News Archives: May, 2016

ICI's "Trends in Mutual Fund Investing April 2016" confirmed a big decrease in money market fund assets in April, which declined by $41.8 billion, or 1.5%, to $2.717 trillion. Assets dropped $15.1 billion in March, jumped $38.2 billion in February, and fell $19.0 billion in January. In the 12 months through April 30, 2016, money fund assets are up $152.4 billion, or 5.9%, according to ICI. But based on ICI's weekly money market flow data, assets should end up sharply -- about $24 billion -- in May. Also, ICI's "Month-End Portfolio Holdings of Taxable Money Funds" shows that Repos and Treasuries plummeted in April while CDs surged. (See our May 12 News, "Latest MF Portfolio Holdings: Repo, T-Bills Plunge; TDs, CP Increase.") We review these below, and also excerpt from the SEC's recently updated "Money Market Reform Frequently Asked Questions." (Please note: Today is the last day to get a discounted hotel rate for those attending Crane's Money Fund Symposium, June 22-24 in Philadelphia. We expect the hotel to sell out soon, so please make reservations asap. See you in Philly in 3 weeks!)

ICI's Trends release says, "The combined assets of the nation's mutual funds increased by $96.31 billion, or 0.6 percent, to $15.82 trillion in April, according to the Investment Company Institute's official survey of the mutual fund industry.... Bond funds had an inflow of $19.06 billion in April, compared with an inflow of $21.37 billion in March.... Money market funds had an outflow of $37.95 billion in April, compared with an outflow of $16.11 billion in March."

It explains, "In April funds offered primarily to institutions had an outflow of $16.44 billion and funds offered primarily to individuals had an outflow of $21.52 billion." The report shows Taxable MMFs with $26.8 billion in withdrawals, while Tax-Exempt MMFs had $11.2 billion in outflows. Year-to-date through April, MMFs have had $36.9 billion in outflows, with $4.5 billion in inflows to Taxable funds and $41.4 billion in outflows from Tax-Exempt funds.

Money funds now represent 17.2% of all mutual fund assets, while bond funds represent 22.5%. The total number of money market funds dropped sharply in April to 456, down from 478 in March, due most likely to BlackRock completing its acquisition of BofA's money funds. One year ago, April 2015, there were 522 money funds.

ICI's latest "Portfolio Holdings" summary shows that CDs gained in April, due to an increase in Time Deposits, while Repos and Treasuries declined. CDs (including Eurodollar CDs) jumped to first, from third, as the largest portfolio segment, increasing $68.3B, or 13.5%, in April to $576.1 billion. (ICI's CD totals likely include Time Deposits, which Crane Data and the SEC categorize as "Other" -- we reported a large increase in Other/TDs in April.) CDs make up 23.0% of all holdings.

Repurchase agreements fell to second, dropping $67.2 billion, or 11.3%, in April to $529.9 billion. Repo represents 21.2% of taxable MMF holdings. Treasury Bills & Securities dropped to third place among composition segments, decreasing $28.9 billion, or 5.3%, in April to $516.6 billion (20.6% of assets). U.S. Government Agency Securities remained in fourth place, increasing $9.3 billion, or 2.0%, to $470.2 billion (18.8% of assets). Commercial Paper remained fifth, decreasing $17.1B, or 5.1%, to $316.3 billion (12.6% of assets). Notes (including Corporate and Bank) dropped by 12.4 billion, or 23.5%, to $40.4 billion (1.6% of assets), and Other holdings (including Cash Reserves) stood at $53.3 billion.

The Number of Accounts Outstanding in ICI's series for taxable money funds increased by 143.1 thousand to 23.277 million, while the Number of Funds fell by 10 to 327. Over the past 12 months, the number of accounts fell by 353.3 thousand and the number of funds declined by 33. The Average Maturity of Portfolios was 38 days in April, down 1 day from March. Over the past 12 months, WAMs of Taxable money funds have declined by 3 days.

In other news, the SEC's updated MMF Reform FAQs include several new questions (outlined in blue). One of the new FAQs is number 20: "As amended, Rule 482 will require money market funds to include different disclosure statements, depending on fund type (e.g., retail, government, or institutional prime) and whether they can impose liquidity fees and suspend redemptions. For money market fund advertisements, what type of legend should a multi-fund marketing piece use if the money market funds covered differ in these respects? More specifically, is a combined legend permissible?"

The SEC answers: "No. If an advertisement discusses multiple money market funds that require different disclosure statements under Rule 482 due to differences in fund type or the ability to impose liquidity fees and redemption gates, then each required statement must be presented separately. Money market funds may not combine these disclosures in a single statement."

FAQ 29 is also new. It asks: "The compliance date for the floating NAV reform is Friday, October 14, 2016. Does that mean that the last day on which a money market fund subject to the floating NAV requirement may operate with a stable NAV is Thursday, October 13th or Friday, October 14, 2016" They answer: "The staff believes that a money market fund subject to the floating NAV requirement would need to switch to a floating NAV on or before Thursday, October 13, 2016. Accordingly, the staff believes that such funds must begin to operate using a floating NAV by no later than the beginning of the business day on Friday, October 14, 2016. The staff notes, however, that a fund may also convert to a floating NAV earlier at any time during the compliance period, and not only on the last day."

FAQ 56 asks: "May a government money market fund "look through" its 100 percent-owned subsidiary and treat the underlying assets as if it were holding them directly for purposes of the definition of a government money market fund?" The answer is: "Yes. So long as a subsidiary is 100 percent-owned and controlled by a single government money market fund and has no leverage or debt of its own, the staff believes there likely would be no risk of competing claims or other interference by third parties over the respective underlying assets. As a result, the staff believes that a government money market fund would have substantially the same access and control over assets held through such a wholly-owned subsidiary as if the fund were holding them directly. Accordingly, the staff would not object if a fund were to "look through" such wholly-owned subsidiaries and treat the respective assets as if it were holding them directly for purposes of the definition of a government money market fund."

FAQ 68 asks: "If a money market fund has materially changed its investment objective (e.g., a prime fund reorganizing into a government fund), should the fund continue to include its performance history from before such change in its performance disclosures and marketing materials? A: Yes, it is the staff's longstanding view that a fund, including a money market fund, that has materially changed its investment objective should continue to include its prior performance history in its performance disclosures and marketing materials."

Finally, there was also a question related to money market funds in Variable Annuity or Variable Insurance products. The last FAQ update before this one was released on March 18. (See our March 22 News, "SEC MMF Stats: Assets, Yields Up in Feb; Updated FAQ; Keen on Phase II.")

Mutual fund publication Ignites hosted a webinar on Tuesday called, "Counting Down to Money Fund Reform," featuring Crane Data's Peter Crane and Federated Investors' Bud Person, and Moderated by Ignites' Beagan Wilcox Volz. In the 45 minute webinar, the panelists discussed asset flows, yield spreads, money fund managers readiness for reforms, strike times, lineup changes, and new products. In particular, Person talked about new funds that Federated has in the pipeline to launch prior to the October 14 implementation date.

When asked about the readiness of money fund managers for the upcoming money market reforms, Person said, "At Federated we are ready and able to move forward as we've substantially completed the required reform work." He said Federated has been working on it since July 2014 when the reforms were first announced and the firm expects to have testing completed by August, well in advance of final implementation deadline. "As far as the industry as a whole, my general sense is that yes, the leading money fund companies have been diligently working on this for the last the last 22 months since the rule came out."

Crane added, "The major changes are well underway. We're two thirds of the way through, but there's still an awful lot of dotting the I's and crossing the T's -- things like strike times. Most of the major product announcements and plans are in the midst of being made but there's still a lot to do."

Among the hot topics in the industry right now are asset flows, yields and spreads, lineup changes, disclosures, and alternatives, like ultra-short bond funds, said Crane. "One thing to keep in mind is that money market assets overall have been remarkably stable. Over the past five years, they've been flat to up slightly. Bank savings during this period have been skyrocketing, so there's a lot of extra cash out there a lot of cash that may push these levels higher. But of course as we've seen since November, an awful lot of changes have been occurring under the surface."

He continued, "We've seen about $300 billion shift from Prime to Government funds, of which, over $200 billion has already moved into Government as we approach October. You may see hundreds of billions more in institutional asset shift over but that's all guesswork and a lot depends on how comfortable investors are with some of the new features -- the floating NAV, the gates and fees, and how yield spreads look at the time."

Crane added, "The changes have been absolutely relentless. Other than the Prime to Government shifts, you've seen consolidation on a scale that we haven't seen in decades where small managers are either getting out of the business or going government. Particularly among tax exempt funds, you've seen a major exodus. While most of the major lineup announcements have been made, the smaller players continue to announce changes, and going forward we'll see more."

He said there's also been a shift from Prime to Ultra-Short Bond Funds as well as new product launches, such as Private funds. "Fund companies are in effect throwing spaghetti against the wall trying to get products that investors may move to if they do abandon Prime Institutional funds. But I think it's still a big if." To date, investors have not moved assets yet, Crane said, but that could be coming in Q3.

On the changes at Federated, Person explained, "Here at Federated, approximately 400 colleagues have been involved in money market reform. It's just been a monumental task and true collaboration between investment management, sales, product management, marketing, client services, IT, fund treasury, legal, and compliance. It's also given us an opportunity to rationalize and consolidate our funds. We've done 10 fund mergers resulting in 26 new share classes, and we've designated all our Prime and Municipal funds as either Retail or Institutional."

He added, "The new website disclosure rules went into effect April 14th, not coincidentally a full six months before the October implementation of the fees and gates rule. This is just great new transparency for money fund investors.... It's on our website, and all the fund websites you'll see daily and weekly portfolio liquidity, daily net flows, shadow NAVs, and a rolling six month history for each. We think these disclosures are crucial to getting clients comfortable with the reforms. Once they understand the changes and see these disclosures, they'll be less concerned. We want investors to see that floating NAVs are relatively steady in this kind of a rate environment and that our funds will have well above 30% in weekly liquidity." This transparency and broader understanding of the portfolio could result in more investors staying in Prime and Muni funds, he added.

Person continued, "The transitioning of fund assets is very important to coordinate in advance with your fund manager. We do expect flows to move from Prime and muni into government. Maybe not as much as everyone thinks, but advance notice is always a good idea.... We can help you determine which accounts are retail or institutional, if you have questions we have a website dedicated to money market reform; it's called "`Money Market Reform Resource Center." And we have mapping guides to help transition accounts from one fund to another."

Person elaborated on Federated's lineup changes. "We've reduced the number of funds -- we're down to 30. We've been streamlining, basically with the goal of having fewer but larger funds, and I think we've accomplished that. We have 6 Government funds, 5 Institutional floating NAV funds, and 19 Retail funds. We slightly changed the names of our 5 Institutional funds, inserting the word "Institutional" into the formal names of those funds to make it clear that those are institutional funds subject to a floating NAV."

He also commented on new funds in the pipeline. "We're looking at two kind of new concepts that we're really excited about in the floating NAV arena. One, on the taxable Prime side, is being referred to as a "60-day max fund." This is a floating NAV fund that will not buy any securities with the remaining maturity of greater than 60 days. As a result, its weighted average maturity will be under 40 days, which will be shorter than how we run the majority of our prime funds. By running shorter it will seek to minimize the volatility of the NAV."

Person explained, "On the Muni side we're going to run a 7-day max floating NAV muni fund -- both of these products are being geared towards institutional investors. How did we come up with seven days? Look at the variable rate demand note market -- most of those notes are seven day maturities and historically, the majority of muni money funds hold a majority position in seven day variable rate demand notes.... Again, we're doing this to minimize the NAV fluctuation."

Furthermore, Person commented, "In the non-registered world, we are offering a Private Liquidity Fund. This fund will be able to accept non-natural person investors meaning, institutional investors. We'll run this fund with traditional portfolio amortized cost meaning, dollar in and dollar out.... Also because it's not registered and subject to 2a-7 rule changes, it will not be subject to liquidity fees and gates. What we're trying to do here is replicate, in a non-registered form, a prime liquidity experience that many of our institutional clients have historically experienced with our traditional registered money funds."

He added, "An additional non-registered product will be a Prime Collective investment fund, which will be limited to ERISA accounts only. It will also use amortized cost and seek to maintain a one dollar N.A.V. It will also not be subject to fees and gates. We're really pretty excited about all four of these."

On spreads between Prime and Government funds, Crane stated, "Currently there is a little bit of spread for prime money funds. That first Fed hike in December was a godsend. If we get another one, you're going to see spreads go up. Historically, Prime funds yield 10 to 20 basis points over Government and Treasury funds. Now you're seeing a 20 to 25 point spread. Most believe that a 40 or 50 basis point spread, which is double the historical average, is enough to stop or slow the outflows. But clearly we're going to need another Fed hike, maybe even another two Fed hikes, to move rates up to the level where the fee waivers are unwound and that natural spread sort of finds a level."

When asked if there should be an industry standard for strike times, Person commented, "I think the standard is that all the leading fund companies will be offering both. `We will be offering multi-strike time funds along with single strike funds. This is all new ground." For some funds, Federated will do NAV calculations three times a day -- 8 am, 12 noon, and 3pm. On others it will be once a day, 3pm.

Finally, the panelists were asked if they thought the reforms will have a benefit to the industry. Said Crane, "With reform, you're going to pay more for safety. Investors will get lower yields, and they'll get more safety.... Overall, I think it is a workable reform. So, yeah, it's a pain because there's a cost in both the yield and in time and effort for this additional safety, but I think these are changes people can live with."

Person concluded, "After many years of a super low rate environment, there's still $2.7 trillion in money market mutual funds. I confidently believe we'll still have $2.7 trillion in money market mutual funds post October. The vehicle just works too well. It will be a little different now in some cases, but I think with time everyone will get used to it and the products will still play an important role with cash management."

In the May edition of our Money Fund Intelligence, we profile Dave Fishman, Head of Liquidity Solutions at Goldman Sachs Asset Management. Fishman discusses GSAM's reform plans, its fund lineup, and the industry shift from Prime to Government. Says Fishman on their recent growth, "For the past several years we've been investing in our business, and we've been staying in front of clients, working to educate them on the coming regulatory reforms and their investment options. I think clients have responded, and our growth is simply the result of staying in front of people and investing in a business we believe in." (We reprint our latest MFI interview below.)

MFI: Tell us about GSAM's history. Fishman: Goldman Sachs got into the business in 1981 when we were asked to take over two retail money market funds from another manager. We started building an asset management business around that and formed GSAM in 1988. We are currently celebrating our 35th year with approximately $280B in money market fund assets and over $1 trillion in asset under management in GSAM. I began here as a portfolio manager in 1997 and became co-head of the money markets business in 2001.

Over the years, we have continued to evolve along with our clients. We merged our short duration and money markets businesses in 2008 to improve our ability to provide clients with a holistic approach to managing liquidity. We are going through a similar evolution today and that is why we recently rebranded our business as Liquidity Solutions. Our goal is to help clients solve for this changing environment.

MFI: What is your biggest priority? Fishman: Our biggest priority is meeting or exceeding our clients' needs. Obviously, money fund reform has made that a bigger job compared to the past. Reform is creating significant change in a product that was basically unchanged for 40 years and has offered many features and functions that people came to rely on. So our priority is to make sure we offer the right mix of products to meet clients' needs. With this in mind, we have made some significant changes to our product lineup over the last two years, which we think set us up well for October of this year when we'll implement the final changes.

MFI: Can you recap these changes? Fishman: In the past two years, we have added four new funds: an ultra-short duration bond fund, a retail prime fund, a retail tax-exempt fund and a new Treasury fund that invests in US Treasuries and Fed repo. Our government lineup is something that we've been very proud of. As the market is changing, there's been more demand for Government funds, which are going to continue to offer the features that people were most comfortable with in money funds. Our expectation has been that the government complexes are going to grow. Currently, the Government fund sector is larger than Prime funds, so we've tweaked our government lineup to offer more variety.

MFI: What are your big challenges? Fishman: We have three dynamics that are all happening at the same time and interacting with each other. One is global monetary policy. The combination of massive quantitative easing and policy rates that are negative or at extremely low levels creates a challenging environment for generating attractive returns for liquidity investors. Second, the introduction of Basel III and banking regulation has incentivized banks to shed deposits. Third, US money fund reform is top of mind right now and we are trying to get our clients comfortable with the coming changes.

We've spent the past two years urging clients to think about this in advance and not wait until the last minute. We don't think this is a situation where investors should come in after Labor Day and say, 'Money fund reform is happening in the next month.... What should we do?' It's something that needs a lot of thought and effort, especially if you want to actually end up in a place where you want to be. All of these dynamics are working, in effect, at cross purposes ... and that creates a big challenge for the market.... This is where we have been partnering with clients and providing education and direction.

MFI: Are you shortening maturities? Fishman: Broadly speaking, our view that money is in motion within the money market universe leaves us biased to be a little bit shorter duration in prime funds and a little bit longer duration in government funds. Given the challenging dynamics we just discussed, we expect to see money go from prime funds to government funds. Right now, there is about $1.2 trillion left in prime funds. We think we could see half of that, or about $600 billion, move to government funds. If [this happens] that is going to create a strain on Prime funds because they will need to have liquidity to meet redemptions. On the other hand, we think government funds are going to struggle to get those assets invested.

MFI: How about Government supply? Fishman: There is a constant hunt for supply in government securities. Money market demand is strong as investors shift to government funds, and regulatory changes like Basel III require banks to hold a large amount of high quality liquid assets (HQLA). So we're competing for those assets with banks as we look to put them into our government funds. We're obviously pleased that the Fed RRP continues to offer large amounts of supply -- up to $2 trillion -- so that continues to give us confidence that we'll be able to accept inflows throughout the reform transition period.

MFI: What are customers' concerns? Fishman: Based on our conversations, customers seem most concerned about the potential fees and gates that will be a feature of prime funds under the new rules. Those seem to be a larger concern than the variable NAV. Those concerns are among the main reasons we think assets are likely to move over to government funds as we get closer to October. But we haven't seen a massive shift yet. I think investors are waiting because they can pick up about 20 bps by staying in prime funds. That's attractive enough for people to stay put for the time being.

MFI: What about the new disclosures? Fishman: There's no doubt that it's a changing process, and the businesses is much more expensive to be in because you need to do things that you never had to do before. From our standpoint, we started disclosing long before the April 14 deadline. Transparency is good for clients, and it's a big part of our philosophy. We're happy to let clients know where we are, and we think the quality of the portfolio stands on its own. We're pleased that it's now become the standard. We weren't the only ones who were disclosing prior to the April deadline, but we think standardization will now give the market a lot more confidence in being able to see what's going on. In 2008, you saw industry-wide Prime fund outflows because people didn't know what was in each fund. So I think transparency can give the industry a little more stability when the next crisis hits.

MFI: What about alternatives? Fishman: If we're talking about liquidity alternatives, we are seeing more interest in the short duration and separately managed account business -- a business we have been involved in for 20 years. It's always been a solid business, but it was overshadowed by money market funds. Money funds have been much more popular because of their features -- stable NAV, T+0 settlement -- and that carried a big advantage over the short duration space. Short duration has been more popular among investors who understood that taking a little bit more risk should get them higher expected return. Now we're seeing the emergence of funds that are even shorter than a typical short duration fund, but longer than a money fund.

This is a new category that is somewhere in between money market and short duration funds. A few years ago, we launched a product that has a very short duration, the GS Limited Maturity Obligations Fund, knowing that regulation may make prime funds less attractive. It's been building a track record for when regulation hits. Then, people will be able to examine it and see that there's very little movement in the NAV and it's provided a return that's north of money funds. But it is going to take people awhile. However, we are seeing some clients who have gone into separately managed accounts that are shorter than what we've seen historically, but typically longer than a money fund, in order to look for an alternative where they will not have to worry about a liquidity fee or a gate.

MFI: What about Private funds? Fishman: We look at everything, but we believe the fund lineup we have now is the right one. We're constantly talking with clients and looking at what's in the marketplace, and we are always willing to expand our product lineup where there is client demand.

MFI: What is your outlook? Fishman: We are very bullish on the money fund industry. We've been picking up assets while the industry is fairly flat. We're optimistic that the industry will pick up money. There's a lot of cash in the system, and there's a lot of demand for high-quality, short investments. When you look 3 to 5 years out, Prime funds will be a very viable alternative. Prime funds are likely to shrink in the near-term, but we absolutely think prime money funds will survive. Clients are going to need time to look at how NAVs move through a full cycle and to see that liquidity fees and gates are not being dropped frequently. Once people get some history, they'll be able to better evaluate the risks and returns. At that stage, I think there will be people who determine that the extra yield that you can pick up in a prime fund is in fact worth it. So, while prime survives, I think it gets smaller.... But I think all money funds have a bright future.

As usual, money market funds were barely mentioned at the Investment Company Institute's General Membership Meeting, which took place last week in Washington, DC. (Crane Data exhibited, promoting its new bond fund information product line; watch more coverage in our Bond Fund Intelligence.) But there were a couple of sessions which briefly touched on MMFs, including SEC Chair Mary Jo White's keynote address, "The Future of Investment Company Regulation," and a panel on global investing. We review the GMM below, and we also revisit the "2016 Investment Company Fact Book," which was officially released at the show. (See our May 10 News, "ICI 2016 Fact Book Contains Wealth of Statistics, Reviews MMFs in '15.")

In her address at ICI's GMM, Chair White said, "When we first met in 2013, the industry was anxiously awaiting the SEC's actions on money market fund reform, the question of how to address potential systemic risk in the asset management industry was still nascent, and the Commission had not yet embarked on its latest effort to enhance its regulatory regime for asset management. Much has happened since, including the adoption of final rules for money market funds and a public statement by the Financial Stability Oversight Council (FSOC), issued last month, updating its review of the potential systemic risks in certain asset management products and activities. Today, the Financial Stability Board (FSB) is working toward issuing a second consultative draft analyzing similar issues."

She later commented, "In 2014, we fundamentally reformed the way that money market funds operate to both make our financial system more resilient and to enhance the transparency and fairness of these funds for America's investors. Then, building on a series of regulatory initiatives I announced in December 2014, last year we proposed rules to modernize reporting, to strengthen liquidity risk management requirements, and to address the use of derivatives by registered funds. And the staff has been closely focused on developing recommendations for transition plans and annual stress testing for certain funds and investment advisers."

Another ICI session, called "Investment Insights and Strategies," was moderated by CNBC's Tyler Mathisen and featured Krishna Memani, CIO, Oppenheimer Funds, and Liz Ann Sonders, Chief Investment Strategist, Charles Schwab & Co. Memani said that he expects that "rates are going to remain low for the rest of my career," joking, "that means I'm either going to have a short career, or rates are going to remain low for a long time." He quipped, "What the world really wants more than anything else is a really good-yielding bond.... That would solve the world's problems." Schwab's Sonders added that she didn't think negative rates are working and are having the opposite effect of what the central banks intended <b:>`_. She expects to see a Fed rate hike this summer, either June or July.

During a session entitled, "The Evolving Global Asset Management Landscape," Frank Xiaoling Zhang of China Asset Management Co., said money market funds are booming and that the company has seen a dramatic increase in assets. He said, "It's the number one trend in China." Finally, in a session, "Facing the Future: Fresh Perspectives," panelists wondered if something as disruptive as the Yue Bao Chinese money fund, which is offered by Alipay, a unit of online retailer Alibaba, could happen in the US through an offering by say, Amazon or some other online retailer. The panelists didn't think it was out of the question, but said it would be a challenging endeavor for an outside entrant to take on. (They evidently weren't aware of the Paypal Money Fund, which didn't go anywhere a decade ago.)

In related news, we revisit the "ICI Fact Book's," focusing this time on its numerous "Data Tables" on "Money Market Mutual Funds, which start on page 206. ICI lists annual statistics on shareholder accounts, the number of funds, net assets, net new cash flows, paid and reinvested dividends, composition of prime and government funds, and net assets of institutional investors by type of institution.

ICI's Table 36 on page 207, "Total Net Assets of Money Market Funds by Type of Funds," shows us that total net assets in taxable U.S. money market funds increased $30.1 billion to $2.754 trillion in 2015. At year-end 2015, $1.814 trillion (65.9%) was in taxable institutional money market funds, while $941.2 billion (34.2%) was in taxable retail money market funds. Breaking the numbers down by fund type, $1.273 billion (46.2%) were in prime funds, $1.226 trillion (44.5%) in government money market funds, and $254.9 billion (9.3%) in tax-exempt accounts.

ICI's Tables 40 and 41 on pages 211 and 212, "Asset Composition of Taxable Government Money Market Funds as a Percentage of Total Net Assets" and "Asset Composition of Taxable Prime Money Market Funds," show that of the $1.226 trillion in taxable government money market funds, 32.8% were in U.S. government agency issues, 32.2% were in Repurchase agreements, 17.2% were in U.S. Treasury bills, 17.2% were in Other Treasury securities, 0.4% was in "Other" assets, 0.1% was in corporate notes. The average maturity was 40 days.

Furthermore, it shows that of the $1.273 trillion in Prime funds at year-end 2015, 34.7% was in Certificates of Deposit, 23.4% was in commercial paper, 23.9% was in Repurchase agreements, 5.1% was in U.S. government agency issues, 2.8% was in Other Treasury securities, 3.0% was in Corporate notes, 2.0% percent in Bank notes, 1.9% in U.S. Treasury bills, 0.9% in Eurodollar CDs, and 2.3% in Other assets (which includes Banker's acceptances, municipal securities and cash reserves). The average maturity was 31 days.

ICI's annual statistics also show that there's been a steady decline in the number of money market mutual funds over the last 15 years. (See Table 35 on page 206.) In 2015, according to the Fact Book, there were a total of 481 money funds, down from 527 in 2014 and down from 1,039 in 2000. The number of share classes stood at 1,427 in 2015, down from 1,506 in 2014.

Also, Table 37 on page 208, "Net New Cash Flow of Money Market Funds by Type of Fund," show that there was $21.5 billion in net new cash flow into money market funds last year, the most since 2008. A closer look at the data shows $16.2 billion in net new cash flow into institutional funds and a $5.3 billion cash outflow from retail funds. There were also $40.8 billion in net inflows into Government funds, and $13.9 billion in net outflows from Prime funds. Paid dividends totaled $7.9 billion last year, up from $7.6 billion in 2014. This is down drastically from the peak of $127.9 billion in annual dividends in 2007. Also, there was $5.3 billion in reinvested dividends, up from $5.0 billion in 2012. (See Table 39 on page 210.)

Finally, Table 60 on page 231, "Total Net Assets of Mutual Funds Held in Individual and Institutional Accounts," shows that there was $1.048 trillion of assets with institutional investors and $1.707 in assets in Individual accounts in 2015. Table 62, "Total Net Assets of Institutional Investors in Taxable Money Market Funds by Type of Institution and Type of Fund," shows of the total of $1.005 trillion in taxable Institutional assets, $543.2 billion were held by business corporations, $334.3 billion were held by financial institutions, $77.2 billion were held by nonprofit organizations, and $50.5 billion were held by Other.

BlackRock released an Update recently informing clients of the strike times for floating NAV funds. The letter reads, "We are excited to share with you some important updates related to the requirement for institutional prime and institutional municipal money market funds to adopt a per share floating net asset value no later than October 14, 2016. As previously communicated, certain BlackRock money market funds will be designated as institutional and will transact based on a per share floating net asset value. Today, the Board of Trustees of our institutional prime and institutional municipal money market funds listed below approved the following net asset value strike times to become effective on or about October 11, 2016. The determination of these NAV strike times was made in an effort to provide investors with the most flexibility to help meet their ongoing liquidity needs."

BlackRock is the latest in a string of major money fund managers to announce "strike times" for FNAV funds. Our May 6 News reports on First American's FNAV strike times, and our May 5 News, "Federated: Variety of Strike Times; Wells: Reform's Investor Impact," reports on Federated's cutoff times. In our April 27 News, we wrote, "Goldman on Disclosures, Strike Times; BNY, TRP, NTRS Waivers Drop," and in our April 8 News, we wrote, "Market Share: Few Gainers in Down Month; Invesco Sets Strike Times." Also, our March 3 News, "JPM Details Fund Updates, Cutoffs, Gates in Filing; Linton Comments," discusses JPMAM's FNAV strike times. Finally, our Feb. 22 News, "Wells Finalizes MMF Lineup, Strike Times; ESMA, European MMF Update," reviews Wells Fargo's announcement.

The BlackRock update sets strike times for 4 Prime Institutional funds and 1 Municipal Institutional fund. Specifically, BlackRock TempFund and BlackRock Cash Prime will have 3 strike times -- 8am, 12pm, and 3pm daily. BlackRock Cash Institutional will strike once at 5pm, while both TempCash and MuniCash will strike once at 3pm.

The letter says, "Trading deadlines for each of the funds will change to the times detailed above, with the exception of BlackRock Liquidity Funds MuniCash, which will continue to have trading deadlines of 2:30 p.m. E.T. for subscription orders and 1:00 p.m. E.T. for redemption orders. Each of the Funds will be able to accept payment for subscription orders up to the federal funds wire deadline (normally 6:00 p.m. E.T.)."

On "Order Placement," BlackRock comments, "Today, subscription and redemption orders may be placed in these Funds in either units or dollars. After implementation, to accommodate the new operational requirements of the Funds surrounding the per share floating NAV, subscription orders in the Funds can only be placed in dollars, whereas redemption orders can be placed in either units or dollars."

It adds, "The changes detailed above will go into effect on or about October 11, 2016. Additional information about how to purchase and redeem shares of these Funds will be provided in the coming months. We hope the availability of intraday liquidity will assist you with your cash management needs, and ease your transition to the new operational landscape brought on by money market fund reform."

BlackRock concludes, "We are proud to serve a variety of clients who use money market funds for many different reasons. We believe our platform is reflective of the types of clients we serve and the varying needs which drive their use of these investment vehicles, both now and in the future."

In other news, Fitch Ratings issued the release, "U.S. Money Funds' Liquidity Profiles Vary Ahead of Reform." It states, "Liquidity levels of U.S. institutional prime money funds vary ahead of upcoming reforms, suggesting some funds will need to increase their liquidity cushions, according to a new report from Fitch Ratings. While 60% of prime funds maintain high weekly liquidity levels of 40% or higher, others have a low buffer relative to the 30% regulatory threshold which may be insufficient in light of liquidity-based triggers introduced by the Securities and Exchange Commission (SEC)."

Fitch Senior Director Greg Fayvilevich explains, "While many institutional prime money market funds have already started to increase their liquidity levels, some funds may not have enough of a liquidity cushion if cautious investors redeem their cash on the fear that the fund may fall below the new threshold."

The release continues, "The reforms coming into effect in October provide the funds that breach regulatory liquidity limits the ability to impose liquidity fees on redeeming shareholders or gate the fund to redemptions. These reforms as well as recent disclosure requirements have focused investors' attention on institutional prime funds' weekly liquidity levels. In response, the funds have been increasing their liquidity to alleviate investors' concerns about access to cash if regulatory liquidity thresholds are breached. While average weekly liquidity for prime money funds has been increasing, there are still some funds that may need to add liquidity as a buffer to unexpected redemptions."

Finally, Standard & Poor's Global Ratings issued a release entitled, "U.S. Corporate Cash Hoard Masks Increased Debt Burden, Report Says." It explains, "Cash is on the decline and debt is decidedly on the rise for 99% of rated U.S. corporations, says a new report from S&P Global Ratings titled "U.S. Nonfinancial Corporates' Record $1.84 Trillion Cash Holdings Mask A Massive $6.6 Trillion Debt Burden."

It explains, "Corporate America's most lucrative layer--the top 25 of S&P Global Ratings' universe of over 2,000 rated nonfinancial corporations--collectively hold $945 billion in cash and maintain an enviable cash-to-debt ratio of 153%. This top 1% include familiar names such as Apple Inc., Google Inc., and Microsoft Corp. However, this group's success masks a decade-low cash-to-debt ratio of 15% (an aggregated $900 billion in cash and $6 trillion in debt) for the vast majority of firms in the U.S.... In prior years, S&P Global Ratings identified the practice of "synthetic cash repatriation," in which U.S. companies issued debt as a proxy for bringing back overseas cash earnings."

S&P adds, "The top 1%'s immediate concerns center on what to do with their growing cash pile. In contrast, the bottom 99% are more focused on new financing needs and upcoming debt maturities.... We also believe that these companies' significant cash holdings directly benefit from the accommodating credit markets, and more limited access would likely have curtailed shareholder returns."

The Office of the Comptroller of the Currency issued a Bulletin entitled, "Compliance With SEC Money Market Fund Rules by Bank Fiduciaries, Deposit Sweep Arrangements, and Bank Investments," which "describes how the SEC's MMF rules are likely to affect banks, addresses the product and process changes that affected banks should consider, and highlights potential compliance, liquidity, operational, and strategic risks." Also, we review a report from Financial Advisor magazine on a Senate Subcommittee hearing on long-shot legislation to change money fund rules. (See our May 18 News, "Stable NAV Money Fund Legislation Has Subcommittee Hearing Says BB.")

The release, which we learned about from the ABA Banking Journal, says, "The Office of the Comptroller of the Currency (OCC) is issuing this bulletin to highlight actions that national banks and federal savings associations (collectively, banks) should take and factors that banks should consider based on the U.S. Securities and Exchange Commission's (SEC) revised money market fund (MMF) rules in effect now and going into effect. Although these rules directly apply only to MMFs, the rules indirectly affect banks that make MMFs available to their customers through their fiduciary and custody activities, bank programs that automatically sweep funds between deposit accounts and MMFs, banks that invest in MMFs, and banks involved in any of these activities will likely be affected by compliance, liquidity, operational, and strategic risks related to the SEC’s revised rules."

The OCC explains, "Banks that make MMFs available to customers through their fiduciary and custody activities or through bank programs that automatically sweep funds between deposit accounts and MMFs, or that own MMF shares, should assess the compliance, operational, and investor liquidity implications of the 2014 MMF rules. These regulatory changes affect a broad range of bank activities, including discretionary and directed fiduciary accounts, retirement accounts, corporate trust relationships, custody accounts, deposit sweep arrangements, and MMF investments held on a bank's balance sheet. Banks should monitor the changes initiated by MMF complexes as these complexes announce which specific funds will be characterized as government, retail, or prime. Banks should determine how these changes might affect the funds that banks make available to their customers or hold on their own balance sheets. Banks should develop plans for any resulting bank product changes that include tracking and reporting while the changes are being implemented."

On Retail MMFs, they state, "The SEC ... notes that although it is a fund's obligation to satisfy the retail fund definition, an intermediary could nonetheless be held liable for violations of other federal securities laws, including the antifraud provisions, when funds of institutional investors are improperly funneled into retail MMFs. As a result, banks that make MMFs available to customers through omnibus accounts should have processes and systems to accurately determine and report which underlying accounts are eligible to purchase specific types of MMFs. Banks also should ensure that accounts that do not have beneficial owners who are natural persons are not allowed to purchase retail MMF shares whether through an omnibus account maintained by the bank or otherwise."

The Bulletin continues, "When developing policies and related procedures, banks should seek advice of counsel to determine which specific types of accounts are eligible to purchase retail MMFs. Banks should have effective processes to determine whether each MMF that they make available qualifies as government, retail, or prime, and they should code their systems accordingly."

On "Redemption Gates and Liquidity Fees," it says, "Banks that make retail and prime funds available to their customers should establish effective processes and system capabilities to implement redemption gates and impose liquidity fees at the account level if and when an MMF implements these tools. Banks also should consider the potential effect on bank liquidity if the banks make funds available to clients' accounts before those funds are actually received from the MMFs, and the MMFs subsequently impose redemption gates that temporarily restrict payment of those customer funds."

The OCC adds, "The SEC has stated its belief that prime MMFs should be able to provide intraday liquidity, meaning that these MMFs would establish a process to strike a NAV at multiple, predetermined times each day. These characteristics, which would likely pose numerous operational challenges, make it unclear whether banks will be able to continue to offer prime MMFs as sweep vehicles for deposit sweep arrangements or for a bank’s fiduciary and custody accounts. Banks that make prime MMFs available to their fiduciary and custody clients will need the system capabilities to report and process transactions to four decimal places. They will also need to establish processes to submit and settle trade orders in the modified time frames established by the funds."

The guidance also says, "When establishing processes for the initial and ongoing due diligence for MMFs approved for use as sweep vehicles or as part of the cash equivalent allocation in fiduciary accounts, banks should continue to review the prospectuses and Statements of Additional Information for the MMFs, as well as Form N-MFP. Banks should regularly monitor MMF websites for disclosures related to the funds' liquidity, market-based NAV rounded to the fourth decimal place, and support from a sponsor or fund affiliate to ensure that the MMFs selected by the bank meet the banks' ongoing standards for fiduciary account sweep vehicles or cash equivalent assets."

It continues, "Banks that offer sweep arrangements between deposit accounts and MMFs should assess the respective processing characteristics, system requirements, compliance requirements, and liquidity characteristics of government, retail, and prime MMFs. Based on operational and liquidity considerations, most banks will likely conclude that once the SEC's MMF reforms are fully implemented, government funds are the only practical option for bank deposit to MMF sweep arrangements.... Banks that make changes to the deposit sweep vehicles and arrangements they offer should determine whether updated disclosures are required under the Federal Deposit Insurance Corporation's disclosure rules pertaining to sweep accounts."

Finally, the Bulletin summarizes, "The OCC expects banks that make MMFs available to customers through their fiduciary and custody activities or through deposit to MMF sweep programs, and banks that own MMF shares, to actively monitor rule changes and SEC guidance in this area. The OCC also expects banks offering this product to bank customers to track specific changes initiated by MMF complexes as these complexes determine whether each of the funds they offer will be government, retail, or prime. Banks should assess how these rule changes and the resulting changes made by the fund complexes affect bank fiduciary and custody activities, deposit sweep programs, and bank investments. Banks should determine what changes are needed and develop and implement comprehensive plans for incorporating these product changes into their policies and systems."

In other news, an article in Financial Advisor, entitled, "Senators Spar Over Floating NAV For Money Market," explains, "Senate Banking Committee members sparred Thursday over a proposal to bar the Securities and Exchange Commission from imposing a variable price (called a floating net asset value) on any money market mutual fund.... A co-sponsor of a bill to create a ban, New Jersey Democratic Senator Robert Menendez said local government officials are complaining the floating NAV will increase their borrowing costs while investors and fund managers worry it will significantly reduce the viability of money market funds as tools to invest money short term."

It continues, "Noting that upheaval in the money fund market helped precipitate the financial crisis, Virginia Democratic Senator Mark Warner said removing the SEC's ability to require floating NAVs on the industry would restore a false sense of security the investments are risk-free. He said the bill has little chance of passage.... In defense of the legislation, Pennsylvania Republican Senator Pat Toomey noted after the Reserve Primary Fund "broke the buck" when its underlying shares fell below $1 in value, investors received 99 cents on the dollar."

Northern Trust posted an article, "It's Time to Weigh the Risks of Your Cash Strategy," which examines liquidity trends, and opportunities, ahead of the October 14 implementation date for MMF reform. It features commentary from Peter Yi, Director of Short-Duration Fixed Income, and discusses new ways to think about cash segmentation, balancing risks and rewards, and customized solutions for investors. Also, JP Morgan Securities' discusses "Sticky Deposits" in their latest "Short-Term Fixed Income" commentary, which examines the likelihood of bank deposits moving to money market funds in this regulatory environment.

Northern's article explains, "Cash is an expensive insurance policy. As the industry and investors alike grapple with the soon-to-be new reality of money market fund reform, the cash management experts at Northern Trust Asset Management believe it is time investors rethink their cash strategies. To date, much of the industry has been focused on the mechanics of the rule changes: How will redemption gates and liquidity fees affect investors' access to liquidity? How will the industry meet investors' liquidity needs?"

It says, "But Northern Trust's Director of Short-Duration Fixed Income, Peter Yi, CFA, believes now is an opportune time for investors to benefit from the trends and opportunities taking shape within the marketplace. "Even with the introduction of new regulations, we don't expect the day-to-day experience of money market fund managers and investors to meaningfully change," Yi said. "The bedrocks of a money market product will be preserved, which includes having access to daily liquidity and focusing more on principal preservations with a competitive yield."

Northern adds, "As the current Chairman of the Investment Company Institute's Money Markets Advisory Committee and a senior leader at one of the industry's largest cash managers, Yi has been at the forefront during this monumental period of change. He and his team have worked alongside regulators and industry peers to review, evaluate and respond to rule changes. "This is a transitional period for the money market fund industry," Yi said. "We anticipate that there will be a segment of investors who transition back into prime funds once they become comfortable with the new regulations and start searching for a higher return than a government money market fund can provide.""

The piece explains, "But, the best way for investors to navigate new changes is to adopt a cash segmentation strategy ahead of the October 2016 rule implementation deadline. "A cash segmentation framework allows investors to achieve a better balance between risk and reward," Yi said. "It's a more effective way of managing cash holistically." The strategy relies on three buckets, each with its own distinct risk, return and liquidity characteristics."

"Thinking about the gating concept that's about to go into effect, if a fund's liquid assets fall below a minimum threshold and a 'gate' is implemented, your access to the assets may be limited and you may not be able to rely on that money market fund for your operational cash," Yi said. "So rethinking cash lets you allocate some of your cash into these different buckets. Before, you may have had 100 percent of your cash in operational, but now if some of your money market funds are under scope of a gate or a variable NAV, maybe it's no longer applicable for operational. Maybe it's more applicable to reserve."

Northern's piece goes on, "Cash management plays a critical role in a balanced asset allocation by providing liquidity or stability in an overall asset allocation. "Cash gives you the flexibility to be opportunistic in the marketplace," Yi added. The allocation to cash can protect the principal for part of a portfolio. This stability can help offset the impact of volatility elsewhere. "By having a portion of the portfolio readily accessible, this acts as a buffer, protecting other investments in more volatile asset classes from having to be accessed in the event of a liquidity crisis," he said."

Furthermore, it says, "And within a cash segmentation strategy, the operational cash can act as that buffer, providing some protection for the allocation to the strategic cash bucket. Holistically, this can allow for higher yields without exposing investors to inappropriate levels of risk. "Yes, cash is an expensive insurance policy," Yi said. "Markets fluctuate over time, but investors stand to benefit when they work with an experienced investment manager. At Northern Trust Asset Management, we have remained steadfast in our investment philosophy and in our focus on finding the right solutions for investors."

Northern continues, "Some investors likely will move toward exempted government funds in order to maintain a constant NAV on their assets, while others will move -- or already have moved -- further along the maturity spectrum, seeking higher yields and a better risk/reward balance. This journey toward longer maturities can extend beyond cash/money market products into the ultra-short maturity segment of fixed-income strategies. The key is to find the optimal risk/reward balance, and many investors have found an ultra-short fixed income strategy to be most consistent with this need, enhancing their high-quality short-duration exposure."

Finally, it adds, "There's no one-size-fits-all approach for meeting investor objectives, so it's important to provide investors with liquidity solutions, not just standardized cash management offerings. "We can customize our cash suites in ways that supplement our product," he added. "Our focus is on educating clients, providing guidance and customizing our products wherever suitable." We continue to explore product developments to address liquidity needs in this changing industry, and we are committed to ensuring investors have a voice in our product evolution."

Also, JP Morgan Securities' Alex Roever, Teresa Ho and John Iborg wrote recently on deposits, saying, "Last year, one of the issues that concerned money market participants was the possibility that deposits could flood the money markets. As regulations incentivized banks to shed them off balance sheet, a large inflow into the money markets would overwhelm an environment that was already short on investible supply, significantly suppressing yields. Yet, the concern proved largely unfounded as bank data suggests that the money simply shifted from large US banks to smaller US banks over the course of the past year."

They continue, "Still, the concern about deposit outflows remains. Over the past seven years, the amount of deposits in the US has grown by a staggering 50% as the Fed engaged in a series of quantitative easings. As of April month-end, there were roughly $12tn of deposits in the US, most of which belong to large US banks as depositors favored larger institutions over others. As banks continue to optimize their balance sheets, particularly in the current financial environment, it's possible that more unwanted deposits could be shed to continue to boost the firm's regulatory ratios and/or return on equity. It's also possible that depositors could be incentivized to leave the banks for other higher yielding cash substitutes as the Fed raises interest rates. That being said, we think the likelihood of deposit outflows in the near-term is low."

JPM's piece adds, "Just looking more in depth into the composition of deposits, there is a sizable portion of deposits that we estimate is retail.... Under Basel III, retail deposits are viewed as more stable and hence are treated more favorably under various capital and liquidity rules. To that end, banks, and particularly large US banks, have sought to hold a greater portion of these retail deposits.... Additionally, given the current expected path of interest rates, it's unlikely that depositors would be incentivized to move into the money markets in the near-term either."

They explain, "Historically, during prior tightening cycles, flows into MMFs would increase as yields on MMFs become more competitive relative to bank money market accounts. However, we are experiencing one of the slowest tightening cycles in history. Markets are currently not pricing in a second rate hike until 3Q2017. And while yields have picked up in prime MMFs given liftoff last December, we don't think it's sufficient to pull depositors into MMFs given upcoming reform changes. On the government MMF side, yields also remain very low and are likely going to remain low as cash rotates from prime funds into government MMFs due to reform, thereby lessening the appeal of government MMFs relative to deposits."

Finally, they conclude, "Ultimately, bank deposits are likely going to be stickier than during prior tightening cycles given the need for banks to hold certain deposit types and the lack of attractive suitable alternatives. At a price, deposit money may move to the money markets, but we do not expect such a shift to take place to any great extent any time soon."

As we make final preparations for next month's Crane's Money Fund Symposium in Philadelphia (June 22-24), we are also preparing for our 4th Annual European Money Fund Symposium, the largest money market event in Europe. The preliminary agenda is set for this year's show, scheduled for Sept. 20-21 in London, England. Read on for details. But first, if you haven't already registered for Money Fund Symposium, you can still do so via www.moneyfundsymposium.com. (We look forward to seeing many of you in Philadelphia next month and in London this fall!)

While the Agenda is still being tweaked for Crane's European Money Fund Symposium, registrations are now being accepted. Last year's event in Dublin attracted 120 attendees, sponsors and speakers, our largest ever, and we expect our return to London to be even bigger and better.

"European Money Fund Symposium offers European, Asian and "offshore" money market portfolio managers, investors, issuers, dealers and service providers a concentrated and affordable educational experience, as well as an excellent and informal networking venue," says Crane Data President Peter Crane. "Our mission is to deliver the best possible conference content at an affordable price to money market fund professionals," he added.

EMFS will be held at the Hilton London Tower Bridge hotel. Book your hotel room before Monday August 1 and receive the discounted room rate of L289. Registration for our 2016 Crane's European Money Fund Symposium is $1,000. Visit www.euromfs.com to register or contact us to request the PDF brochure, for Sponsorship pricing and info, and for more details.

The EMFS agenda features sessions led by many of the leading authorities on money funds in Europe and worldwide. The Day One Agenda for Crane's European Money Fund Symposium includes: "Welcome to European Money Fund Symposium" with Peter Crane of Crane Data; followed by "IMMFA Update: The State of MMFs in Europe" with Reyer Kooy and Jane Lowe of IMMFA; "Beyond MMFs: Enhanced Cash Strategies" with Jason Granet of Goldman Sachs AM and Peter Yi of Northern Trust; "Senior Portfolio Manager Perspectives," with Joe McConnell of JP Morgan AM, Jonathan Curry, of HSBC Global AM, and Deborah Cunningham of Federated Investors; and "French Money Funds, VNAV & Negative Rates," with Charlotte Quiniou of Fitch Ratings and Vanessa Robert of Moody's Investors Service.

Day One also includes: "MMFs in Asia: China, Japan, and Beyond" with Andrew Paranthoiene of Standard & Poor's and Fitch Rating's Charlotte Quiniou; "US Money Funds: Adapting to Reforms" with Charlie Cordona of BNY Mellon Cash Investment Strategies and Peter Crane; and "UK Sterling MMF Issues" with Dennis Gepp of Federated UK and Jennifer Gillespie of Legal & General IM.”

The Day Two Agenda includes: "The Changing Face of European MMFs" with Rudolf Siebel of BVI (and an additional presenter to be named later); "New Regulations: Devil in the Details" with Jane Heinrichs of ICI and Dan Morrissey of William Fry; "Strategists Speak: Negative Rates and Reforms" with Giuseppe Maraffino of Barclays and Vikram Rai of Citi.

The afternoon of Day Two features: "Repo & ABCP in Europe: MM Securities" with Kieran Davis of Barclays and David Hynes of Northcross Capital LLP; "Dueling Domiciles: Ireland vs Luxembourg; "Risks and Ratings: Areas of Concern and Changes" with Marc Pinto of Moody's and Greg Fayvilevich of Fitch Ratings; "Client Concerns & MMF Investor Issues" with James Finch of UBS Global AM, Jim Fuell of JP Morgan AM, and Kevin Thompson of SSGA <i:http://www.ssga.com>`_; and "Offshore Money Fund Data, Holdings, and Portals with Peter Crane and Ryan Kipp of Cachematrix.

In other news, Robert Pozen, former Fidelity and MFS executive and current Senior Fellow at the Brookings Institution and Senior Lecturer at MIT Sloan School of Management, penned an article for Real Clear Markets called, "Money Market Funds in China Become Less Systemically Risky. He writes, "Last year, China's stock market took a tumble, which sent shock waves through the global securities markets. Now, money market funds are booming in China and could present the next systemic risk. While Chinese regulators have taken steps to reduce that risk, the question is whether they have gone far enough."

He continues, "Assets of Chinese money market funds have doubled in the last year -- from approximately $350 billion at the end of 2014 to over $700 billion at the end of 2015. These funds are primarily sold online to individual investors by Internet giants like Alibaba and Baidu. Money market funds have become so popular in China because they offer higher interest rates than retail bank deposits. But these funds achieve higher rates by investing in a much riskier array of debt securities than U.S. money market funds -- and the average Chinese investor may not be aware of the level of risk involved. If there were significant defaults in the debt securities held by Chinese money market funds, investors would likely run for the exits, just as they did last summer in the Chinese stock market."

Pozen explains, "To prevent these potential problems, the Chinese Securities Regulatory Commission has adopted rules, which became effective in February of this year. These rules are designed to decrease the riskiness and increase the liquidity of Chinese money market funds, although the rules are still looser than the regulations for U.S. money market funds. Since Chinese money market funds are not backed by the government, they can approach bank-like levels of risk only by holding high-quality debt securities with very short maturities. Such maturities reduce the fund's exposure to defaults and other adverse events that can happen between the purchase date and the payment date."

He adds, "The new regulations move in this direction by shortening the holding period until payment of a Chinese money market fund (the weighted average maturity of its debt securities) from 180 to 120 days. But this time limit is still twice as high as the time limit in the U.S., where the weighted average maturity is 60 days for a money market fund. U.S. money market funds are also not allowed to use any leverage -- borrowing monies and investing these monies in additional securities.... Again, the Chinese regulations move in the right direction, though not as far as the safer U.S. standard. They reduce the maximum leverage of a Chinese money market fund from 40 to 20 percent of its assets."

Pozen writes, "To cope with turbulent markets, the new regulations give Chinese money market funds, like their American counterparts, more tools to meet heavy redemptions. When the liquidity of a Chinese money market fund is thin, it must impose a 1 percent redemption fee on anyone redeeming more than 1 percent of the fund. And if someone tries to redeem more than 10 percent of any Chinese money market fund, it may delay the transaction or postpone payment of the proceeds. More broadly, the regulations mandate an array of disclosures designed to educate investors about the risks of Chinese money market funds."

He concludes, "Yet, the new regulations make one potentially significant change in the credit rating of fund investments, which may not be readily apparent to retail investors. Specifically, the regulations lower the minimum rating for fund investments in non-financial bonds from AAA to AA+. These are ratings from Chinese rating agencies, which some experts already view as using less rigorous standards than international rating agencies.... `In short, the recent regulations have generally reduced the risks associated with Chinese money market funds, although they do not yet meet international best practice standards. Over the next few years, we will see whether the new restrictions will be adequately enforced by the Chinese securities regulators, and even if so, if they are enough to make this booming investment safe for individual Chinese investors."

A bill introduced in Congress last year, the "Consumer Financial Choice and Capital Markets Protection Act of 2015," which would allow all money market funds continue to have a constant or stable NAV, is in the news once again. The bill's sponsor in the House, Rep. Gwen Moore (D-WI-4), along with co-sponsor Steve Stivers (R-OH-15) wrote in yesterday's Bond Buyer an article entitled, "Preventing Another Self-Inflicted Wound to Public Infrastructure Investment." It says the bill, which we covered in our March 8 News, "Long Shot Legislation Could Keep All Money Funds Stable, Ban Bailouts," is scheduled for a hearing by a Senate subcommittee this week. The Senate version of the bill (S.1802) was introduced on July 16, 2015, while the House version (H.R.4216) https://www.congress.gov/bill/114th-congress/house-bill/4216 was introduced on Dec. 10, 2015 by `Moore. We review the article below, but first some background.

As we quoted in our "Long Shot Legislation" piece, "This bill amends the Investment Company Act of 1940 to authorize any open-end investment company to elect, in its registration statement, to be a money market fund and to compute the current price per share, for purposes of distribution or redemption and repurchase, of any redeemable security issued by the company using the amortized cost method of valuation or the penny-rounding method of pricing, regardless of whether its shareholders are limited to natural persons, if: the company's objective is the generation of income and preservation of capital through investment in short-term, high-quality debt securities; the company elects to maintain a stable net asset value per share or stable price per share, by virtue of such methods, and the board of directors of the company has determined in good faith that it is in the best interests of the company and its shareholders to do so and that the money market fund will continue to use such method(s) only as long as the board believes that the resulting share price fairly reflects the market-based net asset value per share of the company; and the company agrees to comply with such quality, maturity, diversification, and liquidity requirements as the Securities and Exchange Commission (SEC) prescribes as necessary or appropriate in the public interest or for the protection of investors, if consistent with this Act."

The Bond Buyer article states, "This week, the Senate Banking Subcommittee on Securities, Insurance and Investment will hold a hearing on the Senate version of legislation we introduced in the House of Representatives, H.R. 4216, the Consumer Financial Choice and Capital Markets Protection Act, that will save a long-standing source of low-cost capital for public infrastructure investment. The bipartisan and bicameral legislation permits money market funds that invest in the short-term debt of commercial entities and state and local governments to continue to use amortized cost accounting for valuing fund assets. We introduced the legislation because it would preserve money market funds as a source of liquidity and capital for the public infrastructure needs of our citizens."

Moore and Stivers write, "State and local governments rely on access to robust capital markets to finance the construction and maintenance of schools, roads, public transportation systems, affordable housing, airports and other important infrastructure projects. Money market funds facilitate access by investing in short-term municipal debt and holding it to maturity. That access has been put at risk by a Securities and Exchange Commission (SEC) rule that requires certain money market funds offered to institutional investors change their method of calculating their net asset value (NAV) from fixed to floating."

Furthermore, the piece says, "Money market funds are among the largest investors in short-term municipal bonds. As of the end of 2015, money market funds held over $245 billion in municipal debt issuances from all 50 states and the District of Columbia.... Unfortunately, the SEC rule, which was adopted in July 2014 and that will take effect beginning on October 14, 2016, will make money market funds far less attractive to investors who desire a stable NAV cash management vehicle. Instead, their options will be limited to money market funds that invest exclusively in government securities, bank deposits, or non-SEC registered investment funds."

It continues, "As investors begin to leave funds that invest in municipal bonds, which has already started to happen, there will be less demand for municipal securities. According to a recent study by Treasury Strategies, a financial industry consulting firm, more than 40 percent of tax-exempt money market fund assets are directly at risk due to the floating NAV rule, and the indirect impacts are significantly higher because of the complexity of the rule's definition of non-natural persons. As demand decreases, the logical consequences will be higher borrowing costs for state and local governments in Wisconsin, Ohio, and across the nation."

The two Representatives add, "Over time, state and local taxpayers could be even more impacted from not having those options because current market conditions are favorable.... Our legislation simply provides institutional non-government money market funds with the option to offer and redeem their shares on a stable NAV basis, which would be consistent how money market funds operated in the past. It forbids any federal assistance from being provided directly to any money market fund, being it a stable or floating NAV. Equally important, it does not alter any aspect of the Dodd-Frank Wall Street Reform and Consumer Protect Act, nor does it alter any of the safety and soundness regulations adopted by the SEC in 2010 and 2014, which we strongly support. Those rules effectively addressed and enhanced money market fund liquidity, credit quality, transparency, and regulatory monitoring, and made money market funds more resilient to future market turmoil."

Moore and Stivers write, "While it is true that money market funds are not FDIC insured or hold regulatory capital like banks, money market mutual funds are far more liquid than banks, with a 10 percent of fund assets required to be convertible to cash overnight and 30 percent convertible in a week. Banks remain the cornerstone of U.S. financial markets, but money market funds are a safe and vital option for cash management, especially for amounts above FDIC insurance rates. Academics and studies have highlighted that, in the 40-year history of money market funds, only two have ever failed to pay investors the dollar par share value (known as "breaking the buck"); whereas, over the same 40 years, thousands of FDIC insured banks have failed."

They conclude, "The Senate subcommittee will soon hear important testimony that state and local governments need Congress to act on H.R. 4216 (S. 1802 in the Senate) so they can continue to have access to the indispensable financing options provided by money market funds. We urge our colleagues to heed this call and work with us to enact this legislation, which preserves those options while protecting the stability of the financial system."

As we wrote in our previous News article, an organization has formed to support the bill, the Coalition for Investor Choice, which is made up primarily of state treasurers, universities, state and local government, businesses, trade associations, and pension funds. The Coalition website explain, "These funds, which collectively have more than $1 trillion in assets, will be forced into a "floating" net asset value or "NAV" requiring them to value shares in increments of 0.0001 cents per share."

On the website's "Facts" page, the Coalition explains, "By ending the stable $1 per share valuation, new government regulations eliminated a key aspect of Money Market Funds that make them a vital tool for institutions. Without a stable valuation, institutions will have trouble using these funds as a way of handling daily cash needs. The effects will ripple across the financial sector where institutions already hold more than $1 trillion of assets in stable NAV, prime and tax-exempt money market funds."

With now less than 5 months to go before the remaining money market reforms go live, fund managers continue to ramp up their communications. Wells Fargo Funds' discusses how reforms are changing the investment landscape in their latest "Overview, Strategy, and Outlook," First American Funds reviews the April 14 "Phase II" MMF reforms in a commentary called, "Two Down, One To Go," and, Fort Pitt Capital Group looks forward to a "whole new ballgame" in its piece, "Money market reform finalized." We review these updates below.

Wells commentary, written by Head of Money Funds Jeff Weaver and his team, says, "In the 21 months since the SEC published its amendments to Rule 2a-7, much planning has gone on behind the scenes to prepare for the implementation deadline of October 14, 2016, though it may not seem like it from all outward appearances. Other than announcements about fund lineups and anticipated changes from mutual fund companies, as well as the conversion of approximately $235 billion in prime funds to government funds, not much about the industry appears to have changed. [B]oth institutional prime and government fund assets have remained relatively flat to their July 2014 balances. In spite of the planned fund migration from prime funds to government funds, institutional prime fund assets have decreased only approximately $109 billion while institutional government fund assets have increased about $115 billion."

It continues, "Based on surveys fortified by conversations with existing shareholders, many industry observers have concluded that a large number of institutional prime shareholders will migrate from prime funds to another as-yet-unidentified product as a result of product changes to a variable NAV as well as the possibility of fees and gates being imposed. However, it's still unknown when these changes will occur. Because these funds' primary objectives are liquidity and stability of principal, risk management would suggest that in the face of presumably large shareholder redemptions of unknown timing, portfolio managers will begin to build liquidity and shorten the average maturity of their funds, which now seems to be the case."

Wells explains, "Crane Data reports that the weighted average maturity of all institutional prime funds has decreased from 40 days at the end of July 2014 to 30 days at the end of April 2016. Over nearly the same time period, the SEC reports the following changes from July 2014 to March 2016: Weekly liquid assets of prime funds increased from 39% to 43%, the amount of securities maturing in more than 60 days dropped from 42% to 37%, and the amount maturing in more than 180 days dropped from 12% to 4.6%."

Furthermore, they tell us, "Should uncertainty still rule the day, it seems reasonable to expect this trend to continue. As we have discussed a number of times in previous commentaries, the desire of portfolio managers to invest in shorter maturities is often at odds with issuers' regulatory requirements to issue longer dated securities. This relative scarcity on the short end of the money market curve could cause short prime rates to go even lower; if demand overwhelms supply in that part of the curve, portfolio managers may be forced into other sectors in order to meet diversification and regulatory requirements -- most likely the government sectors and/or increasing usage of the Federal Reserve's (Fed's) reverse repo facility."

Wells concludes, "As all this works its way through the system, the end result could be very liquid prime funds at lower yields. The key to solving this conundrum is information: The more certain fund managers become of the size and timing of large cash flows, the better they are able to manage funds and provide competitive returns with an optimal level of liquidity. By early fall, it is our expectation that many of these unknowns will become more clear and portfolio structures will be readjusted accordingly."

Also, in First American Funds' piece, Managing Director Lisa Isaacson writes, "Whew! That collective sigh of relief you just heard is from all of the money market fund managers who have just gotten through the second Money Market Reform deadline. Hopefully, it seemed like a non-event to investors, but we can assure you a lot happened behind the scenes to meet the Securities and Exchange Commission's (SEC's) April 14, 2016 deliverable.... More fund information, available in a standard and timely format can only help investors understand their investments. We are all for transparency and ensuring investors have the data needed to make informed decisions."

She says, "Making stress testing more stringent and standardizing the testing parameters will assist fund families in assessing whether their portfolios are positioned to withstand market events. Results may ultimately be incorporated into portfolio composition. Stress testing models can also be utilized off-cycle to assess how a specific market event may impact a portfolio's liquidity or share price. Ultimately, fund families want the same thing as investors want -- a stable share price and ample liquidity to honor redemptions -- and enhanced stress testing is another tool to help managers achieve these objectives."

On Enhanced Diversification, Isaacson writes, "The 2014 reforms limited the maximum exposure to an entity by requiring funds to aggregate affiliate issuers and also put more stringent limits on exposure to asset-backed commercial paper sponsors and demand-feature guarantors. Admittedly, that may be a bit hard to follow and the rules are quite technical.... These diversification enhancements are designed to spread out the risk in money market funds and limit any potential downside impact should an issuer or guarantor get into trouble. At First American Funds, we agree so much with these changes that we were actually following similar guidelines several years before the SEC proposed them."

She adds, "In reviewing historic weekly liquid asset percentages of the First American Prime Obligations Fund, one can see that our portfolio manager has carried liquidity well in excess of 30%, a trend we expect to continue. It is our position that shareholders invested in money market funds expect principal preservation and daily access to their investment. We will continue striving to manage our portfolios with weekly liquid assets in excess of the 30% fee and gate trigger."

Finally, Fort Pitt Capital Group's commentary says, "Looking ahead, we believe the additional headaches which the new rules create for institutional investors may cause many to simply exit the product. As a money manager, if for many years you've been able to count on redeeming your money fund investments at $1.00, with very little risk of loss and immediate liquidity, the new rules are a whole new ballgame, and not a fun one at that."

They add, "If investors can't count these investments as cash [sic], and they may not have access to them when they need them most, what good are they? Many institutional investors are therefore likely to drop the product altogether, and move to a government-only money fund, or invest their cash themselves, directly in U.S. Treasury bills. Thus the ultimate effect of these rules could be to further fuel demand for U.S. government debt, while reducing the demand for private credit."

The May issue of Crane Data's Bond Fund Intelligence was sent out to subscribers on Friday. Our latest edition features the stories, "ICI Fact Book Shows Outflows for Bond Funds in 2015; Stats," which looks at year-end 2015 trends in bond funds, and a profile of Charles Melchreit, co-Portfolio Manager of the $2.7 billion Pioneer Multi-Asset Ultrashort Income Fund. Also, we recap the latest Bond Fund News, including flows for March and April, and the launch of several new Ultra-Short funds, including one by Morgan Stanley. (See our May 11 News and today's "Link of the Day.") BFI also includes our Crane BFI Indexes, which showed gains in April. In other news, Stradley Ronon's new "Tax Insights" features recent IRS notices involving money market funds. (See our May 9 LOTD, "IRS Gives Guidance on Diversification in Govt VA MMFs, Advisor Contributions," and see our July 30, 2014 News, "Reform Floating NAV Accounting Issues Addressed by Treasury Proposal.")

Our lead Bond Fund Intelligence story says, "The ICI's recently released its "2016 Investment Company Fact Book," an annual statistical compilation that shows that bond funds suffered outflows in 2015 for the first time since 2008. However, flows and performance have returned in 2016.... Of the $15.7 trillion in US mutual fund assets, 22% were in bond funds at year-end 2015."

In a sidebar "Big Spring for Bond Flows," we explain, "Bond funds posted four straight weeks of inflows in April, according to ICI's "Estimated Long-Term Mutual Fund Flows" report. From April 6 through April 27, bond funds showed $25.2 billion in inflows. ICI's monthly "Trends in Mutual Fund Investing, March 2016 shows that bond fund assets were up $71.3 billion in March to $3.501 trillion -- the first time they have topped $3.5 trillion since August of 2015. It was the largest monthly gain since June of 2012, according to ICI data.... Year-to-date, bond fund assets are up about $89 billion."

Our Profile on Pioneer's Charles Melchreit says, "This month, Bond Fund Intelligence interviews Charles Melchreit, Senior Vice President and Portfolio Manager at Pioneer Investments. He manages several funds, including the $2.7 billion Pioneer Multi-Asset Ultrashort Income Fund -- one of the largest and oldest ultra-short funds on the market. He discusses how the fund "threads the needle" between short-duration products on the market using a layered investment strategy." We also report on returns, writing, "Returns moved higher in April across our Crane BFI Indexes. Our BFI Total Index averaged a one month return of 1.05% and is up 2.49% year to date. (`Contact us if you'd like to see a copy of our latest Bond Fund Intelligence.)

Stradley Ronon's "Tax Insights" publication, features a piece on, "IRS Issues Guidance to Government Funds for Section 817(h) Diversification Requirements." It says, "The IRS has issued Notice 2016-32, which provides guidance to taxpayers regarding the diversification requirements under Section 817(h) for a segregated asset account that invests in an MMF that is a government MMF.... The notice explains that under current practice, only a limited number of United States agencies or instrumentalities issue securities that Rule 2a-7 allows MMFs to hold. Also, in coordination with the MMF Reform Rules described above, some MMFs are expected to convert to government MMFs, resulting in increased demand for government securities. This increased demand, the IRS notes, may exacerbate MMFs' difficulty in acquiring the assets necessary both to qualify as a government MMF and to satisfy the diversification requirements under Section 817(h) and Treasury Regulations Section 1.817-5."

Stradley continues, "The Treasury Department and the IRS have determined that variable contracts should be able to offer government MMFs as an investment option. Therefore, the notice states, the Treasury Department and the IRS intend to amend Treasury Regulations Section 1.817-5. Pending the promulgation and effective date of future administrative or regulatory guidance, taxpayers may rely on the following alternative diversification requirement under Treasury Regulations Section 1.817-5 for a segregated asset account that invests in a government MMF: A segregated asset account, within the meaning of Treasury Regulations Section 1.817-5(e), is adequately diversified for purposes of Section 817(h) if: (1) No policyholder has investor control; and (2) Either: (a) The account itself is a government MMF under Rule 2a-7(a)(14); or (b) The account invests all of its assets in an "investment company, partnership, or trust," as defined in Treasury Regulations Section 1.817-5(f)(1), that satisfies the criteria of Treasury Regulations Section 1.817-5(f)(2) and qualifies as a government MMF under Rule 2a-7(a)(14)."

The law firm also wrote a segment entitled, "IRS Provides Relief for Certain Money Market Funds That Receive 'Top Up' Contribution." It says, "The IRS released Revenue Procedure 2016-31 to provide guidance to money market funds that receive contributions from their advisers as the MMFs transition to comply with Securities and Exchange Commission rules that change how MMF shares are priced. Revenue Procedure 2016-31 advises that if an MMF receives a contribution as part of a transition to implement the floating NAV reform before Oct. 14, the IRS will not challenge the MMF's treatment of the contribution as an amount that is included in investment company taxable income (ICTI) for purposes of Section 852(b)(2) (section references are to the Internal Revenue Code of 1986, as amended), but it is excluded from ICTI for purposes of Section 852(a)(1)."

Stradley's piece continues, "The revenue procedure provides an example that includes a contribution from the adviser of an MMF that increases the MMF's NAV to $1.0000. In the example, the adviser "grosses up" the contribution to the MMF so that the contribution is sufficient to cover the federal income tax that will be owed by the MMF. The net amount of the adviser's contribution remaining after the payment of federal income tax by the MMF is sufficient to restore the MMF's NAV to $1.0000.... Revenue Procedure 2016-31 does not address the ability of the adviser to deduct its contribution to an MMF and does not address the state and local tax consequences, if any, of an adviser contribution to an MMF."

It adds, "An MMF converting to a floating NAV may receive a contribution so that when the MMF transitions to a floating NAV, all shareholders receive the same value per share at the time of the transition (a "top up" contribution), e.g., a contribution from the adviser to the fund. RICs are required to meet certain income distribution requirements under Sections 852 and 4982. As the IRS highlights in the revenue procedure, if the distribution requirements apply to an adviser contribution, it may be impossible or impractical for the advisers of some MMFs to make contributions that raise the MMF's NAVs to $1.0000, so that shareholders will receive the same value per share both before and after the transition to a floating NAV."

Finally, Stradley Ronon writes, "The Treasury Department and the IRS believe that it is in the interest of sound tax administration to apply Section 852 in a manner that will support the efforts of the staff of the SEC Division of Investment Management to facilitate a smooth transition to compliance with the SEC MMF Reform Rules. The Treasury Department and the IRS believe that excluding certain adviser contributions from ICTI for purposes of the distribution requirements in Section 852(a) is important to facilitate those contributions, but they do not believe the contributions should be excluded from the RIC's income for other federal tax purposes." Note, the guidance doesn't finalize the proposed "wash sale" and simplification of gains for floating NAV funds -- that's expected to come out late this summer.

Both Vanguard and BlackRock recently released video interviews with their leading portfolio managers and executives to discuss money fund related issues. Vanguard posted an interview entitled, "Money Market Reform: Are You Impacted?" The clip features money market fund PMs David Glocke and Justin Schwartz, who discuss how investors will be impacted by the SEC's Reforms. Also, BlackRock posted a video on its Cash Academy website called, "The Importance of Scale," which features commentary from Thomas Callahan, Head of BlackRock's Global Cash Management Business, on the recent acquisition of BofA's money fund business.

Vanguard's Q&A begins with Schwartz, who will speak on Tax-Exempt MMF issues at Crane's Money Fund Symposium next month in Philadelphia (June 22-24), talking about the recent changes to MMFs. He says, "I think the most important thing to note is that for most of our shareholders, not a lot is going to change, but we are happy to go through a couple of the key changes here today. And the first thing I'd like to get started on is enhanced disclosure. So our shareholders are going to have some increased transparency into the portfolios, and that's going to take place through the website. So we'll have daily website disclosure on our daily and weekly liquid assets that we hold in the portfolio."

Schwartz continues, "In addition, they'll be able to see a market-based value of the portfolio; something different from money market funds. This will be taken out to the fourth decimal place. It's important to note that this is not the share price that investors will be transacting at. We'll strive to maintain a stable $1 NAV in all of our money market funds. In addition to that, we'll be posting daily shareholder cash flows on the web page so shareholders will have a better insight into what's going on to the fund day in and day out. [We] currently report ... detailed portfolio holdings to the SEC at the end of every month. Those [were] available on a 60-day lag and after April 14, our shareholders will be able to access those through the SEC's website [and] on our website as well."

Glocke adds, "A couple of things that investors are probably going to start hearing about is the SEC allowed the money market funds to not just offer the stable net asset value portfolios, which clients have gotten used to for the last 40 years, but to also go ahead and offer floating-rate net asset value type portfolios. And we've decided at Vanguard that's not really where we want to go. We just want to offer the stable NAV traditional-type money market funds that clients are used to. So those are the products that we'll offer."

He continues, "Also, they'll hear something about fees and gates. So the SEC is going ahead and allowing boards of directors of portfolios to implement fees and gates, which we would expect would be implemented in times of extreme stress. The trigger mechanism for that is something that's going to be displayed on our website through the enhanced disclosure, which represents the amount of weekly liquidity in the fund. As long as the portfolio has at least 30% weekly liquidity in the portfolio, the board of directors won't have to consider whether they need to implement fees and gates. So what we've done is we've enhanced the amount of liquidity in our funds to around 40% in total assets. And we think that's going to give us enough of a buffer to go ahead and avoid the times where we might have to turn around and implement that. And in addition to the government funds that we offer, won't have fees and gates apply to them at all. The SEC allowed the board of directors to go ahead and opt out of that for government funds and Vanguard's board chose to do that."

Glocke adds, "On the taxable side, there's not a lot of changes other than enhancing the amount of liquidity. During the financial crisis, in particular during the Lehman period when things were really volatile, we lost less than 2% of our assets over the course of a week. So having that additional buffer from 30 to 40% I think gives us a lot of comfort knowing that we can go ahead and deal with anything that comes up day to day. And certainly, as we did during the financial crisis, if we saw conditions eroding in the markets, we would turn around and enhance that to go ahead and make sure that we had an even larger buffer, again, similar to the way we managed the cash back in that time period."

Schwartz comments, "`On the municipal side, I'd say very little has changed in terms of how we manage the portfolios. The securities that are available for money market funds in the municipal market are actually structured such that they qualify for daily or weekly liquid assets. So, traditionally, even dating back before the financial crisis, municipal money market funds ran about 70 to 80% in what today qualifies as weekly liquid assets."

Regarding brokerage accounts, Schwartz explains, "That's probably one of the biggest areas of change that our shareholders will see. So, as a result of the reform, Vanguard has decided to only offer the Vanguard Federal Money Market Fund as a settlement option and a brokerage account. As David mentioned before, government funds are not subject to fees and gates and they're open to all investors. So with Vanguard Brokerage thought that would be the best option for clients. It is important to note that they can continue to use all the Vanguard money market funds as they do today with the exception of settling brokerage trades."

He adds, "It's a good opportunity for investors to think about what they value in their money market fund, whether it's tax-exempt income or, in the case of a prime fund, maybe a slightly higher yield than a government portfolio <b:>`_. So those are decisions and things that the clients may want to consider."

Glocke says of their Ultra Short Bond Fund alternative, "The strategies that we're hearing about and seeing people execute on ... Vanguard introduced an ultra-short bond fund recently. So it's positioned right between a money market fund and a short-term bond fund. It's a variable NAV fund very similar to a bond fund, but it buys shorter-duration assets. So that's where its maturity profile would be right between the two. And we've seen a lot of interest in that product, investors considering that, mostly though from investors who have money maybe in money market funds that recognize at this point that maybe it's time to take some of that cash that has traditionally been long-term cash in the money market fund and move it into something that offers a better opportunity for returns."

Schwartz comments, "And we have a municipal product, Short-Term Tax-Exempt Fund, that has a similar maturity and duration profile to the ultra-short-term taxable fund that is available for clients as well who desire the tax-exempt income." Glocke tells us, "In this low-yield environment that we finally are starting to move out of very slowly, a lot of clients were looking for a way to go ahead and get a higher return but yet not necessarily to go into the more traditional-type bond funds. So these products give investors who have that risk profile an opportunity to do something a bit different."

Finally, on Vanguard opting not to have floating NAV funds, Glocke says, "But I think a lot of clients really prefer to go ahead and know that when they're transacting, it's $1 in, $1 out. It's never a guarantee. We can say that over and over, and it's in all the prospectus. We have a long tradition of very conservative investment management and we feel very comfortable that our investment-style approach that Vanguard has will go ahead and keep us where we should be."

In BlackRock's video on Scale," Callahan says, "Today, I'll be discussing the changing face of the cash industry and the role that scale plays in our ability to meet the needs of our clients.... We see the impact of scale in three critical dimensions: Accommodation, Access and Investment Diversity. Let's dig into each of these." (See our April 19 News, "BlackRock Completes BofA Funds Merger; Now 2nd Largest MMF Manager," for more.)

He continues, "First, Accommodation. This refers to the ability of money market funds to accept the flows of all its investors, big and small. In an environment where supply of traditional cash instruments such as commercial paper, time deposits and government debt is shrinking, larger clients need larger funds to accommodate flows without impacting the overall fund. We believe clients should consider fund size and manager track record when choosing cash investment options, and seek providers that manage funds in a way that is equitable to shareholders of all sizes."

Callahan goes on, "Second, Access. In our view, the size of a money market platform impacts the access that it has to the market. Relationships are important, not just with clients, but also with partners and counterparties in the market, on whom we rely on every day for both supply and liquidity. Scale players such as BlackRock are more active in the market and work more closely with dealers to access investments and achieve liquidity for our clients."

He concludes, "Finally, Investment Diversity. A platform at scale allows providers to invest their funds in a more diverse set of assets, producing deeper liquidity and reducing concentration risk across the portfolio." He adds, "As the firm trusted to manage more money than any other investment firm, BlackRock has long believed in the value of scale.... To that end, we are pleased to announce the addition of assets from Bank of America Global Capital Management, a deal we closed in April 2016.... It solidifies our commitment to being a scale player in this space; working tirelessly to meet your cash management needs every day."

Crane Data released its May Money Fund Portfolio Holdings earlier this week, and our latest collection of taxable money market securities, with data as of April 30, 2016, shows a drop in Repo, Treasuries and CDs but increases in Time Deposits and Commercial Paper. Money market securities held by Taxable U.S. money funds overall (tracked by Crane Data) decreased by $21.0 billion in April to $2.580 trillion. MMF holdings decreased by $75.5 billion in March, increased by $64.2 billion in February, and increased by $6.0 billion in January. Repos remained the largest portfolio segment, followed by Treasuries and Agencies. CDs were in fourth place, followed by Commercial Paper, Time Deposits securities and VRDNs. Money funds' European-affiliated securities jumped to 28.6% of holdings, up from the previous month's 20.3%. Below, we review our latest Money Fund Portfolio Holdings statistics. Note: we made a number of category changes to reflect the SEC's new disclosure mandates, which went live on April 14.

Among all taxable money funds, Repurchase Agreements (repo) decreased $65.3 billion (-10.8%) to $542.2 billion, or 23.4% of holdings, after increasing $49.3 billion in March and increasing $4.4 billion in February. Treasury securities fell $36.8 billion (-6.4%) to $538.8 billion, or 22.1% of holdings, after rising $37.5 billion in March and climbing $40.9 billion in February. Government Agency Debt decreased $9.0 billion (-1.9%) to $473.1 billion, or 18.5%, after decreasing $14.7 billion in March and increasing $5.5 billion in February. Repos normally plunge following quarter-ends, and Treasuries and Agencies declines even amidst the continued conversion of Prime funds to Government funds ($242.0 billion so far has converted).

Certificates of Deposit (CDs) were down $17.0 billion (-3.9%) to $413.8 billion, or 16.6% of holdings, after dropping $41.8 billion in March and climbing $7.6 billion in February. Commercial Paper (CP) was up $20.1 billion (6.0%) to $352.8 billion, or 13.7%, while Other holdings, primarily Time Deposits, jumped $81.1 billion (52.7%) to $235.0 billion, or 9.1% of holdings. VRDNs held by taxable funds increased by $5.9 billion (32.7%) to $23.8 billion (0.9% of assets).

Among Prime money funds, CDs represent just under one-third of holdings at 31.2% (down from 32.0% a month ago), followed by Commercial Paper at 26.6% (up from 24.7%). The CP totals are comprised of: Financial Company CP, which makes up 15.8% of total holdings, Asset-Backed CP, which accounts for 6.8%, and Non-Financial Company CP, which makes up 4.0%. Prime funds also hold 4.3% in US Govt Agency Debt (down from 5.7%), 7.1% in US Treasury Debt (up from 5.9%), 3.7% in US Treasury Repo (up from 9.3%), 2.9% in Other Instruments, 13.7% in Non-Negotiable Time Deposits, 4.8% in Other Repo, and 4.3% in US Government Agency Repo.

Some of the new Portfolio Composition "Categories" (taken from changes in the SEC's Form N-MFP) include: Non-US Sovereign Debt, Other Asset Backed Securities, Other Investment (Corp Notes), Other Investment (Medium Term Note), Other Municipal Securities, and Tender Option Bonds. But holdings in all of these were too small to mention. Prime money fund holdings tracked by Crane Data total $1.326 trillion (down from $1.348 trillion last month), or 51.4% of taxable money fund holdings' total of $2.580 trillion. (Let us know if you'd like to see our spreadsheet comparing the old vs. new Holdings categories.)

Government money fund portfolios totaled $735 billion, up from $716 billion in March, while Treasury money fund assets totaled $519 billion, down from $536 billion in March. Government money fund portfolios were made up of 56.7% US Govt Agency Debt, 19.0% US Government Agency Repo, 8.7% US Treasury debt, and 15.3% in US Treasury Repo. Treasury money funds were comprised of 76.8% US Treasury debt, 22.4% in US Treasury Repo, and 0.3% in Government agency repo, Other Instrument, and investment company shares. Government and Treasury funds combined total $1.254 trillion, or 48.6% of all taxable money fund assets.

European-affiliated holdings increased $210.1 billion in April to $737.8 billion among all taxable funds (and including repos); their share of holdings increased to 28.6% from 20.3% the previous month. Eurozone-affiliated holdings increased $129.7 billion to $434.6 billion in April; they now account for 16.9% of overall taxable money fund holdings. Asia & Pacific related holdings increased by $14.8 billion to $274.3 billion (10.6% of the total). Americas related holdings decreased $245.0 billion to $1.562 trillion and now represent 60.6% of holdings.

The overall taxable fund Repo totals were made up of: US Treasury Repurchase Agreements, which decreased $96.3 billion, or -25.7%, to $278.3 billion, or 10.6% of assets; US Government Agency Repurchase Agreements (up $31.5 billion to $199.6 billion, or 7.7% of total holdings), and Other Repurchase Agreements ($64.2 billion, or 2.5% of holdings, down $400 million from last month). The Commercial Paper totals were comprised of Financial Company Commercial Paper (up $10.6 billion to $209.8 billion, or 8.1% of assets), Asset Backed Commercial Paper (down $100 million to $90.3 billion, or 3.5%), and Non-Financial Company Commercial Paper (up $9.6 billion to $52.6 billion, or 2.0%).

The 20 largest Issuers to taxable money market funds as of April 30, 2016, include: the US Treasury ($538.8 billion, or 20.9%), Federal Home Loan Bank ($342.7B, 13.3%), BNP Paribas ($85.0B, 3.3%), Wells Fargo ($84.2B, 3.3%), Credit Agricole ($81.1B, 3.1%), Societe Generale ($55.5B, 2.2%), Mitsubishi UFJ Financial Group Inc. ($54.5, 2.1%), Federal Reserve Bank of New York ($52.6B, 2.0%), Federal Farm Credit Bank ($52.0B, 2.0%), RBC ($51.2B, 2.0%), Bank of Nova Scotia ($50.6B, 2.0%), Federal Home Loan Mortgage Co. ($47.3B, 1.8%), Bank of America ($43.3B, 1.7%), Natixis ($40.7B, 1.6%), Credit Suisse ($40.6B, 1.6%), Mizuho Corporate Bank ($40.4B, 1.2%), JP Morgan ($38.3B, 1.5%), HSBC ($37.6B, 1.5%), Sumitomo Mitsui Banking Co ($37.4B, 1.4%), and DnB NOR Bank ASA ($36.5, 1.4%).

In the repo space, the `10 largest Repo issuers (dealers) with the amount of repo outstanding and market share (among the money funds we track) include: Wells Fargo ($55.8B, 10.3%), BNP Paribas ($53.6B, 9.9%), Federal Reserve Bank of New York ($52.6B, 9.7%), Societe Generale ($39.9B, 7.4%), Credit Agricole ($39.9B, 7.4%), Bank of America ($34.0B, 6.3%), Credit Suisse ($27.4B, 5.0%), RBC ($24.4B, 4.5%), Bank of Nova Scotia ($24.3B, 4.5%), and JP Morgan ($21.8B, 4.0%).

In the repo space, the Federal Reserve Bank of New York's RPP program issuance (held by MMFs) plummeted by $194.4B to $52.6B, or 9.7% of money fund repo -- the lowest level since the end of 2013 when the program began. The 10 largest Fed Repo positions among MMFs on 4/30 include: Fidelity Cash Central ($9.1B), Goldman Sachs FS Treas Sol ($5.0B), Vanguard Market Liquidity Fund ($3.8B), Franklin IFT MMP ($3.4B), UBS Select Treas ($3.0B), JP Morgan US Govt ($2.4B), Morgan Stanley Inst Lq Govt ($2.3B), Schwab Cash Reserves ($1.5B), UBS RMA Money Market Portfolio ($1.5B), and Deutsche MMkt Series ($1.5B).

The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: Mitsubishi UFJ Financial Group Inc. ($43.2B, 4.9%), Credit Agricole ($41.2B, 4.6%), Sumitomo Mitsui Banking Co ($37.4B, 4.2%), DnB NOR Bank ASA ($36.5B, 4.1%), Skandinaviska Enskilden Banken AB ($33.1B, 3.7%), Svenska Handelsbanken ($31.5B, 3.6%), BNP Paribas ($31.3B, 3.5%), Swedbank AB ($29.8B, 3.4%), Wells Fargo ($28.4B, 3.2%), and Natixis ($27.1B, 3.1%).

The 10 largest CD issuers include: Sumitomo Mitsui Banking Co ($29.4B, 7.2%), Mitsubishi UFJ Financial Group Inc. ($29.1B, 7.1%), Wells Fargo ($22.2B, 5.4%), Mizuho Corporate Bank Ltd ($19.8B, 4.8%), Bank of Nova Scotia ($18.3B, 4.5%), Bank of Montreal ($17.9B, 4.4%), Sumitomo Mitsui Trust Bank ($17.9B, 4.3%), Toronto-Dominion Bank ($17.7B, 4.3%), Canadian Imperial Bank of Commerce ($16.4B, 4.0%), and Norinchukin Bank ($14.8B, 3.6%).

The 10 largest CP issuers (we include affiliated ABCP programs) include: BNP Paribas ($21.8B, 7.4%), Commonwealth Bank of Australia ($13.6B, 4.6%), JP Morgan ($12.8B, 4.3%), RBC ($12.0B, 4.0%), Credit Agricole ($11.6B, 3.9%), Mitsubishi UFJ Financial Group Inc. ($11.5B, 3.9%), ING Bank ($11.3B, 3.8%), HSBC ($11.1B, 3.8%), Societe Generale ($10.5B, 3.5%), and Australia and New Zealand Banking Group Ltd ($9.4B, 3.2%).

The largest increases among Issuers include: Credit Agricole (up $41.5B to $81.1B), DnB NOR Bank ASA (up $27.3B to $36.5B), Societe Generale (up $26.5B to $55.5B), Skandinaviska Enskilda Banken AB (up $21.6B to $33.1B), BNP Paribas (up $15.6B to $85.0B), Natixis (up $13.2B to $40.7B), Credit Mutuel (up $11.8B to $19.9B), Barclays PLC (up $11.3B to $21.6B), Credit Suisse (up $11.1 to $40.6B), and Mizuho Corporate Bank Ltd. (up $9.9B to $40.4B).

The largest decreases among Issuers of money market securities (including Repo) in March were shown by: Federal Reserve Bank of New York (down $194.4B to $52.6B), US Treasury (down $38.0B to $538.8B), Canadian Imperial Bank of Commerce (down $8.9B to $17.1B), Bank of Montreal (down $8.2B to $25.1B), Federal Home Loan Mortgage Co. (down $6.8B to $47.3B), RBC (down $3.7B to $51.2B), Mitsubishi UFJ Financial Group Inc. (down $3.4B to $54.5B), Rabobank (down $2.7B to $15.8B), Federal National Mortgage Association (down $1.9B to $28.1B), and State Street (down $1.8B to $9.1B).

The United States remained the largest segment of country-affiliations; it represents 53.1% of holdings, or $1.370 trillion (down $225.0B). France (11.5%, $295.7B) moved back into second, displacing Canada (7.4%, $190.9B) which fell to third. Japan (7.2%, $184.3B) stayed in fourth, while Sweden (4.5%, $117.1B) held fifth. The United Kingdom (3.5%, $89.8B) remained sixth, while Australia (2.6%, $67.8B) stayed in seventh. The Netherlands (2.4%, $61.7B), Germany (2.3%, $60.0B), and Switzerland (2.2%, $55.8B) round out the top 10 among country affiliations. (Note: Crane Data attributes Treasury and Government repo to the dealer's parent country of origin, though money funds themselves "look-through" and consider these U.S. government securities. All money market securities must be U.S. dollar-denominated.)

As of April 30, 2016, Taxable money funds held 29.8% (up from 29.7%) of their assets in securities maturing Overnight, and another 13.2% maturing in 2-7 days (up from 9.1%). Thus, 43.1% in total matures in 1-7 days. Another 18.4% matures in 8-30 days, while 14.6% matures in 31-60 days. Note that more than three-quarters, or 76.1% 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 10.9% of taxable securities, while 10.9% matures in 91-180 days, and just 2.1% matures beyond 180 days.

Crane Data's Taxable MF Portfolio Holdings (and Money Fund Portfolio Laboratory) were updated late Tuesday and Wed., and our Tax Exempt MF Holdings and MFI International "offshore" Portfolio 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.

A press release entitled, "Morgan Stanley Investment Management Launches New Ultra-Short Income Fund" explains, "Morgan Stanley Investment Management today announced the launch of its new Morgan Stanley Institutional Fund Trust (MSIFT) Ultra-Short Income Portfolio, a conservatively managed fund that may be appropriate for cash investors." The fund, managed by Jonas Kolk and Michael Cha, launched on April 29, according to the fund's website. The release says the fund "provides a compelling alternative for cash investors." We excerpt from the release below, and we also review a report from Fitch Ratings, "Foreign Banks Lose Money Fund Financing as Reform Looms." (Note: We initially reported on the MS filing in our October 2015 Bond Fund Intelligence, and watch for more coverage in our May BFI, which ships Friday.)

Morgan Stanley's press release says, "The reforms to SEC Rule 2a-7 which govern money market funds and are effective this October will require institutional Prime money market funds to operate with a floating net asset value (NAV) and face the possible imposition of liquidity fees and/or redemption gates. As a result of these reforms, investors in prime money market funds who are concerned about the potential imposition of liquidity fees and gates will be forced to re-evaluate their current cash investment strategies. Conservatively managed ultra-short funds are being considered by many cash investors as a potentially intriguing vehicle for cash investments."

Kolk, Managing Director and Chief Investment Officer for Global Liquidity, comments, "This is a member of a new category of funds, Conservative Ultra-Short. Because the 'ultrashort' category lacks specificity -- with some funds managed very conservatively and others aggressively, with durations close to a year and credit quality that dips into the high yield space -- it is critical for investors to look under the hood of ultra-short funds to see how their investment engines run. Not all ultra-short funds are created equal."

The release continues, "The MSIFT Ultra-Short Income Portfolio provides a compelling alternative for cash investors. It focuses on capital preservation and liquidity, has an initial NAV of $10.00 that may float, a maximum weighted average maturity of 90 days, a conservative investment approach, daily liquidity, a diversified portfolio, AAA/V1 rating and the same experienced and specialized team that manages the Morgan Stanley Institutional Liquidity Funds."

Fred McMullen, Managing Director and Head of Client Engagement for Global Liquidity, tells us, "In many ways, a very conservatively managed ultra-short income fund can provide great utility to a cash investor. We're advising clients to expedite their analysis and expedite their decision-making timeframe, because a lot is going to change between now and October."

The release adds, "The MSIFT Ultra Short Income Portfolio is not a money market fund and does not seek to maintain a stable net asset value. Morgan Stanley Investment Management's Global Liquidity Solutions business offers a unique value proposition to its clients to navigate the evolving cash investment landscape -- direct and easy access to a combination of expertise, resources and investment solutions, including money market, ultra-short and short duration products."

On the Ultra-Short Income Portfolio's webpage, MSIM explains the investment process. They say, "The management team follows a multi-pronged investment process with respect to credit risk, interest rate risk and liquidity. Securities are reviewed on an ongoing basis on their ability to maintain or improve creditworthiness taking into consideration factors such as cash flow, asset quality, debt service coverage ratios and economic developments. Additionally, exposure to guarantors and liquidity providers is monitored separately as are the various diversification requirements. The team manages the Portfolio's assets in an attempt to reduce credit or interest rate risks." (See our March 17 News, "Morgan Stanley Declares Inst Funds in Filing; BlackRock Fed RRP Fund," for more on MS's money fund plans.)

In other news, Fitch's report on Foreign Banks says, "Foreign banks are losing a source of dollar funding as U.S. prime money funds convert to government funds, according to a new report from Fitch Ratings. U.S. money fund managers are revamping their product line-ups in response to reforms enacted by the SEC in 2014 and many prime money funds are converting to government funds. As funds convert, they invest in government securities instead of corporate and bank short-term debt, reducing available funding for banks."

Senior Director Greg Fayvilevich comments, "Foreign banks that rely most on U.S. prime money funds to support their clients' U.S.-dollar-based activities will be most affected by prime to government fund conversions, and may incur higher costs to replace relatively cheap dollar funding from U.S. prime money funds." Fitch says, "Many foreign banks use money fund financing only opportunistically, and have access to other sources of dollar funding, such as central bank swap facilities."

The report continues, "U.S. prime money funds provide funding to foreign banks that do not have a natural retail deposit base in U.S. dollars. As the funds convert to government funds, some banks have lost a significant portion of their total funding from U.S. money funds. Thirteen foreign banks lost more than $4 billion each in funding from the converting money funds between May 2015 and March 2016, in portfolios of 34 converting funds tracked by Crane Data LLC, with $259 billion in total assets. For example, Sumitomo Mitsui Trust Bank lost $6.2 billion in financing from converting prime money funds since May 2015, accounting for 31% of its total financing from all money funds."

Finally, Fitch adds, "Some foreign banks are adjusting their funding profile to rely more on secured government funding. While Bank of Tokyo-Mitsubishi UFJ lost $7.6 billion in prime-type financing from the converting prime funds, it increased its government repo borrowing by $1.9 billion from the same funds, reducing the net impact of reform-related asset shifts. Fitch expects that additional foreign banks will follow a similar strategy."

The Investment Company Institute released its "2016 Investment Company Fact Book," an annual compilation of statistics and commentary on the mutual fund industry. The latest edition reports that while equity and bond funds experienced outflows in 2015, money market funds had modest inflows last year. It also looks at institutional and retail MMF demand, as well as the effects of the SEC money market fund reforms. Overall, money funds assets were $2.755 trillion at year-end, comprising 18 percent of the $15.7 trillion in mutual fund assets. Households held $1.715 trillion, while institutional investors held $1.040 trillion. Among households that owned mutual funds, 54 percent owned money market funds, while 88 percent owned equity funds, 35 percent owned balanced funds, and 42 percent owned bond funds.

On "Demand for Money Market Funds," the Fact Book says, "In 2015, money market funds received a modest $21 billion in net inflows. Like demand for long-term funds, however, demand for money market funds fluctuated in 2015. In particular, money market funds experienced outflows in the first four months of 2015, with investors redeeming $162 billion, on net. Tax payments by corporations in mid-March and individuals in mid-April were likely key drivers behind these redemptions. Outflows abated and money market funds received net inflows of $183 billion over the last eight months of the year. About half of these flows went to government money market funds."

It continues, "Institutions rely more heavily on money market mutual funds to manage their cash today than they did in the early 1990s. For example in 2008, US nonfinancial businesses held 37 percent of their cash balances in money market funds, up from just 6 percent in 1990. Though this portion has declined since the 2007-2009 financial crisis -- it remains substantial, measuring 23 percent in 2015. Part of this demand reflects the outsourcing of institutions' cash management activities to asset managers. Depending on the amount of cash an institutional client wishes to invest and how the client wants the assets managed, it may invest in a money market fund or, alternatively, in a separate account -- an account wholly owned by the institutional investor and managed on its behalf by an asset manager. Institutional money market funds -- used by businesses, pensions funds, state and local governments, and other large-account investors -- had net inflows of $16 billion in 2015, following a net inflow of $37 billion in 2014."

ICI explains, "Individual investors tend to withdraw cash from money market funds when the difference between yields on money market funds and interest rates on bank deposits narrows or becomes negative. Because of Federal Reserve monetary policy, short-term interest rates remained zero throughout most of 2015. Yields on money market funds, which short-term open market instruments such as Treasury bills, also hovered near zero and remained below yields on money market deposit accounts offered by banks. Retail money market funds, which are principally sold to individual investors, saw a small net inflow of $5 billion in 2015, following a net outflow of $31 billion in 2014."

On "Recent Reforms to Money Market Funds," the Fact Book explains, "The SEC has amended Rule 2a-7, a regulation governing money market funds, several times since 1983.... In response to the 2007-2009 financial crisis, the SEC significantly reformed Rule 2a-7 in 2010. Among other things, these reforms required money market funds to hold a certain amount of liquidity and imposed stricter maturity limits."

It tells us, "One outcome of these provisions is that prime funds have become more like government money market funds. To a significant degree, prime funds adjusted to the SEC's 2010 amendments to Rule 2a-7 by adding to their holdings of Treasury and agency securities. They also boosted their assets in repurchase agreements (repos).... Prime fund holdings of Treasury and agency securities and repos have risen substantially as a share of portfolios, from 12 percent in spring 2007 to a peak of 36 percent in fall 2012. In December 2015, this share was 34 percent of prime fund assets, still more than double the value before the financial crisis and subsequent reforms."

ICI writes, "In July 2014 the SEC adopted additional rules for money market funds, precluding the use of amortized cost accounting by institutional funds that invest more than one-half of 1 percent of their assets in nongovernment securities and by requiring that such funds price their shares to the nearest one hundredth of a cent (i.e. float their NAVs). Additionally, under the July 2014 rules nongovernment money market fund boards can impose liquidity fees and gates when a fund's weekly liquid assets fall below 30 percent of its total net assets. The July 2014 rules also include additional diversification, disclosure, and stress testing requirements, as well as updated reporting by money market funds."

Furthermore, they comment, "Because the new rules will not be fully implemented until late 2016, it is not yet clear how these reforms will affect investor demand for money market funds. In late 2015, however, some money market fund sponsors altered their product offerings on the view that demand for prime money market funds, both from institutional and retail investors, will decline once the July 2014 rules are fully implemented. In late 2015, a total of $188 billion in assets migrated from prime funds into government funds through mergers with existing funds or through changes in funds' investment strategies."

They add, "As a result of these and other factors, the total net assets of institutional and retail classes of prime money market funds fell by $77 billion and $103 billion, respectively, during the last two months of 2015. As expected, these reductions were offset by the growth in the assets of government money market funds. By the end of 2015, assets in prime funds were at their lowest since 2004 and assets in government funds were at their highest level since 2008."

The Fact Book says of the "Federal Reserve's Overnight Reverse-Repo Facility," "At the end of 2015, the Federal Reserve was the repo counterparty for 54 percent of the $718 billion in repurchase agreements entered into by taxable money funds. This share has risen from 29 percent at the end of 2013, the year the program began. The rise, however, reflects a strong seasonal pattern. Money market fund repurchase agreements with the Fed tend to spike at quarter-ends, in large part because of changes in bank regulations, especially in Europe. Historically, European banks have been major repo counterparties with money market funds. Due to regulatory changes, however, European banks have generally become less willing to borrow from U.S. money market funds, especially at the end of the quarter."

The ICI's annual update also says, "Mutual funds remained the largest investors in the U.S. commercial paper market -- an important source of short-term funding for major corporations around the world. From year-end 2014 to year-end 2015, mutual funds' share of outstanding commercial paper decreased from 46 to 40 percent. Prime money market funds accounted for most of mutual fund commercial paper holdings. Consequently, mutual fund holdings of commercial paper tend to fluctuate with the total net assets in prime money market funds. In 2015, assets in prime money market funds fell $180 billion as these funds adapted to a 2014 SEC rule change that will be fully implemented in October 2016."

Finally, the Fact Book mentions money fund assets in Retirement plans. It says, "Defined contribution (DC) retirement plan and IRA assets in money market funds totaled just $356 billion, or 13 percent of the $7.1 trillion assets in DC plans and IRAs. Of that $356 billion, $216 billion of money fund assets was invested in IRAs, while $141 billion was in DC plans." (Note: ICI will hold its annual General Membership Meeting late next week in Washington (May 18-20). Crane Data will be exhibiting, so drop by to say "Hi" if you're attending.)

Crane Data's latest Money Fund Market Share rankings show asset declines for the vast majority of U.S. money fund complexes in April with the notable exception of BlackRock, which saw assets spike on the acquisition of BofA's money fund business. Overall, money market fund assets decreased by $41.4 billion, or 1.6%, in April, and they've decreased by $24.0 billion, or 0.9%, over the past 3 months. For the past 12 months through April 30, total assets are up $149.5 billion, or 6.0%. The biggest gainer in the past month was BlackRock, which rose by $34.2 billion, or 15.3%. Invesco, First American, Vanguard, UBS, and Deutsche also increased, rising by $1.2 billion, $833M, $518M, $320M, and $238M, 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 Money Fund Wisdom subscribers.) We also look at money fund yields in April, which inched lower for the first time since the Fed hike in December.

BlackRock, Goldman Sachs, Invesco, Vanguard, and Western had the largest money fund asset increases over the past 3 months, rising by $36.8 billion, $28.8B, $4.5B, $3.0B, and $2.6B, respectively. Over the past year through April 30, 2016, BlackRock completed the trifecta, showing the largest asset increase (up $57.5B, or 28.9%), followed by Goldman Sachs (up $54.3B, or 38.7%), Fidelity (up $49.9B, or 12.6%), SSGA (up $15.5B, or 19.8%), and Morgan Stanley (up $13.1B, or 11.4%). Other asset gainers for the past year include: Vanguard (up $11.4B, 6.6%), Federated (up $10.2B, or 5.2%), Schwab ($7.9B, 5.1%), Northern (up $6.6B, 8.0%), and Invesco (up $3.8B, or 7.1%). The biggest decliners over 12 months include: Dreyfus (down $15.9B, or -9.6%), JP Morgan (down $9.4B, or -3.9%), RBC (down $4.3B, or -23.1%), Deutsche (down $2.8B, or -9.7%), and Western (down $2.3B, or -5.4%).

Our latest domestic U.S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $444.6 billion, or 16.9% of all assets (down $3.6 billion in April, down $3.4B over 3 mos., and up $49.9B over 12 months. With the acquisition of BofA's assets, BlackRock moved into second place with $256.8 billion, or 9.7% of assets (up $34.2B, up $36.8B, and up $57.5B for the past 1-month, 3-mos. and 12-mos., respectively). JPMorgan is now third with $231.1 billion, or 8.8% market share (down $1.7B, up $1.5B, and down $9.4B for the past 1-month, 3-mos. and 12-mos., respectively). Federated Investors remained fourth with $206.3 billion, or 7.8% of assets (down $8.8B, down $5.1B, and up $10.2B). Goldman Sachs stayed in 5th place with $194.5 billion, or 7.4% of assets (down $499M, up $28.8B, and up $54.3B).

Vanguard held sixth place with $183.8 billion, or 7.0%, (up $518M, up $3.0B, and up $11.4B). Schwab ($161.6B, 6.1%) was in seventh place, followed by Dreyfus in eighth place with $149.4B (5.7%), Morgan Stanley in ninth place with $128.5B (4.9%), and Wells Fargo in tenth place with $108.1B (4.1%). The eleventh through twentieth largest U.S. money fund managers (in order) include: SSGA ($93.5B, or 3.5%), Northern ($89.1B, or 3.4%), Invesco ($57.5B, or 2.2%), First American ($41.2B, or 1.6%), Western Asset ($40.9B, or 1.6%), UBS ($38.7B, or 1.5%), Deutsche ($26.1B, or 1.0%), Franklin ($23.9B, or 0.9%), American Funds ($16.0B, or 0.6%), and T. Rowe Price ($15.5B, or 0.6%).

BofA, which had been the 14th largest manager with $43.5 billion in assets in our April XLS, has been removed from our database as its assets have either been liquidated or transferred over to BlackRock. First American jumped ahead of Western to move into 14th. Also, T. Rowe Price appears on the list at number 20. Crane Data currently tracks 64 U.S. MMF managers, one less than 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 6) and SSGA breaking into the top 10. Also, BlackRock moved ahead of JP Morgan to become the second largest global money market fund manager.

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 ($452.6 billion), BlackRock ($358.8 billion), JPMorgan ($351.3 billion), Goldman Sachs ($277.4 billion), and Federated ($215.0 billion). Vanguard ($183.8B) was sixth, followed by Dreyfus/BNY Mellon ($174.3B), Schwab ($161.6B), Morgan Stanley ($148.3B), and SSGA ($113.4B), which 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 May Money Fund Intelligence and MFI XLS show that after steady increases across the board over the past 4 months, we saw net yields inch lower in April. However, gross yields continued to move upward across most indexes. The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 767), fell 1 basis point to 0.11% for the 7-Day Yield (annualized, net) Average, while the 30-Day Yield was unchanged at 0.11%. The Gross 7-Day Yield was 0.42% (up 2 basis points), while the Gross 30-Day Yield was 0.43% (up 4 basis points). (Note that expense ratios likely were impacted by the removal of the 2-month "lag" in Form N-MFP gross yield data, which Crane Data uses to estimate some expense information.)

Our Crane 100 Money Fund Index shows an average 7-Day (Net) Yield of 0.21 (down 1 basis point) and an average 30-Day Yield of 0.21% (down from 0.22%). The Crane 100 shows a Gross 7-Day Yield of 0.46% (unchanged), and a Gross 30-Day Yield of 0.47% (up 1 basis point). For the 12 month return through 4/30/16, our Crane MF Average returned 0.05% (up 1 basis point) and our Crane 100 returned 0.10% (up 2 basis point). The total number of funds, including taxable and tax-exempt, fell to 1,063, down 40 from last month and down 98 over the last two months.

Our Prime Institutional MF Index (7-day) yielded 0.25% (down 1 bps) as of April 30, while the Crane Govt Inst Index was 0.13% (up 1 basis point) and the Treasury Inst Index was 0.10% (unchanged). (Thus Prime funds are yielding 0.15% over Treasury funds.) The Crane Prime Retail Index yielded 0.08% (unchanged), while the Govt Retail Index yielded 0.02% (down 1 basis point) and the Treasury Retail Index was 0.02% (unchanged). The Crane Tax Exempt MF Index yielded 0.05% (up 2 bps).

The Gross 7-Day Yields for these indexes in April were: Prime Inst 0.55% (up 1 basis point from last month), Govt Inst 0.37% (up 1 bp), Treasury Inst 0.34% (up 2 bps), Prime Retail 0.50% (up 6 bps), Govt Retail 0.37% (up 5 bps), and Treasury Retail 0.32% (up 5 bps). Also, the Crane Tax Exempt Index skyrocketed 15 basis points to 0.34%. The Crane 100 MF Index returned on average 0.02% for 1-month, 0.05% for 3-month, 0.06% for YTD, 0.10% for 1-year, 0.05% for 3-years (annualized), 0.05% for 5-year, and 1.13% for 10-years. (Contact us if you'd like to see our latest MFI XLS, Crane Indexes or Market Share report.)

The May issue of our flagship Money Fund Intelligence newsletter, which was sent to subscribers Friday morning, features the articles: "Crane Data Celebrates 10th Birthday; Happy to Be Here," which looks at where Crane Data has been, where we are, and where we are going; "Goldman's Fishman Talks MMF Reforms, Growth," which profiles Dave Fishman, Head of Liquidity Solutions at Goldman Sachs Asset Management; and "ICI Fact Book Shows Money Funds Hung Tough in 2015," which reviews trends from the just-released "2016 Investment Company Fact Book." We have updated our Money Fund Wisdom database query system with April 30, 2016, performance statistics, and also 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 May Money Fund Portfolio Holdings are scheduled to ship Tuesday, May 10, and our May Bond Fund Intelligence is scheduled to go out Friday, May 13. Below, we also review a release entitled, "First American Funds Announce Strike Times For Prime Fund, Share Class Name Changes."

MFI's lead "10th Birthday" article says, "Crane Data hits a milestone this month, celebrating our 10th birthday. Given the wild and crazy events of the past decade in the money markets, we consider ourselves lucky to have made it this far. As we've done in past May issues, we'd like to take a moment to review our progress and update you on our efforts, which include expanding the types of data we track and extending our coverage beyond money market funds. Our company, run by money fund expert Peter Crane and technology guru Shaun Cutts, was launched in May 2006 to bring faster, cheaper and cleaner information to the money fund space. We began by publishing our flagship Money Fund Intelligence newsletter, and we've grown to offer a full range of daily and monthly spreadsheets, news, database query systems and reports on U.S. and "offshore" money funds."

It continues, "Just as money market fund complexes have been busy the past year preparing for the 2016 MMF reform deadlines, so have we at Crane Data. In reaction to the new rules on website disclosure that went into effect April 14, we’ve begun publishing Daily Liquid Assets, Weekly Liquid Assets, and Daily MNAVs -- all of which money fund firms are now required to post on their websites to comply with the new regulations. Given the stresses of the zero yield environment and massive regulatory changes, we have evolved and expanded our coverage beyond money funds. In early 2015, we officially launched our Bond Fund Intelligence monthly newsletter, which tracks the bond fund universe with a focus on the ultra-short and short-term bond fund sector."

Our profile of GSAM's Dave Fishman reads, "This month, MFI profiles Dave Fishman, Head of Liquidity Solutions at Goldman Sachs Asset Management. Fishman discusses GSAM's reform plans, its fund lineup, and the industry shift from Prime to Government. Says Fishman on their recent growth, "For the past several years, we've been investing in our business, and we've been staying in front of clients, working to educate them on the coming regulatory reforms and their investment options. I think clients have responded, and our growth is simply the result of staying in front of people and investing in a business we believe in."

Responding to the question, What is your biggest priority? Fishman answers, "Our biggest priority is meeting or exceeding our clients' needs. Obviously, money fund reform has made that a bigger job compared to the past. Reform is creating significant change in a product that was basically unchanged for 40 years and has offered many features and functions that people came to rely on. So our priority is to make sure we offer the right mix of products to meet clients' needs. With this in mind, we have made some significant changes to our product line-up over the last two years, which we think set us up well for October of this year when we'll implement the final changes."

The article on the "Fact Book" explains, "ICI's just-released "2016 Investment Company Fact Book" reports that while equity and bond funds experienced outflows in 2015, money market funds had modest inflows last year. The annual guide looks at institutional and retail money fund demand and the effects of the SEC's money market fund reforms. Overall, money funds assets were $2.755 trillion at year-end, comprising 18% of the $15.7 trillion in mutual fund assets."

On "Demand for Money Market Funds," ICI says, "In 2015, money market funds received a modest $21 billion in net inflows. Money market funds experienced outflows in the first four months of 2015, with investors redeeming $162 billion, on net. Tax payments by corporations in mid-March and individuals in mid-April were likely key drivers behind these redemptions. Outflows abated and money market funds received net inflows of $183 billion over the last 8 months of the year."

In a sidebar, we discuss, "More Changes Afoot." This brief says, "The latest month-end saw 23 funds, totaling $28.4 billion, converted from Prime to Government. With these changes, $242.1 billion has now already shifted from Prime to Govt, 83.6% of the $289.7 billion slated to convert by October 14. Deutsche was by far the largest chunk of it, converting 8 funds totaling $18.8 billion on May 2."

Also, we do a sidebar on "Fee Waivers Keep Dropping," which says, "Federated, Schwab, BNY Mellon, T. Rowe Price, and Northern Trust all released their Q1 earnings this month and a common thread throughout was reduced MMF fee waivers.... BNY Mellon said in its earnings release that "roughly half of money market fee waivers have been recovered following the Fed's December rate increase." Finally, as we do every month, we review all the important "Money Fund News."

Our May MFI XLS, with April 30, 2016, data, shows total assets decreased $42.0 billion in April to $2.636 trillion, after decreasing $20.3 billion in March, increasing $37.4 billion in February, and decreasing $22.4 billion in January. Our broad Crane Money Fund Average 7-Day Yield dropped by 1 bps to 0.11% for the month, while our Crane 100 Money Fund Index (the 100 largest taxable funds) decreased 1 basis point to 0.21% (7-day). It is the first time since the beginning of the year that these indexes have declined.

On a Gross Yield Basis (before expenses were taken out), the Crane MFA was up 3 bps to 0.43% and the Crane 100 was down 1 bps to 0.46%. Charged Expenses averaged 0.31% (up 2 bps) and 0.29% (up 4 bps) for the Crane MFA and Crane 100, respectively. The average WAM (weighted average maturity) for the Crane MFA was 35 days (down 1 day from last month) and for the Crane 100 was 35 days (down 2 days). (See our Crane Index or craneindexes.xlsx history file for more on our averages.)

In other news, First American Funds' release says, "The First American family of mutual funds today announced that it intends to offer intraday liquidity for shareholders in its planned institutional prime obligations fund. As previously announced, the current First American Prime Obligations Fund will be renamed First American Institutional Prime Obligations Fund (Institutional Prime). First American plans to offer three intraday pricings for Institutional Prime at 9:00 a.m., 12:00 p.m. and 3:00 p.m. (Eastern Time) beginning October 14, 2016. Institutional Prime will be subject to a floating net asset value and the possibility of liquidity fees and redemption gates beginning October 14, 2016."

It adds, "Also as previously announced, on July 18, 2016 First American plans to launch a new fund for retail investors only, First American Retail Prime Obligations Fund (Retail Prime). Retail Prime will seek to maintain a stable $1.00 per share NAV and will price once daily at 4:30 p.m. (Eastern Time). Beginning October 14, 2016, Retail Prime will be subject to the possibility of liquidity fees and redemption gates. First American also announced today that it intends to change several share class names across its family of funds ... effective October 14, 2016."

The share class name changes are as follows: First American Govt Obligs Institutional Investor Share will be V shares; FA Inst Prime Obligs I Shares will be T shares and Institutional Investor shares will be V shares; FA Treasury Obligs Reserve Shares will be G shares and Institutional Investor shares will be V shares; FA Tax Free Obligs Institutional Investor shares will be V shares; and FA US Treasury MMF Institutional Investor Shares will be V shares.

Federated Investors became the latest money fund manager to announce "strike" or pricing times for its pending Floating NAV funds. It outlined plans in an April release entitled "Federated Announces Institutional FNAV Money Market Funds and Strike Times." The firm also put out a document, "New Money Market Fund Disclosure Rules Mitigate Concerns on Gates and Fees," which says that disclosure rules should help allay investors concerns about fees and gates. Federated's Deborah Cunningham also commented on disclosure rules in her latest "Month in Cash" commentary. Also, Wells Fargo Securities published a report called, "Money Market Reform Series, Part 3: Observations and Updates," which examines the "money market fund changes that will be relevant to institutional investors."

The latest update on strike times says, "Federated Investors, Inc. has announced additional refinements to the company's line of money market funds by defining the NAV strike times for funds which have been designated as floating net asset value (FNAV) institutional funds.... Federated also has designated Federated Master Trust as an institutional FNAV money market fund, subject to board approval, and outlined strike times for all institutional prime and institutional municipal money market funds."

It continues, "Based upon much client feedback, a variety of strike time models are needed to fulfill the varying needs of our investors and intermediaries. Thus, Federated plans to offer five institutional FNAV money market funds, with single or multi‐strike intraday pricing, as listed in the table below. As of Oct. 14, 2016, each of the funds below will offer the following intraday pricing strike times, subject to board approval: Federated Institutional Money Market Management, Federated Master Trust, and Federated Inst Prime Obligations -- 8am, Noon, and 3pm (Multi-strike and T+0 settlement only); Federated Inst Prime Value Obligations -- 3pm (Single-strike and T+0 or T+1 settlement), and Federated Inst Tax-Free Trust -- 1pm (Single-strike and T+0 or T+1 settlement)."

Federated's update on Disclosure Rules says, "Despite the initial hand-wringing over new redemption fee-and-gate rules unveiled in 2014 and effective later this year, concern continues to decline as investors realize the benefits of new accompanying website disclosure rules that significantly enhance 2010's initial reforms. The improved transparency resulting from the daily and weekly portfolio liquidity and flow disclosures greatly improves the ability of investors to monitor and perform ongoing due diligence and oversight of their funds.... Other than empowering fund shareholders through enhanced access to information, Federated does not expect the 2014 rule changes to be all that noticeable to its money market fund shareholders."

Cunningham writes in her latest Federated column, "Fed stays close to the vest; money funds show their cards," "On April 14, [the SEC] began to require money market funds to disclose more information, such as the amount of liquid assets in their portfolios. Believe it or not, we are happy the SEC did this. It specifically designed these disclosure rules to come out six months ahead of requirements that institutional prime and municipal money funds float their net asset values (NAV) and create fees and gates procedures."

She explains, "The disclosures will be crucial in getting clients comfortable with the reforms. We feel that the more they understand the changes, the less concerned they will be about them. We want investors to see that the floating NAVs -- now reported out to the hundredth of a penny -- are essentially steady and that our portfolios have well above 30% in weekly liquid assets. Cash managers welcome all of this openness because we hope it will convince institutional clients to stay in prime and municipal funds."

Cunningham adds, "Certainly, clients are happy about the additional yield they've been getting lately. The yield of prime over government portfolios was about 20-22 basis points in April, well above the historic average of around 12. That should offer plenty of incentive for clients to take a close look at how they operate, especially as some may need to amend their own investment policies to invest in a floating NAV."

Wells Fargo Securities' "Observations and Updates", written by Garret Sloan and Eric Vos, also discusses strike times. It says, "To facilitate same day (cash) settlement and intraday investor liquidity, funds will be required to set a specific market value at least once a day during market hours and likely multiple times a day.... Actual 'strike times' are slowly being communicated by the fund companies as lineups are announced, but we do not believe that the announced times are set in stone as funds seek the sweet spot for pricing and investor risk appetite. [I]nvestors in Prime and Tax-exempt funds may experience more structured timing related to receiving redemption proceeds and also earlier end-of-day cutoff times, but they will continue to have access to intraday liquidity."

Wells writes, "Weekly liquid asset ratios could become a key criterion on which investors make investment decisions. The theory being that all else equal, higher weekly liquid assets reduce the likelihood of a fee or gate being implemented. Unfortunately, higher weekly liquid assets also correspond to lower yields and less supply, especially amongst issues subject to Basel III capital and liquidity constraints. Money market funds began reporting daily and weekly liquid asset levels on April 14."

On Prime to Govt conversions, it says, "Looking at Prime fund provider activities, Crane Data has reported that providers have announced approximately $287 billion in Prime fund asset conversions, with over $212 billion (or 74%) already converted. Interestingly ... more than three quarters of the assets being converted have been from funds designated as retail, with only $73 billion from 25 fund providers in the Prime institutional space. For those providers choosing to convert Prime funds to Government funds, it may simply be the path of least resistance, as Government funds with a stable NAV will allow both institutional and retail investors to co-exist in the same fund structure, permitting fund advisors a certain ease of compliance with the new 2a-7 rules."

Wells continues, "Sweep services represent another challenge for funds, but the subject has received less attention.... This process is expected to become significantly more complicated for Prime funds that are subject to a floating NAV and gates/fees. As a result, most, if not all intermediaries have decided to discontinue the use of Prime funds for sweep services. Statistics on the proportion of money fund business tied to sweep is very difficult to estimate. On the conservative side, sweep could represent approximately 20% of prime fund assets or approximately $244 billion based on informal conversations with various fund product managers. However, the figure could be much higher than that. Fidelity's decision to amend its Fidelity Cash Reserves retail fund from a Prime to a Government fund was at least partly precipitated by its sweep-related investor base. In other words, if the 20% sweep assumption is correct, the Prime fund space could see outflows of $244 billion in addition to non-sweep Prime money fund outflows."

They add, "Despite peaking at more than $1 trillion, institutional Prime funds have never been the most important cash management tool for treasurers, but they have been an important component, and we believe they will continue in that role. While many investors will likely reject the upcoming changes, we would like to share some observations that will hopefully result in a more complete view of institutional Prime funds under the new regulatory framework.... While we consider the gates and fees to be a heavy handed approach, institutional investors should also consider them as tools with the means to manage the quick and orderly liquidation of funds."

Finally, on the Floating NAV, they comment, "[A] review of shadow NAVs since 2010 indicates that prices of $1.0000 can be maintained for extended periods of time, and price movements to the third decimal place are rare. With that in mind, daily price 'volatility' from the floating NAV may have less of an impact on daily transactions than some currently believe.... We believe that it is only in the full redemption scenarios that most clients will notice the Floating NAV. When all factors are considered, we believe that Prime funds will continue to be an important piece of the cash investment strategy for many institutional investors as the Prime fund outperforms the Government fund on a total return basis in an adverse price scenario, at current market levels."

BlackRock has filed to launch a money market, fund of funds ETF, we learned from Wells Fargo Securities Strategist Garret Sloan. He wrote last week, "In a recent SEC registration filing, BlackRock has introduced an interesting new product called the BlackRock Collateral Trust, which is designed as an ETF, in which the principal investment strategy is to invest "at least 80% of its net assets in a portfolio of U.S. dollar-denominated government securities and other money market securities eligible for investment by U.S. government money market funds (including indirect investments through the Underlying Funds)." We examine BlackRock's SEC filing and Sloan's comments below. We also review a "Money Market Fund Planning Update," from SEI Investments, which discusses the liquidation of 5 money funds and the launch of 2 new ultra-short bond funds.

The new BlackRock Collateral Trust filing states, under "Principal Investment Strategies," "As of the date of this Prospectus, the Fund intends to invest a substantial portion of its assets in the following government money market funds, which principally invest in short-term U.S. Treasury bills, notes and other obligations issued or guaranteed as to principal and interest by the U.S. Government or its agencies or instrumentalities, and repurchase agreements secured by such obligations: FedFund and T-Fund (each, a series of BlackRock Liquidity Funds); and BlackRock Premier Government Institutional Fund and BlackRock Select Treasury Strategies Institutional Fund (each, a series of Funds For Institutions Series). BFA may add, eliminate or replace any or all Underlying Funds at any time. BFA or its affiliates may advise the Underlying Funds. The Fund generally allocates and reallocates its assets among the Underlying Funds on a monthly basis on an approximate pro rata basis based on the amount of net assets of each Underlying Fund."

It continues, "The Fund itself will invest only in money market securities eligible for investment for funds that comply with Rule 2a-7, but will not be subject to other requirements of Rule 2a-7 applicable to money market funds that seek to maintain a stable NAV. The Fund is an actively managed exchange-traded fund ("ETF") that does not seek to replicate the performance of a specified index. The Fund may have a higher degree of portfolio turnover than funds that seek to replicate the performance of an index. Each Underlying Fund is a "government money market fund," as defined in Rule 2a-7 and seeks to maintain a stable NAV of $1.00. The Fund, however, is not a money market fund and does not seek to maintain a stable NAV of $1.00."

Wells' Sloan comments, "The fund is expected to invest on a pro-rata basis in each of the four funds based on the assets-under-management of each fund. At the outset, the fund will invest 50 percent in the T-Fund, 35 percent in the FedFund, 10 percent in the Premier Government Institutional Fund and 5 percent in the Select Treasury Strategies Institutional Fund. The ETF will be valued at 12pm Eastern time each day and "shares of the Underlying Funds normally are valued at fair value based on their NAV from the prior business day." In other words, the value of the ETF will in all likelihood be $1 every day, given that it will be fully invested in Constant NAV government funds."

He adds, "Is there an advantage to the ETF over simply investing in the government funds themselves? From a yield perspective the answer is likely no. Moreover, the cutoff times for transactions are slightly earlier in an ETF given that they stop trading at the close of the exchange, which is 4pm, but the BlackRock Collateral Trust prospectus notes that purchase and redemption requests typically need to be made prior to 2pm. Current government fund cutoff times for redemptions and purchases are generally in the neighborhood of 4:30pm–5pm. The ETF also notes that "deliveries of redemption proceeds by the Fund generally will be made on the same Business Day a redemption request is received.""

While we have seen some ultra-short and short-term bond ETF launches the past few years, including BlackRock iShares Ultra Short Term Bond and Short Maturity Bond ETFs, Guggenheim Enhanced Short Duration, PIMCO Enhanced Short Maturity ETF, SSGA SPDR Ultra Short Term Bond ETF, and Vanguard Short Term Bond ETF, we've yet to see any be really successful in the money market fund space to date.

In other news, SEI Investments' "Money Market Fund Planning Update" details the manager's fund closures and fund launches. It says, "SEI currently manages nine money market funds across three different styles. Estimated closure dates for five prime and tax-free money market funds are announced below. The status of the other funds is also provided." SEI is closing 5 funds – Tax-Free and Institutional Tax-Free (on 7/22); SEI Liquid Assets Trust Prime Obligations and SEI Daily Income Trust Prime Obligations (on 7/22); and Daily Income Trust Money Market (on 6/24). It is keeping 4 funds – SDIT Treasury, SDIT Treasury II, SDIT Government, and SDIT Government II.

The update explains, "In consideration of the impacts these reforms will have on our funds, as mentioned in our initial Money Market Fund Planning communication, we designed a plan to restructure our offerings in order to best meet the needs of our clients: Launch two new mutual funds -- one taxable and one tax-free -- which will be conservative, short-term bond funds to serve as investment vehicles in client portfolios; Liquidate existing prime and tax-free money market funds, and transition assets to either our government money market funds (when held for cash sweep purposes) or the new conservative bond funds; Continue offering SEI's government money market funds. These will act as the cash sweep component of accounts for institutional and high net-worth clients held at SEI Private Trust Company." For more on SEI's plans, read our March 29 News, "Another Two Bite the Dust: SEI Liquidates Prime; Wilmington Goes Govt."

Finally, the US Department of Labor issued a press release announcing a settlement between Invesco and its Investors over undisclosed losses related to a non-2a-7 "collective fund" used in ERISA accounts. The DOL says, "The U.S. Department of Labor's Employee Benefits Security Administration has reached a settlement agreement with a subsidiary of Invesco Ltd., an Atlanta-based investment management firm. Invesco Trust Company agreed to pay a total of $10.27 million to settle the department's claims that they violated the Employee Retirement Income Security Act. Invesco operated the Invesco Short-Term Investment Fund, a multi-billion dollar collective fund composed of ERISA plan assets. The department contended that Invesco violated ERISA when it undertook a series of measures to ensure that the ISTIF continued to trade at $1 although the fund's net asset value had fallen below $1 due to losses in the value of the fund's securities holdings."

It adds, "One measure Invesco took was having an affiliate enter into a series of support agreements to provide contingent financial support to the ISTIF without adequately informing the fund's investors. Invesco also retained a portion of the income earned by the ISTIF to increase the fund's net asset value instead of distributing that income to investors. Retaining a portion of the ISTIF's income in the fund not only reduced the distributions to plan investors in the ISTIF, but also reduced the obligations of Invesco's affiliate under the support agreements."

Note: Invesco tells us that the DOL action involved a "collective trust" which was not a "money market funds" (contrary to some press reports). They say they acted in the best interests of shareholders and made sure the trust traded at $1.00, waiving fees and making a voluntary payment into the vehicle.

While the majority of Prime to Government money fund conversions have already occurred, we saw another chunk of assets shift yesterday, and we continue to see a series of minor name and lineup changes as we approach the home-stretch of MMF Reform implementation. Among the most recent switches, Deutsche converted a slew of funds from Prime to Govt. Just the past two days, 23 funds, totaling $28.4 billion, converted from Prime to Government on April 29 and May 2. With these changes, $242.1 billion has now already shifted from Prime to Govt, 83.6% of the $289.7 billion slated to convert by October 14. We also learned that BNY Mellon is converting its BNY Mellon Prime MMF to the BNY Mellon Government MMF, and that Dreyfus changed the names <b:>`_of several of its funds. We review the latest changes and tweaks below, and also excerpt from a recent piece by `TCW's Michael Pak on "Money Market Reform."

The biggest portion of the new changes come from Deutsche, which converted 8 funds on May 2, a total of $18.8 billion. Specifically, Deutsche converted the $2.1 billion Cash Management to Govt Cash Mgmt, the $1.0 billion Cash Reserves and $575 million Cash Reserves Prime Series to Cash Reserves Govt Series, the $245 million Cash Reserves Prime Series Inst to Cash Reserves Govt Series Inst, the $14.2 billion Money Market Series Inst to Govt Money Market Series, the $241 million ProFund VP MMF to ProFund VP Govt MMF, and the $331 million Money Market ProFund and $148 million Money Market VIP to Govt Money Market VIP.

Other funds converting at April month-end include: the $662 million Invesco VI MMF to Invesco VI Govt MMF, the $780 million SunAmerica MMF to SunAmerica Govt MMF, and the $2.4 billion Oppenheimer Money Fund/VA to Oppenheimer Govt MMF/VA; the $129 million Putnam VT MMF to Putnam VT Govt MMF; the $139 million Federated Prime Money Fund II to Federated Government Money Fund II; the $1.3 billion GuideStone MMF; the $456 million Columbia Variable Cash Mgmt Fund to Columbia Variable Govt MMF; the $228 million Transamerica MMF to Transamerica Govt MMF; the $984 million Voya Liquid Assets Portfolio to Voya Government Liquid Assets Portfolio; the $246 million Voya Money market Fund to Voya Government MMF, and the $549 million Voya Money Market Portfolio to Voya Government MMP; the $757 million Lincoln LVIP MMF to Lincoln LVIP Government MMF; and the $441 million MassMutual Premier MMF to MassMutual Premier US Govt MMF.

Among new conversions, the $341 million BNY Mellon Money Market Fund just became BNY Mellon Government Money Market Fund. The SEC filing explains, "At a special meeting of shareholders of BNY Mellon Money Market Fund held on April 11, 2016, the fund's shareholders approved a proposal to change one of the fund's Fundamental Policies, which will enable the fund to change its investment policy so that the fund may invest at least 99.5% of its total assets in securities issued or guaranteed by the U.S. government or its agencies or instrumentalities, repurchase agreements collateralized solely by cash and/or government securities, and cash and comply with the definition of "government money market fund." The changes described below will take effect on or about May 1. As of the Effective Date, the fund's name will change to: BNY Mellon Government Money Market Fund."

A separate filing adds, "As of the Effective Date, the following will replace the information in the section entitled "Fund Summary -- BNY Mellon Money Market Fund -- Principal Investment Strategy" in the prospectus: The fund is a "government money market fund." As a money market fund, the fund is subject to the maturity, quality, liquidity, and diversification requirements of Rule 2a-7 under the Investment Company Act of 1940, as amended, which are designed to help money market funds maintain a stable share price of $1.00. As a government money market fund, the fund normally invests at least 99.5% of its total assets in securities issued or guaranteed as to principal and interest by the U.S. government or its agencies or instrumentalities, repurchase agreements collateralized solely by cash and/or government securities, and cash."

Another fund, the $822 million BNY Mellon National Municipal MMF, will qualify as Retail, according to a filing. Also on May 1, Dreyfus/BNY Mellon converted the $171 million Dreyfus Variable Inv Fund MMP to the Dreyfus Variable Inv Govt Fund MMP.

Dreyfus has also changed the names of several funds. The Dreyfus General Treasury Prime MMF changed its name to the Dreyfus General Treasury Securities MMF, according to a Prospectus supplement. And, Dreyfus Institutional Preferred Treasury MMF is changed its name to the Dreyfus Institutional Preferred Treasury Securities Money Market Fund, states another filing. Furthermore, Dreyfus Govt Prime Cash is now Dreyfus Govt Securities Cash, Dreyfus Treasury Prime Cash Mg is now Dreyfus Treasury Securities Cash Mg, and Dreyfus Inst Treasury Prm Cash Adv is now Dreyfus Inst Treasury Securities Cash Adv.

In addition, Janus filed with the SEC <i:https://www.sec.gov/Archives/edgar/data/277751/000119312516540227/d173764d497.htm>`_to state that its `Janus Government Money market Fund will comply with the new definition of a Government fund. The filing explains, "At a meeting held on March 10, 2016, the Board of Trustees of the Fund approved the designation of the Fund as a "government money market fund." Under the Reform Rules, a government money market fund is defined as a money market fund that invests at least 99.5% of its total assets in cash, U.S. Government securities, and/or repurchase agreements that are collateralized fully (i.e., collateralized by cash and/or government securities)."

Also, the Janus Money Market Fund was officially designated as a Retail fund. The filing states, "At a meeting held on March 10, 2016, the Trustees approved the designation of the Fund as a "retail money market fund," effective on October 14, 2016. Under the Reform Rules, a retail money market fund is defined as a money market fund that has policies and procedures reasonably designed to limit all beneficial owners of the fund to natural persons, which means that a retail money market fund's shares can be held only by individual investors."

In other news, TCW Senior VP of Fixed Income Michael Pak wrote on MM Reform recently. He explains, "With the compliance date for institutional prime money market funds only six months away, we have already started to observe a reallocation of assets within the industry and a changing supply mix in the short-term markets. During 2015 large fund families began converting their prime funds to government-only status in anticipation of the upcoming reform measures.... Although we have seen planned conversions of funds from prime to government status, we have not yet witnessed meaningful shareholder redemptions but expect these to pick up starting 2Q16."

Pak explains, "As funds are reallocated into Treasury and government-only funds, we have naturally seen a large pick-up in demand for Treasury bills as well as agency discount notes and repo collateralized by government securities. Although there was initially concern about a shortage of Treasury bills and repo (due to shrinking dealer balance sheets), two factors have allayed investor concerns for now. First, Treasury bill supply has increased meaningfully over the last six months and we expect it to remain high given Treasury's stated desire to maintain a higher running cash balance, increase bill issuance in lieu of nominals/TIPS, and increase bills as a percent of outstanding debt. Second, the Fed's reverse repo program should also provide ample Treasury collateral."

He adds, "While it is difficult to predict exactly how investors will react to upcoming reform, we broadly expect them to consider one of three options. First, investors may reallocate money to high-quality short-term bond funds although they are not a perfect substitute. Second, investors may elect to manage their short-term investments themselves although this is not always feasible given the operational issues involved. Third, some investors may elect to stay in institutional prime funds if they view the interest differential between prime and government funds to be attractive enough. Since 1995, the average spread between prime/Treasury and prime/government funds has averaged 26 and 12 bps while current spreads to both are 15 bps. Investor surveys indicate that to remain in a prime fund, many would need to see a prime to government spread over 30 bps suggesting further spread widening over the next few months."

Pak concludes, "So while there are plenty of unknowns as to how investors (and issuers) will ultimately respond to money market reform, one thing is certain: change is coming to the industry.... Evaluating the tradeoffs between liquidity, yield and quality in this asset class will be more important than in the past given upcoming stricter regulations."

Federated Investors reported a jump in earnings for the first quarter of 2016, due primarily to higher yields and reduced fee waivers. Their Q1 earnings call Friday also featured some discussion of new products, including a private money fund and a collective fund for retirement accounts. Federated also commented on how assets may shift and settle leading up to and beyond the MMF reform implementation date in October. Debbie Cunningham, CIO, Global Money Markets, said, "They [investors] are enjoying that additional yield spread right now, and the question they're asking is, 'How do I continue to use this product and enjoy this yield spread as these regulations roll in?' It's a different question than maybe a year ago when it was, 'What do I need to do and when do I need to switch?"

Federated's press release explains, "Money market assets were $262.0 billion at March 31, 2016, up $13.8 billion or 6 percent from $248.2 billion at March 31, 2015 and up $5.6 billion or 2 percent from $256.4 billion at Dec. 31, 2015. Money market mutual fund assets were $224.7 billion at March 31, 2016, up $10.4 billion or 5 percent from $214.3 billion at March 31, 2015 and up $3.1 billion or 1 percent from $221.6 billion at Dec. 31, 2015."

In Q1, it says, "Revenue increased by $28.5 million or 12 percent primarily due to a decrease in voluntary yield-related fee waivers. Operating expenses increased by $30.8 million or 18 percent primarily due to an increase in distribution expenses as a result of a decrease in voluntary yield-related fee waivers." Year-over-year, revenue increased by $51.6 million or 23 percent primarily due to a decrease in voluntary fee waivers. Federated reported that the pretax impact of money fund yield related waivers of $9.4 million was down from $16.4 million at the end of the prior quarter.

CFO Tom Donahue said the decreases were due mainly to higher fund gross yields. He comments, "Based on current assets and yields, we expect an impact of these waivers on pretax income in Q2 to be about $6 million. An increase in yields of 25 basis points could lower this waiver impact to about $2 million per quarter and a 50 basis point increase could nearly eliminate these waivers.... As we've previously discussed, the impact of the change in one of our customer relationships may reduce pretax income by about $6 million per quarter when fully implemented late in 2016." (See our March 10 News, "Federated, Edward Jones Restructure Money Fund Deal; New 10-K Filing.")

In his remarks, CEO Chris Donahue said, "As you are all aware, we are moving into the later innings of a substantial effort to position our money market products in advance of the October 2016 requirement for floating NAVs for Institutional Prime and Muni funds. We recently announced further operation details, including the FNAV "strike times" for Institutional Prime and Muni funds. We also made the required disclosures to provide additional money market information on our website for our funds -- this includes daily reporting of daily and weekly liquid asset percentages, net shareholders inflows and outflows, and shadow NAVs."

Donahue continued, "We also conducted a road show for our planned new Private fund, with a targeted mid-year launch, and are developing a new Collective fund. We will have a robust set of products and choices for our Institutional customers as they navigate the new landscape for cash management during 2016 and beyond."

During the Q&A with analysts, the CEO elaborated on the Collective fund. He explained, "We are coming up with a Collective fund ... utilized for retirement assets only, and we think this will be a good addition to the pot. [It] will be a good DOL-proper fund that will have good staying power into the future for cash." On the recent DOL (Department of Labor) ruling, Donahue said he doesn't see the rule having any impact on cash investments.

There was a question about what drove inflows in Q1, a quarter which usually sees outflows. Deborah Cunningham, CIO, Global Money Markets, responded, "I would definitely say the increase in Q1 is the result of lower waivers and higher yields being paid out to participants in the marketplace. Certainly getting off zero or one basis point has had a positive influence on the assets during the first quarter."

One analyst asked about expectations for money moving. Chris Donahue answered that he doesn't expect much investor movement until the summer or closer to the deadline. He said, "Some [clients] are just getting aware of what is going to happen. What is, in part, shaking more action, is the movement by some of the funds to do different things. The most recent thing we did was announce strike times. That doesn't move assets, but it's yet another communication that something else is different, and you're going to have to decide where to go. We just haven't seen the big movements of the underlying clients yet."

Cunningham added, "Basically, Government vs. non-Government [assets] are equal at this point. So, with a $2.8 trillion industry, about $1.4 trillion is in Govie and about $1.4 trillion is in non-Govie, which would be Prime and Muni. That's definitely a shift from the norm, which was $1.8 trillion or so in non-Govies and about $1 trillion in Govie. The majority of that movement has come from products changing their Prime focus to Government. Federated has not done this, but others in the industry have basically converted what were large Prime funds into Government funds.... As far as client flows go, it certainly seems as though the second and into the third quarter will start to produce some [shifts], but you're not seeing them en masse yet at this point."

She does expect to see some money moving in Q2, specifically related to competitors, not Federated, that have booted out Institutional investors from those funds deemed Retail under the new categorizations. Cunningham comments, "That's taking place in the second quarter for a few types of products, and we think we'll see that continue to occur. But again, we're not seeing that from our own standpoint."

She added, "We did have various road shows across the country over the course of the last month and a half.... I'd say our clients are enjoying the additional yield spread of about 20-22 basis points of Prime funds over Government funds, whereas historically that spread has been around 12 or 13 basis points.... Our weekly liquid assets -- assets that are most easily convertible into cash for redemption purposes on any given day -- are drastically different for our Institutional Prime funds than they have historically been. `They are much higher at this point.... The Retail and Institutional Prime funds have been positioned accordingly with shorter WAMs, more weekly liquid assets, and shorter barbells."

Going forward, Cunningham is optimistic. She says, "I definitely feel like there will be a continuation of normal or higher level of assets. Chris [Donahue] has said in various discussions that post-reform in October 2016, going into 2017, we believe we will have assets in the cash space that are higher than they were pre-reform announcements back in 2014. We don't necessarily think this will be a deterrent from an asset perspective. How is that mix of assets ultimately going to position itself?"

She answers, "Certainly there will be Institutional clients who are in Prime and Muni funds today that will go into Govie funds initially in the October 2016 time frame. Depending on what spreads get to, and the performance of those funds from a volatility perspective ... and ultimately looking at them against other funds on a total return basis rather than just on a yield basis, I think clients will [move] back into that space in 2017 and beyond. There will be transitions and movements, lots of clients' money in motion. But ultimately I do believe the assets will be higher post reform."