2016."

How will Federated be impacted if there is a wholesale shift out of Prime? Donahue says, "Since we have products in all areas, we think we will do pretty well. The returns on the government fund can be slightly less than the returns on the prime funds, and that's one of the reasons we come up with a private fund to attempt to duplicate that experience. Our main job will be to retain the client's allegiance, because what happens immediately -- meaning at the end of the second quarter, third quarter this year -- does not necessarily mean that's the end of the game. We do not yet know how much of that will move. You've seen estimates from as low as several hundred billion, which has already moved, to all of it, which would be $1.5 trillion, and estimates all in between. And we don't know what effect that will have on the spreads that exists between Govies and the Institutional Prime funds. Without knowing those, it's really hard to gauge exactly what will mean on the finances of Federated."